The Importance of Investing in Companies That Support Circular Economy

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As most finance experts know by now, the ecological concerns of private citizens have been influencing their investments for decades now. It’s come to the point that companies purposely engage in greenwashing to present themselves as being more eco-conscious in hopes of increasing sales. That should be enough to tell us that consumers and investors alike are ready to see a new kind of economic model take the place of the one that caused the environmental concerns we are facing today.

Why Is Everyone Talking About Circular Economy?

We’ve all seen that a linear economy puts stress on the planet by stimulating climate change and waste accumulation. On top of that, it presents us with several financial disadvantages, including the fact that the price of raw materials will go up as we run out of resources. So at this point, investing in businesses that support the linear economy is a bad financial decision. Essentially, that economic model is quickly becoming a sinking ship.

Luckily, we already have a valid alternative on the horizon. The circular economy model has been around for decades. The concept prioritizes regenerative resources including materials that would have otherwise been considered waste. Proponents of the system hope to reduce waste or perhaps eliminate it, allowing nature to recover from decades if not centuries of abuse.

While many individual people share the values of this system, change can’t happen if the big players decide not to participate. But if there’s one thing big corporations understand, it’s the language of finance. If we can start investing in companies that support a circular economy on a wider scale, more businesses will make the changes we want to see.

For what it’s worth, socially responsible investing has already started changing the tide. The financing of the companies that support circular economy has increased rapidly over the past few years. According to reports from the Ellen MacArthur Foundation, public equity funds that are focused on the circular economy have grown from 300 million dollars at the end of 2019 to over 8 billion dollars at the end of June 2021.

How Are Companies Supporting Circular Economy?

So how could a business land on one of those ESG funds that stress the importance of the environmental, social, and governance responsibilities of investments? A few examples come to mind.

Companies like IKEA have taken strides in the fight against the usage of raw materials, and plastics, in particular. In large part, IKEA has transitioned to renewable and recycled resources. Moreover, it’s even offering buy-back programs to keep its products from clogging up landfills. And since plastic is particularly slow to degrade, the company has also committed to using recycled plastics for the large-scale production of household appliances.

But of course, many companies have branded themselves as being sustainable by using similar campaigns. That doesn’t mean that they’re interested in enabling a circular economy. So there have to be other incentives to invest, aside from following positive optics.

The Benefits of Investing In Companies That Support Circular Economy

As we have previously mentioned, investing in companies that aren’t sustainable is starting to look like a really poor financial decision. After all, it all comes down to risk and reward. With companies that participate in the linear economy model, there’s a risk that the resources will dry up. On top of that, the cost of raw material and production can quickly overwhelm the potential profits, as has been the case in the automotive industry.

The negative public perception of wasteful companies and industries has also led to legislative solutions. For example, the EU has famously pledged to ban single-use plastic and transition to mostly recycled packaging by 2029. That will certainly affect companies that wish to operate within the EU.

Simply put, if companies manufacture products that don’t comply with EU regulations, they will be missing out on that part of the market. That means that their sales will drop, resulting in dropping stock prices too. So really, investing in companies that are closing the loop is the only thing we can do.

As we learned from the Ellen MacArthur Foundation, there are three key benefits of transitioning to a circular economic model. Namely, doing so is:

  • A fantastic way to get financing, particularly since many governments and NGOs are now offering incentives to “go green”
  • Less risky than engaging in practices that support a linear economy
  • A sustainable option for financiers who prioritize ESG investing values

The investors can also experience these benefits. After all, the good luck of a company or investment fund tends to trickle up to the financiers.

How Investment Companies Can Jump on the Circular Economy Bandwagon

In Financing the Circular Economy, the fourth chapter explains how financial services firms can capitalize on the growing popularity of the concept of a circular economy. The main investment opportunities they might explore include:

  • Launching or investing in passive and active public equity funds that benefit from the circular economy
  • Issuing or investing in bonds or loans to allow companies to transition to a circular economic model
  • Supporting sustainable products and services through private equity
  • Investing in innovative sustainable production solutions through venture capital
  • Funding projects that boost sustainable infrastructure and public services

In the above report, you’ll find many examples of investment companies seizing these opportunities, and more! Even Alphabet — aka Google — is putting billions of dollars towards sustainability bonds. And many other international conglomerates are doing the same thing.

All of these companies know what we’ve been trying to prove here — that circular economy is the future. The sooner we realize that, the sooner we can start investing in it to bring it to its full potential. Ultimately, this new economic model is our chance to redeem ourselves and fix the damage we did to our planet. And if we can increase our profit while doing that — why would we wait?