Portfolio Adviser • Portfolio Adviser Magazine Responsible Investing • TURN ‘TAKE, MAKE AND WASTE’ TO ‘REDUCE, REUSE AND RECYCLE’

Q: We hear lots talked about the circular economy, but what does it mean in practice?

A: In its simplest form, it is keeping what we use in consumption every day in constant use to reduce the necessity for virgin material. So by circular economy we mean incorporating an economic system aimed at eliminating waste and the continual use of resources.

Much of the time not only is this possible, but economically it works out better. Rather than the traditional ‘take, make and waste’ linear approach, circular economies employ ‘reduce, reuse and recycling’ to create a closed-loop system that minimises the use of resource inputs and the creation of waste, pollution and carbon emissions.

From an economic standpoint, the circular system aims to keep products, equipment and infrastructure in use for longer, thus improving the productivity of these resources. So rather than the motor going out on your fridge and you having to replace the whole fridge, you can simply just change the motor. The same with your washing machine, cooker, microwave, dishwasher and anything else you can think of. It’s going to take small steps and a change in consumer behaviour, but the opportunities are vast.

Q: How important is incorporating a circular economy in achieving the goal of being net-zero carbon emissions by 2050?

A: The simple answer is that we can’t get there without it. Sending waste to landfill is a large source of carbon emissions, so not only would a circular economy save on those, you also save on toxic chemicals and waste and potential pollutants to soil, water streams, air and biodiversity. By constantly reusing resources and avoiding landfill we benefit both the planet and our own finances.

While reducing energy-related emissions remains the largest effort in our aim to reach net zero, a recent study by the Ellen MacArthur Foundation showed that nearly 25% of carbon emissions can be got rid of completely if we adopt this circular approach.

This is supported by Accenture research, which estimates the circular economy could generate $4.5trn (£3.3trn) of additional economic output by 2030 just as a result of the savings created. So it is good for the environment and also good for economics. As regulations develop to get to net zero by 2050, don’t be surprised over the coming years to hear the promotion and adoption of a more circular economy.

Q: What are the challenges involved at achieving a true circular economy and which countries are leading the race?

A: The problem at the moment is that the term ‘circular economy’ is being used somewhat as an open phrase. It’s not like renewable power where we know what to do and know how to switch. When it comes to the circular economy, every industry, every country and every household will have different plans on how to incorporate it. It’s not a one-size-fits-all approach, instead it’s a behavioural change that is required.

When it comes to sustainability across the board, including the circular economy, recycling and reducing waste, without question northern Europe and specifically Scandinavia are the leaders. They have been at the forefront of this for quite some time and they remain there now. In terms of laggards, southern Europe is a bit more behind, the US is further behind and then the emerging markets are way, way behind. So the opportunity still remains vast, the challenge is getting people to understand that this is something they need to do and that small contributions can be incredibly powerful. The circular economy is a micro event, not a macro one.

Q: What are your hopes and expectations ahead of the UN’s Conference of Parties (COP) meeting at the end of October

A: Given that carbon emissions from power and mainly electricity generation are the biggest net contributor to climate change, it is understandable why much of the focus is placed on that. This is even more enhanced by the challenge of getting the emerging market economies to adopt more renewable power within their electricity generation mix.

The second focus will be on those approximately 35% of CO2 emissions that can’t be electrified, such as aviation, long-haul road transportation and the manufacture of steel and cement. In terms of the circular economy, we haven’t really seen a huge amount discussed in the run up to COP, because it is much more a country-by-country phenomenon.

Q: How is the UK progressing in terms of its efforts to become a circular economy?

A: Given the nature of the country we are, at present we are definitely ahead of the global curve. However, while we are better than some countries, we are not at the Scandinavian level by any means. So there is still quite some way to go, but increasing government legislation will help.

Q: We have many companies this year state their ambitions of being net zero by 2050, but as we stand at the moment is the target truly achievable?

A: When Ronald Reagan was president of the US and was dealing with the Soviet Union, the Soviets talked about disarming their nuclear weapons and he thought they had reached an agreement. He had an excellent term which I am going to reuse, which is “trust, but verify”.

So what does verification mean? The method we have today is called Science Based Targets (SBTs). The SBT Initiative is a non-profit organisation which puts companies on pathways to 1.5C from now to the year 2100. The difficulty with a 2050 pledge is that many of the CEOs signing up today, aren’t going be here in 30 years. So companies and their boards need to sign up to the SBTs to ensure both their processes and cultures change to adopt this challenge.

As we speak today, 859 companies have signed up to the SBTs and another 1,700 are in the process of discussing their targets with the SBTs. In terms of market cap, over $20trn of companies have signed up to the SBTs, which covers 1.25trn of carbon emissions.

Q: Where are the investment opportunities within the move to a circular economy?

A: When it comes to sectors you are looking to industrials and consumers. Just think of any large product you use every day that is sometimes going to go out of use and that can be used again. It could be anything from bricks to tables and chairs, to clothing and food.

Here are four examples of companies that promote a circular economy as part of their business model. Ball Corp is the world’s largest aluminium can manufacturer, making cans for your beans, soups and beers. Given that aluminium can be recycled indefinitely, some 75% of aluminium ever produced is still in use today. The global recycle rate for aluminium cans is 69% supported by the fact the residual product has an economic value and can be easily stored during the collection process. The net impact is that Ball Corp helps save 4.25m tonnes of CO2 emissions per year. That is the equivalent of removing 945,000 petrol cars o the road a year.

Second is the Australian-listed Brambles, which makes over 300m wood pallets and crates that form the invisible backbone of global supply chains. These primarily serve the fast-moving consumer goods, fresh produce, beverage, retail and general manufacturing industries. Given that the pallets and crates are made from wood, they can be constantly recycled. The net impact is that Brambles help save 1.95m tonnes of CO2 emissions per year, the equivalent of recycling 650,000 tonnes of waste instead of sending it to landfill.

Staying on the theme of recycling, the American company Darling Ingredients is a world leader in the recycling of leftover meat-based products and used cooking oil. They go to abattoirs across the country to pick up waste meat, which is then converted back into food, feed and biodiesel. Essentially, they get paid to take away someone else’s garbage and by rendering meat by-products, the carbon is captured and reused, rather than released into the environment as a greenhouse gas. The overall net impact was that in 2019 the company saved 5.5m tons of CO2, the equivalent of the estimated annual emissions of the UK city of Leeds.

Lastly, demonstrating the potential of closed-loop recycling, is DS Smith which is a leader in sustainable packaging. Closed-looped recycling is a process whereby waste is collected, recycled and then reused to make the same product. By using recycled materials in its corrugated boxes, M&G estimates that the UK company saves 55m trees a year from being cut down. Its biggest customer is Amazon, so any Amazon package you have ever received in your home has DS packaging in it.

The overall impact is that DS Smith’s operations offer a net saving of just over 650,000 tonnes of carbon emissions per year, the equivalent of providing 120,000 homes with emissions-free electricity.