The circular economy as an investment opportunity

How we extract, manufacture, use and dispose of earth’s finite resources is becoming increasingly critical to the survival of all life on earth. Isabel Kwok looks at the recycling sector as an investment proposition.

by Isabel Kwok

Investment Manager


As investors it is important to consider how to support innovation which can provide solutions to what are major and complicated global resource challenges. The economics are starting to shift here, and many interesting companies are part of the transition towards a more circular economy, whether that is through the development of more environmentally-friendly materials or innovative recycling methods.

There are a number of sectors that are displaying attractive investment opportunities, three of which are plastics, Lithium batteries and metals recycling:

Some materials are obviously easier to manufacture than others. Plastics are notoriously problematic due to their complex chemical structures. Plastics are so useful that they have often proved difficult to replace. However, we have started to see a big shift in some areas such as in food packaging, where biodegradable plastic alternatives made from materials like cornstarch, mushrooms and even seaweed are being introduced. However, these sometimes pose other problems such as deteriorating too quickly or reducing the shelf life of food, thereby potentially and inadvertently increasing food waste.

Lithium ion batteries are used in electric vehicles and contain valuable components such as cobalt, which can be recycled. However the process, which involves either smelting or high temperature melting, is both complex and energy intensive, making it less commercially viable to do. The lithium ion battery industry therefore lacks a large-scale economic recycling solution. Currently, only about 5 per cent of lithium-ion batteries are recycled globally.  With the huge shift to electric vehicles already underway, we need to find a solution to this problem urgently. 

Extractive industries can have huge detrimental environmental impacts. So, for investors that do not wish to invest directly in mining companies, for example, investing in businesses engaged in metals recycling can provide a more appetising way to ‘play’ the often highly volatile commodities story. This approach supports businesses providing solutions to resource scarcity without directly investing in companies involved in raw material extraction. Recycling aluminium and zinc reduces carbon emissions by up to 90% and 40% respectively, compared with primary production, so there are clear advantages from a climate perspective as well.

The development of robotics will also continue to be instrumental in the safe and efficient management and processing of waste, especially as the cost of robotics continues to decline and automated processing becomes more financially viable.  

Deciding how much exposure you want to this sector entirely depends on your risk appetite and investment objective. Some of the technologies in this space are well established, but many are quite new and so I would probably look at accessing this story through collective investment funds rather than direct investment in order to benefit from the expertise of managers in this field and also to manage the risk.

The circular economy continues to be a difficult area to invest in as it requires a more active approach given the level of research required to evaluate the impact of the investment. I tend to look for more generalist funds which actively identify, or encourage companies which can move in that direction, to provide some exposure to promote reduction of waste, but also to ensure that the investor maintains diversification. 

Isabel Kwok, Investment Manager


All views are those of the author and not necessarily those of JM Finn. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance is not a reliable guide to future returns.

 

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