Circular Economy – The Next Big Investment Topic?

Walter Libby, Pictet Asset Management

The corporate world and especially the financial industry are currently under great pressure to implement the requirements of the EU Phase 1 classification. Standards for measuring and detecting greenhouse gas emissions have now been developed here.

What is less well known outside expert circles is that the classification also applies to other areas of economic life; Among others, with the aim of further developing national economies into what are known as circular economies.

The essence of this concern is to prevent the waste of natural resources through one-time use and subsequent disposal. Because throwing things away not only causes the well-known waste problem, for example huge garbage patches in the oceans, but the things thrown also leads to the restriction of valuable raw materials, which are used to manufacture new products with high energy expenditure or environmental pollution (eg. example, cobalt and rare earth mining for mobile phones) should be promoted again.

The economy of recycling, which will be strengthened with great political support, can be applied in almost all spheres of life and economy. To illustrate the breadth of application of the circular economy, some examples should be given here: About a third of food is lost on the way from one field to another, through spoilage, non-consumption or other causes. With a few exceptions, there is no systematic recycling of food that has not been consumed; It is often simply disposed of as garbage.

The same goes for packaging materials: despite the “Green Dot” recycling system introduced in Germany decades ago, partly financed by consumers through a tax, the actual recycling is less than 10 to 20 percent, depending on the plastic type. Electrical and electronic devices are often not recycled at all, despite the fact that consumer electronics contain very valuable resources (gold, platinum and other metals).

Theoretically, the transition to a circular economy is very reasonable and desirable, as it helps significantly in alleviating the pressure on natural resources caused by human activity. However, there are two powerful challenges to overcome. One is the topic of innovation. To date, recycling considerations have been used for a minority of products, for example in the automobile industry: here, complete reuse of components has already been planned in the design of new vehicles. In other areas of life (such as the consumer electronics industry), on the other hand, less attention is paid to recycling, often due to the fact that it has not been taken into account when designing products.

The major obstacle to reusing individual product components is often the difficulty of disassembling the final product into its individual parts. Extraction of raw materials is impossible without the separation step. An example from everyday life is the packs of TetraPak milk. It has long been praised as a very environmentally friendly packaging material, and it is practically impossible to separate the individual components (cardboard, inner plastic coating), so that the bulk of the thermally combined packaging is “used up” (i.e. burned) rather than broken into individual parts. Raw materials.

The good news: A lot has happened in recent years in terms of innovations in recycling. In more and more areas, there is a fundamental desire to make recycling part of the product cycle.

The second big challenge is the issue of costs. As long as mining raw materials – sometimes under appalling human or environmental conditions – is cheaper than recovering raw materials from perishable products, the proportion of recycled raw materials will remain under control. But here, too, innovation ensures lower costs and increased competitiveness, which, combined with regulatory requirements, can lead to pioneering success.

Does the circular economy really exist? The A new investment topic for investors? This question cannot be answered definitively in the affirmative, because the potential for future growth stories is huge. However, much of the innovation and “new” business models takes place in unlisted companies, making this space not readily available to ordinary investors. But recycling is also playing an increasingly important strategic role in large companies. However, the question then arises as to how to “objectively pure” investing in such a company if investors want to invest specifically in the circular economy.

From our point of view, we are still at the beginning of this new investment topic, it needs more investable companies. However, it is clear that the possibility of recycling to become a profitable investment subject in the medium term.

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