What is driving the shift to a circular economy in today's world

Smart investors who are looking to make the most of their capital over the long term are paying close attention to circular economy practices. After all, the potential benefit could be good for an individual’s portfolio— and help achieve sustainability.

The idea of a “circular” economy started in the 1970s as an academic’s dream: One day, the world would transform its “linear” economy, which operated in a take, make, waste model. Instead, it would adopt a new circular economy that would reduce, reuse and recycle the resources needed for modern life, creating a “closed loop” system that would be sustainable.¹

Over the decades, steps were taken toward making this dream a reality. Recycling laws were passed, innovative businesses were created, patents were registered, and more. Public awareness and enthusiasm slowly began to grow.

Still, humankind’s use of the earth’s resources has more than tripled since 1970. If current practices remain unchanged, the number of earths we’d need could double again by 2050.²

But now, three major catalysts—high inflation, climate change and legislation—are leading us to shift toward circular economic practices (e.g., using renewable energy and materials, building greater efficiency and less waste into supply chains, delivering goods and services virtually, and sharing products or otherwise prolonging their life spans through maintenance and intelligent design).

High inflation is changing businesses and consumers

Today’s persistently high inflation is leading some consumers and businesses to adopt circular economy practices. Central banks have continued to raise interest rates to help rein in inflation, as it hit 40-year highs recently.

Consumer behavior naturally changes when inflation is high, as people limit their expenditures and make trade-offs about what is essential versus what is expendable. For example:

• The retail resale market is surging. According to thredUp 2022 Resale Report, the global fashion resale market is expected to grow 127% by 2026, three times faster than the broader retail clothing sector. The study also found that 58% of consumers say second-hand has helped them in some way during a time of inflation, and 25% say they will consider buying more second-hand apparel if prices keep rising.³
• Companies providing refurbishment services, such as home, car and clothing repairs, are also set to benefit as consumers delay purchases of new items and extend the life of existing ones. The annual growth rate of the consumer electronics repair and maintenance market is forecast to grow as cost benefits of repairing old equipment rather than disposing of it increases.⁴

Inflation is also leading businesses to search for cost savings, often by recycling materials. Most supply-chain leaders expect profits to increase between now and 2025 as a result of applying circular economy principles.⁵ Clearly, savvy investors should be on the lookout for companies that are conscientiously recycling their resources and avoiding waste.

In addition to inflation, the drive to mitigate climate change is also causing some consumers and businesses to adopt circular economy practices.

Over the next 20 years, the global temperature is expected to reach or exceed 1.5° C of warming above pre-industrial levels.⁶ To stop that trend, urgent action is required—and individuals and corporates are responding, seeing the necessity to better manage their waste and reduce their consumption.⁷

Government policies now encourage the transition

Some governments are supporting the shift to a circular economy.

The European Union has taken specific legislative actions to encourage the flow of capital toward companies that would help create a sustainable economy. To help focus investors’ attention and financing, the “EU Taxonomy” was established to identify and define six environmental objectives, including transitioning to a circular economy as well as climate change mitigation and adaption.⁸

Meanwhile, in the United States, the Inflation Reduction Act promises to spend $369 billion to tackle climate change and reduce carbon emissions by 40% by 2030. The law directly offers strong incentives for battery recycling and manufacturer-led solutions for sustainably disposing products at the end of their useful lives.⁹

The act has helped prompt major car companies to announce partnerships with manufacturers to recycle batteries from their electric vehicles.¹⁰ One major car company predicts that 85% of a car could be recycled.¹¹

U.S. states also have stepped in. Some, such as California, Maine and Oregon, are adopting Extended Producer Responsibility (EPR) laws to force companies to reclaim products at the ends of their lives.¹²

Elsewhere, the Chinese government has committed to promoting a circular economy as part of its fourteenth Five-Year Plan (2021–2025).¹³

We can help

Estimates show that the shift to circular economy practices could generate $4.5 trillion of additional economic growth by 2030.¹⁴

A study by McKinsey shows that companies that adopt four out of these six potential circular economy practices might significantly improve their performance and reduce their costs:¹⁵

1. Regenerate (shifting to renewable energy)
2. Share (promoting the sharing of products and prolonging lifespans)
3. Optimize (improving efficiency and removing waste from supply chains)
4. Loop (keeping materials in “closed loops” through remanufacturing and recycling)
5. Virtualize (virtual delivery)
6. Exchange (replacing old materials with advanced renewable ones)¹⁶

We can help investors access these themes through managed funds in the public equity market, or in the private sector via venture capital opportunities. If you want to begin exploring circular economy investment opportunities, speak with your J.P. Morgan team today.

Interested in learning more about the circular economy? Click here to learn more.

¹G. Ready and W. Stahel, “The Potential for Substituting Manpower for Energy: Final Report 30 July 1977 for the Commission of the European Communities,” ECONIS—Online Catalogue of the ZBW.

²“5 Opportunities of a Circular Economy,” World Resources Institute, February 3, 2021.

³“threadUP 2022 Resale Report,” GlobalData, May 2022.

⁴“Global consumer electronics repair and maintenance Market,” The Business Research Company, October 2022.

⁵“Gartner Supply Chain Symposium,” Gartner, October 2022.

⁶“Climate change, widespread, rapid, and intensifying,” IPPC.

⁷“Can inflation drive more climate-conscious behavior?” Kantar, June 2022.

⁸“Explaining the European Union Taxonomy Regulation (EUTR),” J.P. Morgan Asset Management, January 2022.

⁹Aly Bryan, “How the Inflation Reduction Act Will Accelerate the Case for Investing in the Circular Economy in the United States,” Closed Loop Partners, August 18, 2022.

¹⁰Amrith Ramkumar, “Battery recycling race heats up after Inflation Reduction Act,” Wall Street Journal, September 14, 2022.

11 “Battery-makers are powering a circular economy,” The Economist, October 2022.

¹²“Extended Producer Responsibility Bills Gain Momentum”, Retail Industry Leaders Association, August 2021

¹³“Circular economy gets 5-year regulator boost,” China Daily, July 2021.

¹⁴“Waste to Wealth,” Accenture, Palgrave Macmillan, 2015.

¹⁵“Mapping the benefit of a circular economy,” McKinsey Quarterly, June 1, 2017.

¹⁶“Mapping the benefit of a circular economy,” McKinsey Quarterly, June 1, 2017.