International Recycling Day: towards a circular economy

In addition to Internet Day, May 17 also marks International Recycling Day. UNESCO designated this celebration to emphasize the importance of protecting our environment and teaching people about the need to reduce, reuse and recycle products. This day seeks to raise awareness about the importance of taking measures to preserve the environment and promote sustainable practices that help keep our planet healthy.

International Recycling Day: the necessary transition to a circular economy

Jack Dempsey, Fund Manager, and Paul Lamacraft, Head of Investments, Schroders

The current economic model is outdated. We need to transition to a circular economy to ensure greater efficiency and a reduction in harmful practices.

Currently, the population consumes 1.7 times more resources than the Earth can support, yet the world's population is growing rapidly. In fact, it is estimated to exceed 9 billion people by 2050. Despite plans to reduce greenhouse gases, they are being produced at a rate that is rapidly destabilizing the climate. Against this backdrop, our economic model must evolve and a "circular" economic model would allow us to reduce energy and goods consumption, as well as damage to the environment.

But what is the circular economy, how can we achieve it and how can investors participate? A circular economy "redesigns" waste and pollution to keep materials in use by designing products and services with efficiency, reuse, and recycling in mind.

It is a global, sustainable trend that is essential to protect the planet and future living standards. Countries are setting clear targets and supporting policies to reduce the economic impact. Consumers are demanding sustainable products and services and insisting on higher environmental standards. In addition, technology is contributing to the transition, from materials science to digitalization. This will create an estimated $4.5 trillion opportunity by 2030 and $25 trillion by 2050. Investors can contribute - and benefit - from channeling capital toward the success of this shift. In our view, superior returns can be generated by investing in these impact companies.

Why is it so important?

The global ecological footprint measures the amount of biologically productive land area needed to meet the various demands of the human population. It includes space for fishing and food cultivation, fiber production and wood regeneration. It also includes housing, the extraction of raw materials and infrastructure, as well as the absorption of CO2 generated by fossil fuels.

In the 1970s we exceeded the threshold of annual natural regeneration and now need about 170% of the area that can recover naturally. Population growth means we will reach about three times the sustainable level by 2050.

Only 16% of waste is recycled worldwide and waste generation is projected to increase by more than 70% by 2050. 80% of all plastic produced worldwide is wasted and only 9% is recycled. This means that 12 million tons of plastic reach the ocean every year. In addition, almost one third of the food produced in the world is wasted.

On the other hand, more than 32 billion cubic meters of water are lost every year due to leaks. Eighty percent of the world's wastewater is discharged untreated. All this in a context in which almost 60% of the world's freshwater aquifers have already passed their equilibrium point for replenishment and in which water demand will grow by 50% between now and 2050.

The International Panel on Climate Change predicts that, to maintain temperature change at 1.5 degrees above pre-industrial levels, we must reduce greenhouse gas emissions by 45% from 2010 levels by 2030, and reach zero by 2050. Despite this, the U.S. Energy Information Administration projects greenhouse gas emissions in 2050 to be 30% higher than in 2010.

While this is a bleak outlook, it does at least mean that we have a wide range of opportunities when it comes to looking for companies that eliminate waste and pollution and keep products and materials in use.

Where are the opportunities emerging?

The success of the transition to a circular economy depends on a combination of influence and innovation. Large companies have the financial clout and size to bring about the required scale of change. On the other hand, the duration of linear economic models means that certain behaviors are deeply ingrained. In contrast, the youngest and most flexible companies tend to come up with the most disruptive and revolutionary ideas. Many newer companies - those that challenge the status quo - are still privately held and not yet listed on the stock markets.

Investors who want to participate in the circular economy transition should seek to encourage as much flexibility as possible to access innovation where it is most widely available. In this regard, there are five key themes - originally identified by Accenture and now widely adopted - that will offer investment opportunities as the global economy transitions:

The circular supply chain

This involves the introduction of fully renewable, recyclable or biodegradable materials that can be used in consecutive life cycles. This can reduce long-term costs and increase predictability and control of the supply chain.

Recovery and recycling

Recovery and recycling refer to a system of production and consumption in which everything that was previously considered waste is reused for other purposes. Companies can recover products at the end of their useful life to make use of and reuse valuable materials, energy, and components.

Exchange and product as a service (PaaS) platforms

Exchange platforms use technology to increase the utility of assets, avoid idle capacity or find a new use for products. Product as a service involves consumers paying for the use of a product rather than for the product itself. This makes manufacturers focus on longevity, reliability and reusability.

Extending the useful life of products

The product life extension model aims to leverage the value of products that may be broken, outdated or no longer needed. By maintaining and improving products through repairs, upgrades or refurbishment - or by finding a new buyer - companies can create great economic value. In addition, they can greatly reduce raw material consumption and emissions generated by production processes.

