Could the circular economy model, which aims to reduce waste and use resources more efficiently, deliver consistent returns to investors while reducing environmental degradation?

Like the COP29 World Climate Summit is accelerating in Azerbaijan, private banks are increasing their bets on the “circular economy”.

This cycle, in which materials never become waste and nature is regenerated, is quickly becoming a megatrend, according to consultancy Deloitte.

In a circular economy, products and materials circulate through processes such as maintenance, reuse, refurbishment, remanufacturing, recycling and composting. Companies like Ikea and US-based Republic Services play a role in reducing waste by repurposing and repurposing products and materials and encouraging more reuse and recycling.

This is fundamentally different from our current “linear” economy, in which we take materials from Earthextract the products and possibly dispose of them as waste.

On the other hand, a circular economy prevents the production of waste in the first place. As it helps to fight climate change and other global challenges in innovative ways, it has recently attracted considerable interest among academics, regulators, economists and investment experts.

“We are seeing a broadening and maturation of the concept,” says Felix Philipp, head of circular economy research at Lombard Odier Investment Managers. “While in the past the focus was primarily on recycling, more upstream strategies, such as reuse, repair and service models, are now becoming more prevalent,” he adds .

Swiss bank Lombard Odier recently won the prize for best brand image in the field of private banking (Europe) for its campaign entitled “The regenerative power of nature” during the PWM Private Banking Global Prices.

The world’s population consumes more than 100 billion tons of materials each year. More than 90 percent of all mined materials are used and wasted. This ecosystem is increasingly viewed from an economic perspective – to create value and attract customers – and taking into account geopolitical risk, which requires “de-risking” supply chains, according to Mr. Philipp.

Missing link

Many experts say there is a link between nature-based solutions (NBS) and financial returns. A WWF report highlights “Bankable Nature Solutions” to generate financial returns while benefiting ecosystems and communities. He says these projects, which often include elements such as sustainable agriculture or reforestation, can provide consistent returns for investors while reducing environmental degradation.

NBS programs can help “reduce and regenerate some of the negative impact caused by our current linear and extractive economic model,” says Philipp. “We need to increasingly turn to these NBS, reduce the use of virgin and fossil materials and increase the use of renewable and regeneratively grown resources. »

Not only can NBS regenerate “natural assets” including peatlands, forests and oceans, but they can also generate financial returns for investors and project developers who sell carbon credits or regeneratively grown materials , he says.

These investments can also mitigate risks, protecting financial returns and keeping intact the ecosystems that support economic activity.

A step beyond

But this approach is also associated with major challenges, with some investment experts believing that a holistic view is needed rather than a sudden shift to a circular philosophy.

“Even if we achieved a circular economy tomorrow, we would have already lost 73% of our wildlife populations,” says Yi Shi, client portfolio manager and engagement specialist at Pictet Asset Management, referring to the 2020 report Living Planet Index, which indicated an exacerbation of the situation. trend towards loss of global biodiversity.

Given that 50 percent of global GDP depends on ecosystem services, restoring nature and boosting our ability to serve the economy – involving pollination, water, food and timber – are essential to ensure a sustainable future, adds -he.

Moving away from today’s economy requires taking into account the social impact. “The long-term conservation and restoration of our nature requires a stable and resilient society,” says Shi.

Pictet Asset Management’s new strategy, Pictet-ReGeneration, claims to adopt a “new approach” by investing in the economic transition “beyond the circular economy”, bringing together the themes of the circular economy, restoration of biodiversity and social empowerment.

“This means we allocate impact capital to solution providers who help our economy become more circular,” he says, advocating for empowering companies to “better guide the transformation of our economy towards a state regenerative”.

Untapped potential

Those who advocate the transition to a circular economy agree that the path will be strewn with pitfalls.

According to Deloitte Circularity Gap Report 2024the circular economy is gaining popularity but remains short of concrete measures. The share of secondary materials consumed by the global economy fell from 9.1 percent in 2018 to 7.2 percent in 2023, a decline of 21 percent over five years.

“We believe we are just getting started, approaching inflection points,” says Mr. Philipp of Lombard Odier. “There is therefore still significant untapped potential for circularity in many sectors,” he believes.

Regulatory frameworks and targeted investments are essential to catalyze the transition to a circular economy. Institutions, including the European Investment Bank (EIB), are channeling capital into initiatives related to recycling, biogas production and sustainable packaging.

These efforts demonstrate a broader alignment of financial flows with the objectives of the circular economy, fostering innovation and market growth. But the circular economy has not flourished as policymakers hoped. According to a report by the independent European Environment Agency (EEA), the rate of use of circular materials increased by just 0.1% per year between 2011 and 2021. In other words, waste recycled materials are not reused as much as they should be.

Recently, the European Commission implemented a plan to reduce waste and encourage sustainable consumption. He said the EU should double its use of recycled materials from 11.7 percent in 2020 to 23.4 percent by 2030.

“Plastic and packaging has always been one of the priority sectors, certainly for public awareness but also for regulation and corporate commitments,” explains Mr Philipp.

Caring and sharing

More and more sectors are looking at their resource footprint and how they can move towards circularity. “In fashion, for example, rapidly changing trends often lead to overproduction and waste. Adopting circular economy principles could help promote sustainable materials and recycling practices,” he says.

On the other hand, the construction sector has “vast potential” in reusing materials and optimizing resource use, but is often “behind” in integrating these practices due to traditional methods. The electronics industry faces challenges related to e-waste and product life cycle. They can make “substantial progress” by focusing on design focused on longevity and recovery, according to Philipp.

The “shared economy” is “getting attention” as companies move from selling products to offering services, according to Martin Conroy, senior portfolio manager at KBI Global Investors. “For example, brands rent products instead of selling them directly, which promotes reuse and reduces waste,” he adds.

According to Mr. Philipp of Lombard Odier, the circular economy is based on positive foundations. “We will see more widespread adoption, where it will not be a dedicated, individual strategy but part of the core business strategy. »

Ultimately, the next generation will play a role in this crucial transition and they have an appetite for sustainable development. A study by Lombard Odier and Capstone Millennials identified five key priorities for the younger generation, including sustainability.

“The utility function of the new generation is evolving…they want to save for the future, but they also want to make sure they have a future they can enjoy,” says George Sakoulis, Head of Investment Teams and Manager portfolio of the GMO Horizons strategy. , which is also interested in the circular economy approach. “What we are doing cannot even have the slightest trace of greenwashing,” he warns. “That would mean we have failed.”