A sharper focus for 2020 on doing well by doing good
The ever-louder alarm bell of sustainability provides a compelling investment opportunity – and one that is well suited to a long-term horizon and mindset.
Prioritising companies with robust business models that also address environmental and social challenges makes sense. It is a solid foundation on which to build an investment philosophy that breeds an ability to generate attractive and repeatable performance for investors.
With this in mind, we see the circular economy as providing increasing value for portfolios going forward – the circular economy (make, use, re-use, recycle) contrasts with the traditional linear economy (make, use, dispose) in that resources are kept in use for as long as possible. This includes companies that contribute to a system of eliminating waste and ensuring a continual use of resources. This is achieved by protecting, enhancing or enabling a more judicious use of natural capital via circular business models and by mitigating and reducing pollution.
As a result, it is also an effective solution to resource constraints – one of our environmental megatrends – which are destined to get worse as the global population grows.
Many different businesses in diverse industry sectors and geographies have a role to play in the circular economy – from renewable energy replacing finite fossil fuels, to sustainable consumer goods, from the use of ocean plastics in building materials, to reusing water and sustainable design.
The end is as important as the means
The economic and business rationale for investing in this way comes via a two-pronged approach. First, through the product of companies in the circular economy and second, through the operational choices they make.
The key contribution is often from operations. For example, Adidas produces shoes and apparel constructed from recycled plastic, including ocean plastic. In April 2019, the company broke new ground with the announcement that it had designed a 100% recyclable running shoe that was “made to be remade”. This is an even purer example of the circular economy because an old shoe now becomes a new shoe. At the same time, the company’s product has a crucial sustainability impact by encouraging healthy, active lifestyles.
Irish insulation firm Kingspan is also dedicated to ocean plastics recycling in its operations used in making its insulation panels. In early 2019, the firm committed to recycling 500 million plastic bottles each year by 2023, with a further target of 1 billion bottles each year by 2025. The sustainable nature of Kingspan’s products, meanwhile, is evident in how it reduces the carbon footprint of buildings, with the contribution of an annual saving of 27 million tonnes of CO2 – equivalent to the annual output of 47 power stations, 14 million cars or roughly three times the annual electricity consumption of Greater London.
Another ambassador against the use of plastic is DS Smith, a leading European manufacturer and recycler of corrugated packaging products. The firm’s product is a substitute for plastic and it contributes operationally to the circular economy by its closed-loop paper recycling – it only takes 14 days for a cardboard box to be made, used, collected, recycled, pulped, pressed and made back into a cardboard box again.
Our focus in 2020 will also be on those companies in the circular economy that ensure their products deliver key environmental benefits.
Autodesk’s software, for instance, creates its own brand of circularity by enabling architects, engineers and product designers worldwide to design more sustainable products across many different industries.
When it comes to the issues of water management and environmental services, Xylem and Evoqua Water Technologies (EWT) are two examples of firms whose products make them important to the circular economy.
Xylem, the global water infrastructure and technology company headquartered in North America, offers solutions from flood recovery services to water conservation and treatment services. EWT also provides treatment systems, with a focus on helping customers achieve lower costs from the more efficient use of water. Specifically, it does this by treating industrial effluent and cycling the resulting pure water back to the same company.
These and many other examples highlight the potential to blend product as well as operations in terms of the positive impact a company can have.
Further, this fundamental component to our investment approach aligns with the focus of the UN’s Sustainable Development Goals, which encourage companies to advance sustainable development through the investments they make, the solutions they develop and the business practices they adopt.
In all, we see the circular economy as an investment opportunity as well as a solution to resource constraints, which are only going to get worse as the global population grows. Not only is the circular economy absolutely critical to our ability to cater to the needs of a growing population without destroying the natural capital (wealth) that supports our economy, but it also makes great economic and business sense to use our waste as an input.
For us, identifying companies in the circular economy will continue to give investors access to some of the best sustainability ideas while also confronting the natural resource constraints all around us.
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- The Fund follows a sustainable investment approach, which may cause it to be overweight and/or underweight in certain sectors and thus perform differently than funds that have a similar objective but which do not integrate sustainable investment criteria when selecting securities.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In respect of the equities portfolio within the Fund, this follows a value investment style that creates a bias towards certain types of companies. This may result in the Fund significantly underperforming or outperforming the wider market.