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The circular economy: a change for the better as well as an investment opportunity

Investing in businesses that are active in (the transition towards) the circular economy can pay off in the long term. Sébastien Soleille, head of the energy transition at BNP Paribas, and Bertrand Alfandari, ETF & Index Solutions, BNP Paribas Asset Management, explain in this edition of The Intelligence Report.

L’économie circulaire : un changement pour le meilleur et une opportunité d’investissement

What is the circular economy and what are the main challenges?

Sébastien: The ‘linear’ economic model, which follows a 'take-make-dispose’ pattern, is not viable in the long term. A new model of production and consumption is needed: a circular one that consists in extending the life of products, reducing and reusing waste and leasing and sharing goods and services. Some of the main challenges are to improve waste management, reduce greenhouse gas emissions and revise the notion of planned product obsolescence.

Exhibit 1: Five circular business models**

circular economy

** Business models identified by Accenture in its analysis of more than 120 case studies of companies that are improving resource productivity in innovative ways. Source: Accenture, ECPI, BNP Paribas Asset Management; as of 30/04/2019. For illustration purposes only.

What is BNP Paribas as a company doing in this area?

Sébastien: We are committed to the circular economy in many ways, including:

  • working on reducing our own paper consumption and buying recycled paper or paper from sustainably managed forests, recycling more waste
  • developing product-service systems focused on using an asset rather than owning it
  • working with partners such as the Ellen MacArthur Foundation.

What is the role of asset management in the circular economy?

Bertrand: In a rapidly changing world, the circular economy will play a major role in safeguarding natural resources and our planet. BNP supports the transition to a circular economy by financing those who are active in the circular economy and particularly those who innovate; developing its leasing offering, and taking positive action itself.

Can you give examples of companies that are active in the circular economy?

Bertrand: One example is Nike [1]. It is included in the index because of its commitment to double its business with half the impact. Its efforts to combat waste are focused on more efficient design and manufacturing technologies. In 2015, it processed 54 000 tons of factory waste into high-end materials for its footwear and apparel.

IBM [1] is another key player in the transition to a circular economy. For more than 30 years, it has operated an IT equipment recovery unit that processes nearly 30 000 devices a week. More than 99% of the end-of-life IT equipment and product waste returned to IBM is reused or recycled.

In a completely different field, Caterpillar’s [1] remanufacturing and rebuild programmes overhaul components and machines rather than simply repairing or replacing them. This reduces waste and minimises the need for raw materials for new parts. Finally, Heineken [1] has a recycling rate of 97% for co-products, packaging and industrial waste.

How does one invest in companies that are active in the circular economy?

Bertrand: The ECPI Circular Economy Leaders Equity index is one way to do this. This is a euro-denominated index of 50 major companies for their ability to seize the opportunities and meet the challenges of a circular economy model. Some of these are in sectors such as recycling or renewable energy. Others can be included if they are seen to be moving towards the circular economy, such as industries that now generate high CO2 emissions or consume raw materials.

There is also a tracker on the index in the BNP Paribas Easy range [2]. Although the index was created in 2017, there were no ETFs on it at that time. Its constituents fall into five categories – circular supplies, resource recovery, product life extension, sharing platforms and ‘product as a service’ – and come from many different industry sectors. For investors, that means portfolio diversification benefits as well as participating in a future-proof trend with promising growth and return opportunities.

[1] The above securities are for information purposes only and should not be considered as an investment recommendation. Investments are subject to market fluctuations and the risks inherent to investments. The value of investments and their revenue can increase and decrease. Investors may not recover the full value of their investment.

[2] The BNP Paribas Easy ETF strategy mentioned above presents a risk of capital loss. For a complete description of risks, refer to the prospectus and KIID on Past performance is not an indication of future performance.

This article appeared in The Intelligence Report – 15 October 2019

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

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