Why consider a circular economy?
A circular economy is defined as an upgraded production and consumption model for goods production, consumption and disposal that ensures sustainable growth over time. Right now, the world operates in what is called a linear economy; a model that can have significant negative impact on our world. Follow along below to learn more about how we operate today, how we can operate tomorrow and the potential investment opportunity a circular economy offers investors.
Consequences of a linear economy
These are the consequences of our current linear economy, which operates on a framework that is resource intensive, and a take-make-use-waste model. It is not sustainable.
The circular economy wants to change all this by designing and producing goods in a way that creates no waste or pollution in the first place, keeps them in use for longer, provides for efficient recycling and regenerates the natural environment. This sustainable economic system could yield enormous environmental, social and economic benefits across the world.
How can we make circular economy a reality?
Investing in the circular economy
Opportunities to invest in the circular economy are also growing rapidly as more companies, governments and consumers are motivated to find new business models, policies, and consumption patters that support a more circular economy.
The public equity markets offer the opportunity to invest directly in funds targeting environmental solutions or in investment strategies that take sustainability or environmental, social and governance (ESG) factors into consideration. Public debt markets offer municipal bonds that finance infrastructure supporting water, recycling and waste, as well as Green bonds, which support sustainability-related projects.
In the private sector, venture capital helps fund early-stage companies that are developing innovative technologies or services to advance the principles of a circular economy. Private equity funding is critical as companies mature from early-stage entrepreneurship and need to scale their products or services offerings.
Redefine waste
The current linear economy leaves a long trail of waste, starting with byproducts and emissions from the manufacturing process itself, carried on by single‑use packaging and ending with a discarded, often underutilized, finished product in a landfill. The circular economy seeks to design out waste from the start, where 80% of environmental impacts are determined,10 and create “closed loops” to keep materials flowing through the system. A closed‑loop system reuses byproducts as future inputs, runs on renewable energy and sources from recycled materials. The shorter or tighter a loop, the better because it typically yields the most savings by reducing costs, such as labor and energy.
In a circular economy, many industries will transition to service-oriented/sharing models from the prevailing asset ownership models. In the case of autos, this shift could significantly increase the efficient use of resources (fewer cars per capita need to be produced, saving raw materials and fuel) while also reducing pollution.
The environment benefits significantly, as relative to production, remanufacturing uses 80% less energy, 85% less water, 92% less chemical products and 70% less waste.11
Retaining value from repairing to recycling
Extending the useful life of products also combats underutilization. To that end, there is a push to have producers and consumers:
Repair: Figuring out ways to maintain products, rather than quickly discarding them or even recycling them, offers the highest value.
Reuse: Product reuse and redistribution is viewed as the next best option to maintaining existing products.
Refurbish: Repair and/or replace failed parts so a product can remain in use.
Recycle: Investment in innovative technologies and processes is helping many companies incorporate recycling and recycled materials into their production.
Talk to your J.P. Morgan Team to learn more about Sustainable Investment
Plastics: A hundred-billion-dollar opportunity to reuse and recycle
Global companies, from retailers to plastics manufacturers, are setting high targets for plastics recycling, recycled and recyclable content, and recovery. For example, Sealed Air has pledged to make its packaging solutions 100% recyclable or reusable by 2025. The company has also set a goal of 50% average recycled content across all packaging solutions, of which 60% is post consumer recycled content.12 One of the drivers of these goals is the unsustainable practice of shipping plastic waste overseas, whereby developed countries are exporting shipping containers of plastic to developing countries, mostly in Asia.
New demand for recycled plastics could reach 5 to 7.5 million metric tons by 2030. If plastic recycling technologies can meet market demands, they have potential revenue opportunities of US$120 billion in the United States and Canada, alone. More than 40 companies with technologies to recycle used plastic into new plastic are operating pilot and commercial scale plants in these two countries today, or have plans to do so in the next two years.13
Many of them will partner with larger firms and investors to develop and scale their technologies. Unilever, in partnership with CreaSolv® Process and the Fraunho Institute for Process Engineering and Packaging IVV, has developed a new technology to recover the plastic from the hundreds of billions of plastic sachets that are thrown away every year and use it to create new sachets for Unilever products, making it a fully circular approach.14
Reuse will also be essential to meeting the challenge of reducing single‑use packaging. Only about 14% of plastic packaging is collected for recycling, with just 2% recycled to a similar quality. After a short first‑use cycle, 95% of the material value of plastic packaging (roughly US$80 to 120 billion annually) is lost to the economy.15 Replacing just 20% of single‑use plastic packaging with reusable alternatives, such as long‑use, refillable high‑end packaging, offers an opportunity worth at least US$10 billion.16
Colorful clorhes on racks in a fashion boutique
Not-so-fast fashion
Waste is a severe problem across the textile industry. More than USD $500 billion of value is lost every year and in 2018 the fashion industry produced 2.1 billion tonnes of CO2eq. This represents 4% of global carbon emissions—an emissions’ share larger than that of France, Germany and the United Kingdom combined. To align with the 1.5-degree pathway in 2030, 20% of garments need to be traded through circular business models.17 Policy makers, investors and consumers are in support of this transition. In a recent McKinsey survey, more than three in five consumers said environmental impact is an important factor in making purchasing decisions.18
If the fashion industry were to address the environmental and social issues it faces by taking steps such as converting to a sustainable material mix, eliminating harmful chemicals, decreasing water use, and improving transparency and traceability, it could unlock a US$560 billion economic opportunity.19 If not, fashion brands could face significant threats, including declines to profit margins.
