Janus Henderson Investors’ sustainability spotlight will shine more brightly on companies that make a positive impact via the circular economy. In the third of a series, the Global Sustainable Equity Team reveals how, where and why.

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.

The information in this article is not an investment recommendation and does not constitute or form part of any offer or solicitation to buy or sell. These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors.