A Sharper Focus for 2020: Doing Well by Doing Good

Hamish Chamberlayne, Head of Sustainable and Responsible Investing, makes the case for why companies whose operations and products are tied to the circular economy could provide long-term value for investors.

Key Takeaways

  • We believe the circular economy – in which products are made, used, re-used and recycled – will provide increasing value for investor portfolios going forward.
  • The economic and business rationale for sustainable investing comes through both the products of companies and the operational choices they make.
  • In our view, 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 that affect all of us.

The ever-louder alarm bell of sustainability provides a compelling investment opportunity – and one that is well suited to a long-term time horizon and mindset.

Prioritizing companies with robust business models that also address environmental and social challenges makes sense. In our view, it is a solid foundation on which to build an investment philosophy with the potential to generate attractive and repeatable performance for investors.

We see the so-called circular economy as providing increasing value for investor 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, which 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 – that are destined to get worse as the global population grows.

Across industries and geographies, many businesses have a role to play in the circular economy – from creating sustainable consumer goods to making building materials from plastic waste found in the ocean (“ocean plastic”).

The End Is as Important as the Means

The economic and business rationale for investing this way is tied both to the products of companies in the circular economy and the operational choices these firms 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.” The new product 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 using recycled ocean plastics, in this case to manufacture insulation panels. In early 2019, the firm committed to recycling 500 million plastic bottles each year by 2023, with a further target of one billion bottles each year by 2025. The sustainable nature of Kingspan’s products, meanwhile, is evident in how they reduce the carbon footprint of buildings, with an annual savings of 27 million tons 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.

Companies Making a Positive Environmental Impact

Other companies in the circular economy offer products or services that have an even more explicit positive impact to the environment. Xylem, for example, is a global water infrastructure and technology company headquartered in North America. It offers solutions from flood recovery services to water conservation and treatment services. Evoqua Water Technologies also provides water 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 for companies to combine products and operations to deliver a positive environmental impact. We think investors should consider focusing on such companies in 2020.

For one, the approach aligns with the United Nation'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. These companies could help solve resource constraints, which will only get worse as the global population increases.

But we also believe it is an opportunity for investors to realize long-term value. In our view, the circular economy is critical to our ability to support a growing population without destroying the natural capital (wealth) that supports our economy. Furthermore, in our opinion, companies that use waste as an input or follow other principles of the circular economy are exhibiting smart business sense.