Innovators across the industry can and are finding ways to reduce waste. For example, many are seeking to:
- Reduce resources used, including raw materials as well as water and energy sources, in the manufacturing process. 75% of all Nike footwear and apparel incorporates recycled materials, and Nike Air Manufacturing Innovation facilities divert more than 95% of manufacturing waste from landfills.20 They are implementing and scaling new design and manufacturing processes, with materials reclaimed throughout production and at the end of a product’s life.
- Focus on the traceability of materials so companies can meet recycling standards. One innovative company has developed a chemical regeneration technology to transform post-consumer cotton garment waste into high-quality, cellulosic fiber.21
- Increase the durability of clothes, and the ability to repair them, as well as create secondary markets.
More food for thought
Across the current linear food supply chain, 2.5 billion tonnes of food every year is lost and wasted. Food production and waste amounts to an estimated total GHG emissions of 13.7 gigatonnes/year22 and an economic cost of US$5.7 trillion—for every dollar spent on food, society pays two dollars in health, environmental and economic costs.23 In short, the current linear food system is enormously wasteful, drains resources and contributes to disease and pollution.
A circular economy for food can overcome these challenges:
- Source and produce food locally. By 2050, 80% of food will be consumed in cities. While the feasibility of urban farming systems is subject to debate, 40% of the world’s cropland is within 20 kilometers of cities.24 Local sourcing increases the resilience of food supply chains, shortens distribution channels and reduces the need for excess packaging.
- At the farm stage, use precision agriculture and regenerative practices, such as organic fertilizers, crop rotation, crop variation, rotational grazing, agro forestry and conservation agriculture. These methods can have a significant impact, as despite common perception, food loss and waste at the farm stage exceed that at the consumer stage. In fact, agriculture is responsible for 30% of anthropogenic greenhouse gas emissions and 80% of deforestation.25
- At the consumer stage, reduce and make use of food waste by redistributing edible food and using inedible food for fertilizer, biomaterials and bioenergy.
In Milan, Italy, municipal trucks (many powered by biodiesel) collect surplus food from households, commercial properties and schools, and transport it to an anaerobic digestion and composting plant. Once processed, biogas is injected into the local gas network and compost is used to fertilize farmland surrounding the city.
"All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context"
IMPORTANT INFORMATION
1The Circularity Gap Report 2022, Amsterdam: Circle Economy, 2022.
2Beat Plastic Pollution, United Nations Environment Programme, Available at: https://www.unep.org/interactives/beat-plastic-pollution/, October 2021.
3Driven to Waste: The Global Impact of Food Loss and Waste on Farms, WWF UK, 2021.
4Fashion and the Circular Economy, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/topics/fashion/overview.
5Opportunities of a Circular Economy, World Resources Institute, February 2021.
6The Circularity Gap Report 2022, Amsterdam: Circle Economy, 2022.
7Breaking the Plastic Wave, The PEW Charitable Trust & SYSTEMIQ, 2020.
8Waste to Wealth, Accenture, 2015.
9World Employment and Social Outlook 2018, International Labour Organisation (ILO), 20180.
10Source: https://ellenmacarthurfoundation.org/topics/circular-economy-introduction/overview.
11Europe’s first circular economy factory for vehicles: Renault, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/circular-examples/groupe-renault.
12Mapping the Flow of the World’s Plastic Waste, Visual Capitalist, Available at: https://www.visualcapitalist.com/mapping-the-flow-of-the-worlds-plastic-waste/, July 2019.
13Capital Landscape Study, Closed Loop Partners, Available at: https://www.closedlooppartners.com/foundation-articles/capital-landscape-study/.
14CEO Guide to the Circular Economy, World Business Council for Sustainable Development (wbcsd), 2017.
15Harnessing the Fourth Industrial Revolution for the Circular Economy: Consumer Electronics and Plastics Packaging, World Economic Forum, Available at: https://www3.weforum.org/docs/WEF_Plastics_the_Circular_Economy_and_Global_Trade_2020.pdf, January 2019.
16Reuse—Rethinking Packaging, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/reuse-rethinking-packaging
17Fashion on Climate, McKinsey & Company and Global Fashion Agenda, 2020).
18Survey: Consumer sentiment on sustainability in fashion, McKinsey, July 2020.
19Fashion and the Circular Economy, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/topics/fashion/overview.
20Nike’s Latest Sustainable Innovations and Environmental Impact, NIKE Inc, May 2018.
21Closed Loop Partners. GETTING IN THE LOOP
22Driven to Waste: The Global Impact of Food Loss and Waste on Farms, WWF UK, 2021.
23Five benefits of a circular economy for food, Ellen Macarthur Foundation, February 2021
24Cities and the Circular Economy, Ellen Macarthur Foundation, Available at: https://archive.ellenmacarthurfoundation.org/explore/cities and the circular economy.
25Ellen Macarthur Foundation.
26Built Environment, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/topics/built‑environment/overview.
27d.Hub Circular Buildings Toolkit, ARUP & Ellen Macarthur Foundation, Available at: https://ce‑toolkit.dhub.arup.com/strategies.
28Ellen Macarthur Foundation, “Urban Biocycles,” as of March 2017.
29Effective water systems for urban circularity: Biopolus, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/circular‑examples/effective‑water‑systems‑for‑urban‑circularity.
30Cities and a circular economy, Ellen Macarthur Foundation, Available at: https://ellenmacarthurfoundation.org/topics/cities/overview.
31Accenture, “Waste to Wealth,” as of 2015.
32The Circularity Gap Report 2022, Amsterdam: Circle Economy, 2022.
