How to Invest in the Circular Economy

What is the circular economy, and why should you care as an investor?

The circular economy is an economic system where the value of products, materials and resources is maintained in the economy for as long as possible. It can include activities like recycling, reusing, repairing and remanufacturing. In a circular economy, products are designed to be repairable, reusable and recyclable, materials are kept at their highest utility and value, and waste is minimized and redesigned out of the system. For investors, there is a strong business case for circular-economy investing. The linear “take‑make‑dispose” model is highly inefficient, vulnerable to commodity‑price volatility, and faces strong regulatory headwinds. Circular models of design, production and consumption are gaining a competitive advantage and offering growth in recycling, remanufacturing, waste‑to‑value and circular‑business models. Some sources estimate a $4.5 trillion economic opportunity in the circular economy by 2030. In practical terms, how do you identify investments with significant circular‑economy exposure? This guide will discuss that. 

How do you invest in the circular economy? Key sectors and strategies

The circular economy can be applied to almost any sector that uses materials or resources and produces waste. Some of the key sectors include: 

• Waste and recycling collection, logistics, sorting and recycling technologies 
• Advanced and sustainable materials (recycled content, biobased feedstocks) 
• Refurbishment, reuse, and circular‑product-as-a-service business models  
• Repair, remanufacturing and used-products markets  
• Sharing and platform‑economy business models (mobility, office space, equipment) 

Businesses that incorporate these sectors into their strategies or generate significant revenues from these activities can be considered circular economy investments.

Circular business models: Screening and selecting companies and funds

Finding circular‑economy companies and funds to invest in can be challenging due to a lack of consistent reporting and data standardisation across companies and sectors. To help guide this search, there are three criteria that can be used to identify circular business models: 

• Resource productivity: More circular companies improve the efficiency with which materials and resources are used and extracted. 
• Closed‑loop recycling and use of recycled inputs: Circular companies rely on secondary feedstocks and sell recycled materials. 
• Business‑model innovation: Circular business models are built around repair, reuse, leasing, product‑as‑a‑service and other strategies that extend product life. 

The Ellen MacArthur Foundation has developed a Circulytics tool that ranks companies on their degree of circularity across these dimensions. The Circulytics tool, as well as other investor initiatives and databases, can help filter for high‑circularity companies in relevant sectors. Once a shortlist is created, further analysis is required to assess the financial attractiveness and risk profile of these companies and funds.

Evaluating risks and return opportunities in circular-economy investing

Circular-economy investing can offer attractive risk‑adjusted returns due to the structural transformation towards resource‑efficient business models, regulation, and consumer preferences. However, there are also risks to consider including technology risk (scalability, feedstock issues), circular‑hype risk (firms labelled circular but with limited actual circular activities), and regulatory risk (changes in incentives, quotas or waste‑management obligations). Thorough research and due diligence is required to balance these risks with the return potential.

Circular-economy ETFs, indices and funds

Circular‑economy indices, ETFs and funds can offer a simpler way to gain broad exposure to this trend. These funds track a basket of companies whose revenues come from circular economy activities. Some indices also weight companies based on their material‑resource productivity or circularity score. Examples of these funds include the MVCIRC Global Circular Economy ESG Index and the MSCI ACWI Circularity Index.

Circular economy thematic and impact investing

Impact‑investing strategies can be used to target the circular economy, including private‑equity funds, debt, direct‑ownership models, and investments tied to enabling infrastructure or technology. Impact‑investing products allow alignment of financial return with environmental or social goals, including in the circular economy.

Integrating circularity into your portfolio

Circular economy investing can be a part of a diversified investment portfolio with other impact or sustainable‑investing strategies. Circular‑economy investing does offer sector‑specific diversification but still correlates with broad market performance. Portfolio allocation should align with your risk tolerance and return horizon.

The regulatory and policy landscape for circular‑economy investing

Government policies and regulations play a significant role in the circular economy. Mandates on product design, extended producer responsibility, recycling targets, and infrastructure incentives are all becoming common globally and supporting the shift to circular business models. Government grants and procurement policies are also driving the transition. Staying informed about policy developments in key markets is important to understand the policy tailwinds or risks for circular investments.

The future outlook and trends for circular economy investing

Circular-economy investing is still at an early stage, with continued growth and development of the underlying market expected in the coming years. Trends to watch include: 

• Circularity across entire value chains (manufacturing, distribution, retail, reuse, waste collection, and recycling)
• Circular‑product-as-a-service and sharing platforms 
• Circular‑material innovation and design 
• Advanced recycling and sorting technologies 
• New business models enabled by IoT, digital platforms and other enabling technologies
• Increased mainstreaming of circular investing strategies (ETFs, indices, funds)

In conclusion

Circular‑economy investing offers investors an opportunity to support and benefit from a growing trend towards resource‑efficient, regenerative, and circular business models and strategies. By understanding the key sectors and criteria to screen for circular companies and funds, investors can find the right opportunities to invest in the circular economy and align their investments with their financial and impact goals. Circular investing is still at an early stage but offers significant potential for long‑term investors who conduct proper research, diversify their exposures, and remain engaged in the underlying trend.