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Circular Economy Stock Trading: A Pathway to Sustainable Growth and ESG Investing 

TABLE OF CONTENTS

Circular Economy Stock Trading: A Pathway to Sustainable Growth and ESG Investing 

Circular Economy Stock Trading: A Pathway to Sustainable Growth and ESG Investing 

Vantage Updated by Updated Wed, January 10 02:22

Amidst the chaos wrought at the height of the pandemic, a revolution was quietly taking place. The circular economy market – once largely unknown – saw a 25x increase in total assets managed. 

From a mere USD$300 million at the beginning of 2020, public equity funds dedicated wholly or in part to the nascent sector had increased by 28 times to USD$9.5 billion by November 2021 [1].

Meanwhile, the total volume of bonds issued to finance circular economy initiatives also saw similarly bold advances, surging to USD$37 billion by then [2]. This included a mixture of green bonds and sustainability-linked bonds. 

While the reason for the sudden spike in interest was not clear – perhaps brought on by an uptick in the realisation that we cannot carry on taking our world for granted – what is clear is the importance of the circular economy and the long-deserved recognition of its potential to unlock new financial opportunities while furthering climate change and sustainability clauses.  

What’s truly exciting is that those investing in the circular economy market can truly support green causes without giving up value, and perhaps for the first time facilitate the construction of a truly conflict-free portfolio.  

With the circular economy, investors may finally be able to credibly fulfil both moral and financial imperatives when investing. Here’s an overview of the promise that circular economy stock trading may yet hold.  

Growing interest in the circular economy  

First, a quick explanation of what the circular economy is all about. 

The conventional model of product manufacturing is largely a one-way process, where resources are taken from the environment to make the product, and at the end of the product life cycle, it usually ends up as waste.  

This “take-make-waste” model of creating products for consumption is causing the earth to run out of resources, while also driving ecologically harmful practices such as mining that pollute the environment.  

In contrast, the circular economy looks for ways to reduce resource depletion by recovering finite resources as much as possible. It seeks to design out waste by implementing sustainability practices (reducing, reusing and recycling), creating materials with less environmental impact (zero-carbon steel), and introducing new models of consumption (co-sharing vs individual ownership) [3].

The ultimate aim of a circular economy is for goods and products to be produced without having to extract virgin resources, thereby preserving the environment against further harm and allowing the regeneration of depleted or degraded regions.  

But circular economy initiatives can also offer lucrative opportunities, as more and more entities are finding out. In fashion, clothing resale is expected to double to USD 350 billion by 2027 and outgrow fast fashion as soon as 2030 [4].

This development has promoted a surge in financing to capitalise on this new growth area by the likes of multinational luxury group Kering and investment firm Tiger Global Management; Sweden’s EQT and even Morgan Stanley, which has joined BlackRock as a partner of the Ellen MacArthur Foundation, a leading charity championing the cause of circularity. 

The circular economy is also gaining attention in other sectors, such as food. Nestle has pledged CHF 1.2 billion by 2025 to support the use of regenerative farming practices that help improve soil health, enhance biodiversity and mitigate greenhouse gas emissions [5]

Remarkably, businesses and private sector financing aren’t acting on their own. Their activities are accompanied by strong policy support in the European Union – which counts the circular economy as one of six environmental objectives that guide sustainable finance.  

Also, a regional coalition led by the UN Industrial Development Organization and other partners has been recently set up to support Latin America and the Caribbean in transitioning to a circular economy. 

The bottom line is, with governments, enterprises and institutional forces taking note of the potential of the circular economy, this creates greater opportunity for retail investors to potentially benefit from circular economy stocks. 

Can doing good be rewarding, both morally and financially? 

Of course, while we all want to do our part in sustainability and green mandates, the financial motive for investing must not be ignored. Thankfully, there are proven investor benefits in circular economy investing.  

In a 2021 white paper, a study involving 200+ European, publicly listed companies across 14 industries showed a clear inverse correlation between the degree to which a company adopted circular practices and its likelihood of defaulting on debt.  

This means that circular economy stocks have an increased ability to return greater risk-adjusted returns to investors, making them safer bets over the long run.  

Circular economy strategies can reduce investment risk by 

  • decoupling economic growth from resource consumption 
  • diversifying business models 
  • allowing better anticipation of changing regulations and customer preferences 
  • reducing exposure to supply chain disruptions and  
  • tame volatility of resource prices 

For this reason, the circular economy is increasingly recognised by investors as a value-creation opportunity that delivers on goals related to climate and other global challenges. 