Technology enablers

These are companies whose products or services provide the tools for the transition to a circular economy. These companies may span the software, electronics, and industrial sectors, but all provide the tools necessary for a successful circular transition.

The need to act in order to build a change that can be assumed

We have exceeded the limits of the planet to sustain the population. World leaders, having become aware of the challenge, are raising their heads and realizing its magnitude. We need to dramatically reduce the pressure on the Earth through a rapid reconfiguration of the global economy. We believe that by supporting companies that contribute to this economic reality, we will outperform those that remain anchored in the old paradigm. More than that, we can ensure that prosperity for future generations is maintained, or enhanced.

Investing in solutions to the world's serious waste problem

Tzoulianna Leventi, Small Company Investment Analyst at abrdn

The amount of waste generated in the world has reached truly staggering levels. It is estimated that the world's population generates 2 billion tons of waste per year and more than a third is not managed in an environmentally safe manner.

Given that there are some 5.25 trillion tons of plastic waste in the world's oceans and that the global recycling rate for this material is now estimated at only 20%, there is a huge and urgent need to make products used in industry, construction, textiles, healthcare, and all other sectors much more sustainable.

The good news is that many small and highly innovative companies in Europe are tackling these challenges and proposing viable and sustainable solutions. Some companies are finding new uses for centuries-old, traditional materials such as cork and pine resin. Others are creating sustainable, even biodegradable, products in their laboratories to replace the petroleum derivatives on which we are so dependent. As demand for these sustainable products increases, these companies could have promising growth opportunities ahead of them.

The Dutch company Corbion is one of those manufacturing exciting new products based on natural ingredients in the laboratory. Lactic acid and lactates are bio-based emulsifiers that are used to create safe, natural, and cost-effective ingredients for biodegradable products used for skin and hair care. The company also produces poly lactic acid (PLA), a bio-based, recyclable, and compostable polymer that can be used to create materials to replace plastic in many uses, from packaging to fibers to use in the automotive industry.

Currently, the UK alone produces 230 million tons of waste per year - 1.3 kg of solid waste per person per day. In Europe, this figure is 1.1 kg, and in the United States, 2 kg per day. Even waste that has been separated and sorted for recycling often ends up being incinerated, landfilled or sent abroad, where it cannot be recycled or managed effectively.

To mention just a few examples of products that need to be made more sustainable: single-use plastic packaging; sterile but disposable medical products; waterproof but polluting paints; solar panels mounted on plastic; non-recyclable car interiors; and the endless production lines of plastic bags, boxes, and utensils. It is hard to imagine how much of modern life can be replaced by more sustainable products. But without major improvements in all areas, the world will drown under a tide of indestructible waste.

The daily challenge of the Norwegian company Borregaard, a "biorefinery" that uses the many components of the wood to create biochemicals to replace petroleum derivatives, is to replace sophisticated paints, glues, and fuels with equally sophisticated plant-based and sustainable products. The biopolymers, cellulose specialties, biovanillin, cellulose fibrils, and bioethanol manufactured by the company can be used in agriculture and aquaculture, construction, pharmaceuticals, and cosmetics, food, and batteries, as well as biofuels.

Since 1962, the company has been manufacturing plant-based vanillin produced from spruce, which is used in the production of food and personal care products. This spruce vanillin provides a 90% reduction in emissions compared to vanillin synthesized from crude oil.

A Portuguese company, Corticeira Amorim, is at the forefront of finding new uses for cork. As cork is extracted from living trees, it is a carbon-negative product. A cork oak must be 25 years old before its outer layer can be harvested, but then the layer grows back and for the next 150 to 200 years it can be re-harvested every nine years. Of course, being a natural product, cork harvests can be affected by weather conditions and fluctuations in agricultural prices, making production, prices, and profitability more difficult to gauge.

However, there is great potential for this lightweight, durable, insulating, and biodegradable material. Corticeira uses it to make artificial turf and sustainable sports fields, insulation, acoustic panels and flooring and is testing other innovative uses. The company collaborates with Renault in the manufacture of car seats and interiors; it has provided cork insulation for NASA's Mars Rover and the European Space Agency's spacecraft and has lined wind turbine blades to reduce vibrations. In a project with EDP, floating solar panels were created with cork.

If we want to start doing something about the world's existing mountains of garbage and stem the flow of new garbage, many more innovative solutions are urgently needed. Through our analysis, we aim to identify and invest in profitable small and mid-cap companies with growth potential, earnings resilience and momentum, which through their product offerings can benefit people and the planet.