How to identify the winners in the $25 trillion circular economy transition

The Transition to a Circular Economy

The transition to a circular economy will be one of the defining long-term growth trends of the coming decades. It is driven by the need to decouple economic growth from resource consumption.

Overconsumption creates two existential issues facing the planet and the economy today – lack of resources and climate change.

Demand for resources is exceeding supply. Our economy consumes resources today as if we had 1.7 planet Earths, and is on track to hit the need for three planets by 2050 as we push the planet into further natural capital deficits.

c. 45% of global greenhouse gas (GHG) emissions come from the way we make and use things, including agriculture. Given these cannot all be directly addressed by renewable energy, the need to transition to a circular economy becomes more urgent. There is no path to net zero without the circular economy.

$25 Trillion Opportunity for Investors

The circular economy opportunity is not just a “feel good” theme; it’s very much an economic one.

Accenture estimates that the “resource gap” opening up over the coming decades will create a $25 trillion opportunity by 2050 for circular economy business models.

Companies that can provide solutions to our overconsumption problem and close the resource gap will have an opportunity to generate higher revenue and profits. As investors, we want to back these companies.

Circular Score – A Focused Approach to the Circular Economy

Our Circular Score is a proprietary approach to assessing a company across its entire operations – from strategy to inputs/outputs and everything in-between. This analysis is the same regardless of industry or geography.

At Schroders, we believe that sustainability assessment is far too important to outsource.

Similarly, with our approach to the circular economy opportunity, we believe that a bottom-up approach is required. Our Circular Score framework will be critical in helping us identify future circular economy winners.

We focus on three areas: alignment; furthering the circular economy; and externalities and risks.

Alignment

We look at how the company is aligned with the aims of the circular economy, what targets it is setting, and whether its success will contribute to a successful transition.

Capital allocation is a further key element of alignment. We look to see where capex is being spent and what types of businesses are being acquired, if any.

Furthering the Circular Economy

This is the most significant element of the circular score. We examine the products and/or services companies provide, along with how they go about producing them. These will be the key drivers of circularity.

While important, we believe that investors need to look beyond just revenue alignment and really understand a company’s operational footprint.

Where are the raw material inputs coming from? What energy sources are being used? What is the company doing about emissions? How is waste treated? How does the company treat water?

These are just some of the questions we are asking in order to get a true 360-degree view of a company and its footprint.

Externalities and Risks

This final section incorporates the need to recognize that there are risks in delivering on a circular economy. This could be around scaling an unproven novel technology or the risks around operating in a potentially hazardous industry. We also incorporate a view on any controversies that surround the company.

We feel the need to recognize that good execution of a strategy is not always guaranteed, and so it’s important that this risk is reflected in the overall score.

Engagement – Improving a Company’s Circular Score

Engagement is a key focus when it comes to investing in the circular economy. We want our companies to be able to benefit from structural growth trends, as well as maintaining the resilience that comes with greater control over the cost base and supply chain. We see engagement as an important tool in helping to future-proof our investments.

Our circular economy framework helps us to understand key engagement priorities as it highlights where companies can improve across their operational footprint (as well as beyond it).

We take a unique approach in focusing on those companies we invest in that have the lowest circular scores and aim to work with them in order to improve these over time.

The end result of all this is the creation of a portfolio of exciting companies that can genuinely contribute to the transition to a circular economy, with the potential to deliver attractive returns along the way.

SDGs, Targets, and Indicators in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 12: Responsible Consumption and Production
• SDG 13: Climate Action

The article discusses the need to transition to a circular economy to address overconsumption, lack of resources, and climate change. These issues are directly connected to SDG 12, which aims to ensure sustainable consumption and production patterns. Additionally, the article mentions that a circular economy is necessary for achieving net zero emissions, aligning with the goals of SDG 13 to take urgent action to combat climate change.

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.
• SDG 13.2: Integrate climate change measures into national policies, strategies, and planning.

The article emphasizes the need to manage and use natural resources sustainably, which aligns with SDG 12.2. It also highlights the importance of integrating climate change measures into policies and strategies, supporting SDG 13.2.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Resource consumption per capita
• Greenhouse gas emissions
• Renewable energy adoption
• Raw material sourcing practices
• Emissions reduction strategies
• Waste management practices
• Water management practices

The article mentions resource consumption exceeding supply and greenhouse gas emissions from production processes. These indicators can be used to measure progress towards SDG 12.2 and SDG 13.2. Additionally, the article discusses the importance of renewable energy, raw material sourcing, emissions reduction, waste management, and water management, which can serve as indicators for assessing circular economy practices and progress towards the targets.

Table: SDGs, Targets, and Indicators

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: schroders.com

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