This is the next installment in my series of posts focusing on both the energy transition and economic transformation we are undergoing, both of which require significant investment. These thought pieces are directly relevant to the segments we target under our Environmental Ecosystem Fund that leverages the interconnection between Environment, Economics and Energy Security (“E3”).
We no longer operate as a linear economy. Conventional technologies have disrupted the natural “air-water-soil” cycles of the earth, and now demand a circular view. Adoption of a Circular Economy is recognition of our natural resources as finite, and the limitations and dangers of traditional waste disposal methods. The Circular Economy has three key principles: eliminating waste and pollution, circulating products and materials at their highest value, and regenerating nature. The United Nations established seventeen Sustainable Development Goals (“SDGs”) that follow a Circular Economy model, aimed at reducing waste and resource consumption (THE 17 GOALS | Sustainable Development). The Circular Economy contributes to several of the SDGs, including SDG12 – on responsible consumption and production – and is considered the second most important technology innovation space after Big Data.
The circular model entails decoupling economic activity from the consumption of finite resources (What is a circular economy? | Ellen MacArthur Foundation). The transition to a Circular Economy not only addresses the global climate challenge but opens self-sufficiency, sustainability and economic opportunities to companies and cities around the globe. There is a clear investment opportunity in transforming waste into energy, industrial products and consumer goods (“Waste-to-Value” or “WTV”). The WTV view opens opportunity in what I see as the three big transitions taking place today – energy, water, and industrial.
The WTV market presents a significant investment opportunity across multiple segments. The key factors of the WTV market include:
- Reduction in environmental impacts of production and consumption
- Overall reduction in waste
- Greater resource productivity
- More competitive economy
- Tackling emerging resource scarcity and security issues in the future
- Production of substitute fuels and valuable by-products
Deloitte analysts estimate that the circular economy will become a $2-3 billion market in the coming years, with a valuation upwards of $4.5 trillion by 2030, according to WEF (Study: Global circularity still in decline despite circular economy ‘megatrend’; The circular economy can help save the planet – if we start innovating now | World Economic Forum.). I view this as an attractive investment opportunity. Key growth drivers of the WTV market include:
- Tighter environmental regulations
- Corporate sustainability/net zero commitments
- Technological advancements
- Rising waste volumes globally
- Persistent pollution (air, water and land)
- Aging infrastructure
- Consumer and community preferences
Investors often look to policy signals to support new innovative measures. Governments are using policy incentives and regulations to encourage investments in the green transition and promote economic security – specifically supply chains. This year, the Biden Administration released the “National Strategy for Reducing Food Loss and Waste and Recycling Organics” to prevent food and other organic waste and reduce associated environmental impacts, such as methane pollution (National Strategy for Reducing Food Loss and Waste and Recycling Organics | USDA). In a multi-agency approach, the Environmental Protection Agency, the Department of Agriculture, and the Food and Drug Administration identified opportunities for the federal government to meet its goal through policy, funding and research. In 2020 the European Commission recognized the importance of reducing waste by adopting the Circular Economy Plan, a key pillar of The European Green Deal, and one of six environmental objectives of the EU Taxonomy for Sustainable Activities (Circular economy: definition, importance and benefits | Topics | European Parliament). The European Investment Bank partnered with five of Europe’s largest national banks and institutions to launch the Joint Initiative on Circular Economy. In global climate negotiations, there is a push for more countries to adopt circular-based measures to achieve a number of the SDGs, with the ultimate goal of reducing carbon emissions. According to the International Energy Agency (“IEA”), global energy related CO2 emissions grew 1.1% to 37.4 billion tons (Executive Summary – CO2 Emissions in 2023 – Analysis – IEA). Contributing to global emissions is our consumption and use of resources. Growth in our consumption produces more waste – with the potential of a surge of as much as 70% (Towards a circular economy for industrial electronics). With a circular view, the challenge to confront is both waste production and water consumption. As with energy, water is critical to almost every aspect of human life. The demand for freshwater – taken from the ground or surface water sources – is expected to outstrip supply by 40% by the end of this decade, while 80% of the wastewater currently produced is released back into the environment without treatment or reuse (Why water security is our most urgent challenge today | World Economic Forum). While the majority of freshwater withdrawals are for agriculture, industry and domestic/municipal water withdrawals are significant as well, according to the UN. Energy is also water-intensive, accounting for 10 to 15% of global withdrawals (Why investment in water is crucial to tackling the climate crisis | World Economic Forum).
WTV capitalizes on sustainability goals that aim to conserve resources, reduce waste and address climate and environmental challenges. WTV innovations that address the environmental impact from increased urbanization, population growth, per capita wealth growth and other secular trends should drive growth in clean infrastructure investments.
Applying Circular Economy principles in industry can reduce production costs and improve competitiveness; reduce greenhouse gasses, waste and other pollutants; increase long-term availability of raw material supply; and create market opportunities. Some of the most difficult industries to decarbonize (and also the highest carbon emitters) include cement, iron and steel, and chemical industries. There has been a tenfold increase in financing solutions addressing waste and pollution to deliver business and economic opportunities (Financing the Circular Economy). Not only are there environmental and societal benefits in the Circular Economy approach, but there are financial benefits, too. Companies with a circular approach have demonstrated a lower default risk and higher risk-adjusted returns (Going round in circles – the value of waste | Allianz Global Investors). Companies are increasingly turning to this approach to drive a competitive advantage by driving future growth opportunities and meeting customer needs and demands.
Why am I bullish on investing in WTV? It means investing in innovative and leading technologies and resource recovery infrastructure that results in massive efficiency gains for economies and companies. The circular economy and green investing outlook go hand-in-hand.