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Creating value in loops

Creating value in loops

13-02-2020 | Insight

A new RobecoSAM investment strategy will target the ultimate in sustainability – the circular economy.

  • Holger Frey
    Holger
    Frey
    Senior Portfolio Manager, Circular Economy Equities & Sustainable Food Equities

Speed read

  • Circular Economy market potential is USD 4.5 trillion by 2030
  • Opportunities in redesign, reuse, value recovery and sharing
  • Tightening regulations and consumption shift create tailwinds

The traditional linear economy which follows the “take-make-dispose” production and consumption model is unsustainable, producing millions of tons of waste each year. 

A tipping point has been reached in the transition to the circular economy, managers of the new RobecoSAM Circular Economy Equities Fund believe. The strategy, launched in January 2020, embraces this move towards designing out waste, keeping products in use for longer, and the regeneration of natural resources. 

“The linear economy was effective for growth in the early part of the 20th century”, says Holger Frey, Senior Portfolio Manager of the fund. “Now, with our expanding global population, increasing pressure on the Earth’s resources is spinning out of control. This is compounded by urbanization and the actions of a hyper-consuming middle class.”

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We need 1.75 Earths

Humans consume more goods and services – through production, consumption, and disposal of goods – than is sustainable. One estimate soberingly asserts that the linear model consumes finite resources at 1.75 times the planet’s annual regenerative capacity.

Meanwhile, each year in the US alone, approximately 2.3 million tons of goods returned after purchase (equivalent to about 5,600 fully loaded Boeing 747 jets) goes to landfill. This rapidly increasing amount of waste dumping has become far more challenging, and urgent.

Summarized as “take-make-dispose”, the searing lack of sustainability in this status quo has created a transition seen not only as a global necessity, but also a significant opportunity for businesses, according to the European Commission. 

Keeping products in the loop creates value. Source: RobecoSAM

USD 4.5 trillion market

For investors, the benefits in allocating capital towards a more sustainable economic model is to participate in a market with an estimated value of USD 4.5 trillion by 2030, according to Accenture.1  “Since sustainability investing is embedded in our DNA, we’ve been looking at the trends leading to the circular economy for quite some time”, says Frey. 

“Consumer awareness is changing rapidly as younger generations – the millennials and Generation Z – are more informed on production and processes. They have a mindset of not needing to own everything and are much more interested in sharing models and streaming on electronic devices, for example. There is also a rising interest in the secondhand and renting market for premium apparel, as it is well aligned with their ideas about sustainability and sharing.”

“Additionally, as the backlash against plastic pollution has shown, social media facilitates information flow to consumers and the growing product segmentation offline and online, provides them with switching alternatives. At the same time, regulation is tightening.”  

European Green Deal

As Europe strives to become the world’s first climate-neutral continent by 2050, in December 2019 the EU put forward the European Green Deal. The central tenet of the deal is to improve the well-being and health of current and future generations by focusing on areas such as reusing and recycling packaging for less waste, cleaner energy, environmentally friendly transportation and consumption, amongst others.

“There is a highly active community working on the shift towards the circular economy and we see increasing efforts being made to measure the circularity of companies or products,” says Frey. “We perceive this is a strong confirmation that circular economy principles are gaining relevance.”

According to the European Union’s Circularity Gap Report 2019, the world economy is only 9% circular. The RobecoSAM Circular Economy Equities strategy gives investors a unique opportunity to be part of this largely untapped and under-served growth story. 

More than just recycling

Through four ‘clusters’, the strategy essentially seeks to invest in companies that create value in loops through the redesign of production inputs (also to be reused or recycled); circular supply chains, logistics and waste management systems; and the promotion of socially-balanced and eco-friendly lifestyles. These companies employ targeted production and consumption, predictive maintenance, and enhanced use of by-products to create value from inefficiencies.

“As two of our four investment clusters, ‘circular use’ and ‘looping of resources’ are central to our trend selection and investment scope,” says Frey. “A third cluster, the redesign of inputs’, illustrates the inherent value of the basic principles behind circularity, which are a focus on longevity and on bringing innovative products to market. The final cluster, ‘enabling technologies’, harnesses the potential for digitization and innovations for circular supply chains.”

Trend selection and investment scope. Source: RobecoSAM

“An example of redesigning inputs is our targeting of biodegradable plastics, such as companies that are developing biodegradable or compostable packaging solutions, thereby addressing the ‘plastic tsunami’ debate.” 

“We want to break this perception that it's only about recycling. Though recycling is an integral part, with this strategy we take a more holistic view of circular economy principles. Taking the example of electronic devices, it’s possible to retain up to 90% of the product’s value by using a more modular design. Increasing the ease of disassembling products means that components could be reused, instead of relying purely on the recycling properties of waste materials.”

Investment universe

The fund’s investment team will have a universe of about 340 relevant stocks to choose from across the world. Careful selection will narrow down investment candidates to about 40-80 for inclusion. The basic investment rule will be that a company should have at least 20% exposure to the theme, though the strategy targets above 50% on a consolidated level.

The strategy also contributes towards achieving the Sustainable Development Goals (SDGs), as it addresses recyclability of products or packaging solutions, waste prevention in manufacturing, sustainable sourcing, food waste reduction, landfill waste and GHG emissions (CO2 equivalent emissions). 

Companies selected will contribute towards SDG 2 (zero hunger); SDG 3 (good health and well-being; SDG 8 (decent work and economic growth); SDG 9 (industry innovation and infrastructure), and SDG 12 (responsible consumption and production).

1Accenture, ‘Waste to Wealth: Creating advantage in a circular economy’, 2015.

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