A circular economy promotes sustainable development by designing products, systems and processes that focus on recycling and reuse
We consume a lot. And we waste a lot – not just food and packaging but clothes rarely worn and cars or tools that are used infrequently. Things would be different in a circular economy, which promotes sustainable development by designing products, systems and processes that focus on recycling and reuse. This minimises waste, conserves natural resources and provides efficiency gains.
In this issue of #WhyESGMatters, we discuss why we need a circular economy, the economic impacts and which parts of the economy stand to benefit. Given the seismic shifts in the way we would live under a circular economy, investors should understand how this could affect their portfolios and what opportunities may be available.
1. Global Footprint Network
2. Circular Economy Organisation
3. Circular means the percentage of materials produced from cycled inputs. The Circularity Gap report, published 22 Jan 2019 at the 2019 World Economic
Forum by the Circle Economy Organisation
4 & 5. The Ellen MacArthur Foundation
6. The World Economic Forum
What is the circular economy?
The circular economy is a simple concept that requires a radical shift in how we live our lives, design, manufacture and dispose of goods. In contrast to a linear model (chart 1) where we make-consume-dispose, a circular model (chart 2) involves sharing, recycling, re-using and waste-management. There would be less leakage; products would be designed for reprocessing; waste could become a raw material. The energy currently required to replace a product could be spent more effectively.
Why we need it
The need to achieve circularity is significant, for both environmental and economic reasons. Under a linear model, we generate vast amounts of waste that pollutes our water, air, soil and natural spaces, destroying ecosystems and harming human health. The world already uses more natural resources than ecosystems can naturally regenerate, and the extraction, processing and manufacture of goods accounts for 62% of total global greenhouse gas emissions.
A switch to a circular economic model provides the opportunity for efficiency gains that preserve scarce resources, protect our environment, unlock sustainable economic development potential and improve our quality of life. Circularity would bring significant emissions savings, helping to achieve Paris Agreement targets for curbing global warming, and minimise waste, benefiting the environment.
Circularity has profound implications for the economy and the way we think about it. If fewer goods are produced because we reuse or share them, resources can go into more productive activities, substantially raising growth rates. But traditional economic gauges, such as production or spending will fall, causing us to rethink how we measure progress.
Unlocking economic potential
A circular economy could bring huge economic benefits. According to the World Economic Forum, a circular economy can unlock USD4.5 trillion of global gross domestic product (GDP) by 2030, as resources are better utilised and employment switches from resource extraction and waste-disposal to higher-skilled productive industries.
The Ellen MacArthur foundation also estimates that these sorts of initiatives could save countries across the European Union (EU) a total of USD340-630 billion per year, or roughly 3-4% of GDP by 2030 due to products not being wasted.
Given benefits the economic and environmental benefits, we expect the circular economy to feature much more prominently in policy making in the coming years.
But how to measure it?
Despite the considerable economic potential of a circular economy, measuring it may be hard. Financial markets look at activity data to gauge the health of the economy, such as industrial output or retail sales. But many of these indicators that are useful in a linear economy, are less useful in circular one.
If products are ‘used’ rather than ‘consumed’, activity data will fall. If we share cars or drills, fewer will be required and retail sales will be lower. If we need fewer cars, fewer will be made and manufacturing data will suffer. Weak production or spending data may therefore not necessarily mean economic weakness. Indeed, economists will need new gauges to measure economic prosperity, shifting the focus from GDP growth to wellbeing or other measures.
Who’s doing what?
Many economies are implementing polices to help with the move towards circularity. We look at some examples below.
The circular economy is integrated into the 12th and 13th Five-Year Plans and supported by laws and strategies such as Circular Economy Promotion Law, and others.
In 2018, the EU set specific waste management targets: by 2025, 65% of all packaging waste should be recyclable and by 2030, that target would increase to 70%.
A number of cities and organizations have committed to principles and goals aligned with the vision of the circular economy, for example New York City’s Zero Waste initiative aims to reduce the amount of commercial waste by 90% by 2030.
People are already switching to a ‘using economy’. Their demand is driving the trend to sharing and consumers are considering the environmental consequences of their choices. But the world is still only 9% circular and there is a huge amount still to be done.
Technology, particularly the smartphone, is a key enabler of the sharing economy. Instant knowledge of the availability of products and services allows the sharing economy to exist and thrive. Empty homes can be let short-term; ride-hailing, car rental makes car-ownership less important; music streaming makes CDs redundant; e-books mean less paper and printing. Think Spotify for CDs, Netflix for DVDs, Kindles or tablets for books, and Google Maps instead of a physical map.
We identify parts of the economy that investors should be aware of as we move towards circularity.
1. Sustainable resource management
Depleting natural resources unsustainably caps the rate at, and level to, which economies and societies can grow and develop. Sourcing from sustainable supply chains alleviates this. Standards are being introduced to regulate claims of “good” supply chain management, for example, the Forest Stewardship Council (FSC) allows consumers to identify wood and paper made with materials from well-managed forests and/or recycled sources. The Marine Stewardship Council (MSC) certifies that products have been produced with supply chains that ensure sustainable fishing.
Initial products will need to be longer lasting and higher quality, and designed in a manner that facilitates reuse or recycling. UK food retailer Waitrose is latching on to this idea by starting a trial for the use of refillable containers in supermarkets for a range of products including pasta, rice and washing up liquids. Outdoor clothing company Patagonia has introduced a repair system for clothing, for a small fee, to save customers having to purchase new items.
2. Waste management
Higher recycling rates will allow us to continue to manufacture and use products we all love and enjoy, but mitigate the use of natural resources. Walkers crisps recently introduced a scheme in conjunction with recycling company TerraCycle to operate collection points for crisp packaging waste. Apparel and footwear brands including H&M, Marks & Spencer and Asics have launched programmes that involve exchanging used clothes or trainers for discount vouchers.
Deriving energy from waste products that are not recycled is one way of reaping returns and closing the loop. This allows effective treatment and management of some products that are harder to dispose of, such as hazardous waste and low quality plastic. Some countries are implementing policies to promote the use of waste-to-energy processes, for example, China plans to dispose of one-third of its waste via this method by 2030.
Generating products from waste that do not fall under conventional recycling or waste to energy options is an avenue that is being explored. Private company Ecovate is a US-based biotechnology company making products from mycelium (mushroom based) materials. They are partnering with IKEA and Dell to create products including alternative meats, biodegradable packaging, and even footwear and animal free leather.
The idea of a circular economy, where we waste less and we use our resources more efficiently, is growing in prominence. This will matter for companies reliant on linear models and those looking to grow in a more circular way. It will also matter for investors trying to understand the data and future growth opportunities. We may see new jobs with greater emphasis on service sector and high-tech areas, and we could see an improvement in the quality of life for many people.
- This report is dated as at 05 November 2019.
- All market data included in this report are dated as at close 04 November 2019, unless a different date and/or a specific time of day is indicated in the report.
- HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
- You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.
This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document is distributed by HSBC Bank Canada, HSBC Bank (China) Company Limited, HSBC France, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank (Taiwan) Limited, HSBC Bank Malaysia Berhad (127776-V)/HSBC Amanah Malaysia Berhad (807705-X), The Hongkong and Shanghai Banking Corporation Limited, India and HSBC Bank plc (collectively, the “Distributors”) to their respective clients. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice. HBAP and the Distributors are not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use of or reliance on this document. HBAP and the Distributors give no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document. This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You should not use or rely on this document in making any investment decision. HBAP and the Distributors are not responsible for such use or reliance by you. You should consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document. You should not reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to any jurisdiction where its distribution is unlawful.
© Copyright 2019. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.
No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.