The Takeaway: Keeping Materials Spinning Around Is Key to the Rise of the Circular Economy
So, what is the circular economy, and how has it evolved as part of the global economy?
The circular economy is all about keeping materials within the economic system. It all starts with the design of products, as it is a critical first step to ensuring that products can be used for a longer period by multiple users. One example is clothing—how raw materials are mixed and dyed is key for the durability of the garments (for reuse) and the ease of separating materials (for recycling). The better the design, the longer the life of the product, and the more it can be reused and recycled at the end of its useful life. The circular economy is composed of multiple loops, including the sharing economy—sharing, reusing, repairing, refurbishing, remanufacturing, and recycling. There has been a misperception that the circular economy begins and ends with recycling—that’s incorrect. There is a hierarchy in the circular economy and recycling should be the last resort. The circular economy was born primarily from concerns around harmful pollution, which is demonstrated in the growth and evolution of the electronic waste sector. Now, other drivers have materialised, for example, disrupted supply chains and the increase in inflationary pressures on consumer pricing.
What types of products or sectors are more suited for a circular model?
The two main drivers are price and quality—more expensive products (i.e. the price when new and when used) that are better made and have a higher overall quality are successful circular models. For the luxury fashion sector, the circular model makes sense. Not fast fashion, which has lower value and quality. Even though it can be recycled, it doesn’t have a high circular economic value or a long lifecycle. Compare a Louis Vuitton bag to a T-shirt in the fast fashion sector. The luxury bag is of higher quality and has a higher resale price—it can be refurbished and resold. IT equipment and automobile parts are also good examples, as are white goods, such as in the resale of fitted kitchens.
How does the circular economy make a real impact on climate change?
Anything that has embedded CO2 emissions—meaning it emits CO2 to produce—will be greatly improved by extending its product life. It’s simple mathematics. A laptop used for 10 years has half the footprint per year compared to a laptop used for five years when it comes to embedded emissions. When considering CO2 emissions, people typically think only of the use phase (e.g. my electric vehicle emits almost zero emissions as I don’t fill it with gas), not the manufacturing and marketing phase. But often, emissions during the manufacturing phase dwarf those during the use phase. IT is a good example. In IT, 83% of emissions are derived from the manufacturing phase and the first year of use.
What are the core growth drivers and potential hurdles to fully deploying circular models?
The main growth drivers are consumer preferences and fashion is a good example. Second-hand clothing was long seen as evidence of financial constraints and therefore, people bought less of it. Now, this has changed, and consumers are conscious of making environmental gestures and are more aware of CO2 emissions. Regulation also has a direct impact. For example, in the EU there are right to repair, extended producer responsibility, and carbon regulation directives along with the need to reduce greenhouse gas emissions. In the impact finance space, the rules to qualify as an impact fund have become more stringent, making it more challenging for funds to find truly sustainable and financially attractive opportunities. The circular economy is a perfect space to combine both. However, there are still hurdles, as demonstrated by the overconsumption of lower-quality fast fashion and furniture products, for example. The other issue is the speed of the product innovation cycle—the more often you innovate the more often people will buy. iPhones are a good example, as consumers tend to upgrade every time a new model is introduced. However, incremental innovation nowadays is slowing down in many sectors, which means the demand can shift more easily towards second-hand products. Every hurdle we identify is being rectified, but it’s taking time.
Finally, what should investors be looking for as a key investment proposition?
In addition to the points discussed earlier, one key element is the recurring nature of revenue: products-as-a-service, equipment-as-a-service, and devices-as-a-service offer a recurring income to companies, which proves more resilient and has less cyclicality than one-off revenue. However, one key challenge in the market is the availability of high-quality used products to satisfy the demand for second-hand. For example, in Europe, demand for pre-owned IT is currently much higher than supply, which is why the sourcing strategy of circular tech companies is key. Some companies—like Alchemy Global Solutions in the circular tech market for phones, tablets, laptops, and wearables—have even specialised in improving product takeback, acting as a fully integrated intermediate between OEMs and end users. Estendo is another good example of a recurring business model offering extended warranties on white goods products, like cookers, fridges, and freezers.
