Future Returns: Investing In The Circular Economy

The shift to a global economy based on reusing, repairing, and recycling—instead of making things, using them, and then throwing them away—is gaining traction as a sustainable investing theme.

Today, only 8.6% of the global economy is circular as the world consumes 100 billion tons of materials a year, according to Circle Economy, an Amsterdam-based global impact group.

Closing the loop on how goods are produced and consumed can address the problems created by depleting the Earth’s resources, in addition to the problems of pollution and climate change. According to the U.K.’s Ellen MacArthur Foundation, 45% of global greenhouse-gas emissions are generated by the creation and use of products and food, while the rest is generated by the use of energy.

Rising environmental challenges such as drought, fires, and flooding, in addition to changing consumer preferences and government regulation, are driving companies big and small to break away from a reliance on finite resources and to seek other solutions, says Jessica Matthews, head of sustainable investing at J.P. Morgan Private Bank.

That means, “by 2030, the circular economy could yield up to US$4.5 trillion in economic benefits globally,” she says. The benefits? “Saving 92 million tons of textiles in landfills, 1.3 billion tons of food waste, and 45 trillion gallons of water wasted through food production every year,” she says.

This multi-trillion dollar opportunity is leading growth-oriented, as well as sustainability-minded, investors to pay attention to this growing theme, as the push to create a circular economy drives innovation and new business models.

“Companies are innovating to tackle the challenge,” Matthews says. “That’s why it’s a growth story.”

The private bank currently has about US$12.5 billion in client assets invested in sustainable strategies across 100 funds on its platform, Matthews says. The assets are in all kinds of vehicles, from exchange-traded funds to private equity—and represent a range of investing approaches.

Matthews recently spoke with Penta about the potential for investing in the circular economy today.

The Business Case

What makes the circular economy an investing opportunity is that companies stand to profit more by reusing, refurbishing, and repairing products rather than sourcing virgin materials to make them, Matthews says.

Circular practices already are being used by clothing companies as well as technology and manufacturing companies, the Ellen MacArthur Foundation said in a September report titled “Financing the Circular Economy.”

In 2019, the resale market for fashion, including companies such as the RealReal, grew 25 times faster than the broader retail sector, while Philips, a Dutch conglomerate, reported 13% of revenues resulting from its circular practices.

In addition to major companies that are reforming how they make things—such as Unilever’s pledge to cut its use of virgin plastics in half by 2025—small companies are sprouting up to facilitate the shift, the report said.

Examples include RePack, based in Helsinki, which makes reusable, returnable packaging for products bought online, and Algramo, a Chilean startup, which allows consumers to refill cleaning products made by companies such as Procter & Gamble and Nestlé.

The move away from plastics for packaging is expected to create a US$700 million demand for corrugated cardboard in Europe and the U.S., the foundation said.

Investing Opportunities

According to the Ellen MacArthur Foundation there are 10 public stock funds globally focused on the circular economy, either in full or in part, including BlackRock’s BGF Circular Economy Fund, the Geneva-based Decalia Asset Management’s Decalia Circular Economy fund, and BNP Paribas’s Easy ECPI Circular Economy Leaders UCITS ETF.

There were also at least 10 corporate bonds issued globally with the assistance of major investment banks such as Goldman Sachs, HSBC, and Morgan Stanley, with proceeds either in full or in part dedicated to circular practices, the foundation said. Issuers include Alphabet’s US$5.75 billion sustainability bond (with a circular economy component), Daiken Corp.’s JPY5 billion (US$46 million) bond, and Owens Corning’s US$450 million bond.

Private market equity, debt, and venture capital funds are also on the rise—there were 30 funds as of the first half of last year, up from three in 2016, the foundation said.

At J.P. Morgan, Matthews is evaluating the available public mutual funds and is looking to bring one on its platform. Since many of the companies involved in the circular economy today are in niche businesses, “you have to be careful about how limiting you are in your universe,” she says.

Public funds focused broadly on companies with the best environmental, social, and governance practices also buy stocks of corporations on the leading edge of the circular economy, even if these companies—such as Unilever, Adidas, and Nike —don’t represent a distinct circular economy story.

J.P. Morgan is also looking at private markets. Similarly, the bank has found more opportunities to invest in the circular economy through funds that look at sustainability broadly, Matthews says. For instance, the bank has invested with a private venture firm focused on sustainability and climate solutions that has invested in a company working to create cold-pack packaging with less Styrofoam.

“Where [the circular economy] becomes more widely adopted and seen is in being favoured in broader sustainability portfolios,” Matthews says, adding that ESG managers doing fundamental research today will find themselves looking at some of the trends around circular, because “they are still underappreciated by the market.”

For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.

Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.

Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.

Lowered Expectations

Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.

Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.

Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.

Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”

Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.

Behind the Malaise

For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.

The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.

The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.

Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.

Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.

“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.

Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.

For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.

Sticking Around

Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.

Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.

Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.

“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”

Corrections & Amplifications

Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.

Future Returns: Investing In The Circular Economy

Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.

Lowered Expectations

Behind the Malaise

Sticking Around