That’s to say, circular economy stocks are well capable of fulfilling both moral and financial imperatives for all investors. 

Where investors can find the hottest circular economy stock trading opportunities 

  1. Circular economy ETFs 

    1. Investors can look towards ETFs that are focused on the circular economy, either fully or in part. Encouragingly, many of these ETFs are launched by leading institutional investors, including BlackRock, Goldman Sachs and PNB Paribas. 
    2. Available circular economy ETFs include: 
      • BlackRock BFG Circular Economy Fund 
      • VanEck Circular Economy UCITS ETF 
      • HSBC GIF Global Equity Circular Economy Fund 
      • Goldman Sachs Global Environmental Impact Equity Portfolio 
      • BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF EUR 
      • RobecoSAM Circular Economy Equities D USD 
  2. Circular economy corporate bonds

    1. Investors who prefer fixed-income instruments may wish to look towards circular economy corporate bonds. Such bonds are launched to fund circular economy initiatives, and may also involve related programmes such as sustainability and ESG. 
    2. Some leading companies with outstanding circular economy corporate bonds are: 
      • Alphabet
      • Daiken Corporation
      • Henkel
      • Owens Corning
      • PepsiCo 
      • Phillips 
    3. All told, the number of private market funds with a circular economy focus was estimated to have grown from three to around 30 between 2016 and 2020.  
  3. Stocks of companies with strong ESG scores[6,7,8]

    1. Many of the core objectives of the circular economy are also echoed by similar initiatives such as ESG.  
    2. As such circular economy investors will also find credible options among companies that have demonstrated leading ESG scores, even if they aren’t strictly a circular economy company. 
    3. Some examples of such companies include: 
      • Microsoft (Software and technology) 
      • CBRE Group (Real estate) 
      • Hasbro (Consumer durables) 
      • Toppan, Inc (Commercial services) 
      • Nestle (Food) 
      • L’Oreal (Cosmetics) 
      • Unilever (Household consumables) 
      • Applied Materials (Semiconductors) 
  4. Companies directly involved in the circular economy

    1. Of course, investors may also look into trading stocks of companies that are directly involved in the circular economy.  
    2. Due to the wide-ranging nature and scope of the circular economy, investors will have no lack of choices to pick from, such as: 
      • Recycling and waste management companies 
      • Clean energy producers 
      • Water resource management companies 
      • Sustainable agriculture companies 
      • Fashion resale and second-hand markets  
      • Co-sharing platforms 

Do good while investing in circular economy stock trading  

As the circular economy continues to gain traction, investors will have yet more credible and meaningful ways to do while investing. While this idea is not new, having first been seeded by ESG, the circular economy will no doubt foster an acceleration in the march towards making sustainability the norm.  

By paying attention now, early investors stand to benefit from first-mover advantage, and may well find themselves enjoying a rare, front-row view as the curricular economy markets gather steam and take off. 

References

  1.  “Financing the circular economy – Ellen MacArthur Foundation”. https://www.ellenmacarthurfoundation.org/topics/finance/overview. Accessed 5 Dec 2023. 
  2. “How investors are taking advantage of developments within the circular economy – Capital Monitor”. https://capitalmonitor.ai/sector/consumer/how-investors-are-taking-advantage-of-developments-within-the-circular-economy/. Accessed 5 Dec 2023. 
  3. “What is a circular economy? – Ellen MacArthur Foundation”. https://www.ellenmacarthurfoundation.org/topics/circular-economy-introduction/overview. Accessed 5 Dec 2023. 
  4. “Resale Report 2023 – ThredUp”. https://www.thredup.com/resale/. Accessed 5 Dec 2023. 
  5. “Regenerative agriculture – Nestle”. https://www.nestle.com/sustainability/nature-environment/regenerative-agriculture. Accessed 5 Dec 2023. 
  6. “2023 ESG Top-Rated Companies – Sustainalytics”. https://www.sustainalytics.com/corporate-solutions/esg-solutions/top-rated-companies. Accessed 5 Dec 2023. 
  7. “IBD’s 100 Best ESG Companies For 2023 – Investor’s Business Daily”. https://www.investors.com/news/esg-stocks-list-of-100-best-esg-companies/. Accessed 5 Dec 2023. 
  8. “Leading consumer goods companies in the ESG theme – Just Food”. https://www.just-food.com/data-insights/top-ranked-consumer-goods-companies-in-esg/. Accessed 5 Dec 2023.