Canada
@TDAM_Canada
Investor Knowledge + 10 Minutes = Current Insights
In the search for opportunities that can provide additional financial returns, investors often incorporate considerations beyond traditional financial metrics into their investment decision-making process. This concept is known as return additionality. The circular economy, where materials and resources are reused and waste is avoided, can potentially offer economic benefits and may be an avenue for return additionality.
A study by Oxford University revealed that companies with robust Environmental, Social and Governance (ESG) practices often experience lower risk and greater long-term financial performance.1
This same study stated that companies which have specific and effective ESG strategies achieve better operational performance, and their stock price performance is positively influenced by good sustainability practices2
This may provide an opportunity for investors to identify companies that might have unrealized opportunities for revenue growth or expense savings and to encourage them to adopt circular economy practices across their operations. This shift is not just theoretical; it is already happening. Between January and September 2020, public equity fund assets focused on the circular economy increased sixfold, from US $0.3 billion to US $2 billion, according to the Ellen MacArthur Foundation3
Benefits to companies and investors
1. Saving on packaging costs
In our economy, we can see wasted resources in countless industries and situations. Packaging, for instance, can constitute a good portion of the overall cost of goods sold. Most of this value is lost once the consumer discards the package. To recuperate this value, the market is currently concentrating on recycling materials like plastic to create new products, such as outdoor furniture, construction materials and yoga mats. However, only a small portion of these recyclable material inputs are being reused (less than 12% in the EU4 for example).
Reusing packaging at a larger scale may represent a potentially significant opportunity. The beauty industry, for example, tries to reduce packaging costs by using bigger bottles. Certain restaurants and grocery stores in the U.S. offer discounts to consumers who bring reusable containers: the Just Salad restaurant chain offers free toppings for customers with reusable containers5. Several major hotel chains (Mariott International6, Hyatt Hotels7 and InterContinental Hotels8) are replacing single-use shampoo bottles with re-fillable ones.
2. Meeting environmentally conscious consumer preferences
Consumers are increasingly prioritizing sustainability. According to a study from Nasdaq, Gen Z shoppers worldwide are willing to pay up to 10% more for a sustainable product9. They are more interested in sustainability-related concerns than the brand names themselves and they place value on sustainability over cost saving measures. As consumer preferences shift towards sustainable products and services, companies that consider sustainability are better able to build customer loyalty, capture market share and drive revenue growth. Also, innovative waste reduction programs and sustainable product designs can boost a company's brand and public profile, better positioning it in the green economy.
3. Boosting supply chain resilience
The current linear economic model can lead to resources scarcity and eventually depletion, but a circular model can help to mitigate supply chain risks. By using fewer raw materials, companies are less exposed to the price volatility of these materials. This stability can assist with the decrease of the cost of goods sold while helping with long-term planning as it reduces the dependance on new raw material integration.
4. Managing emissions
Reducing greenhouse gas (GHG) emissions is a core pillar of the circular economy. To achieve net-zero by 2050, our economy would benefit from the redesign of products, such that they are made with reusable resources. By reducing waste at multiple stages (from production to disposal), companies can reduce the need for production, thereby cutting emissions. Waste reduction also brings down the amount of material in landfills, which decreases methane emissions. With net-zero commitments for 2030 and 2050 becoming the norm, companies have an opportunity to innovate and implement best practices to reduce cost while meeting net-zero commitments (as opposed to buying carbon offsetting credits, for example).
5. Anticipating future regulations
Regulations related to the circular economy are expected to expand rapidly worldwide. For example, the European Commission adopted an action plan for a circular economy in 201910. In 2022, heads of state and global government representatives committed to developing by the end of 2024 an international legally binding agreement to end plastic pollution11. The circular economy is also a key pillar of the European Green Deal, a set of policies approved in 2020 which aim to make the bloc carbon-neutral by 2050. Countries outside of the E.U., such as Chile and China, have already adopted ESG-related regulations aimed at promoting a circular economy. By cultivating an innovative and forward-thinking mindset, companies can start to implement circular economy policies and procedures. This can help them avoid potential future fines, reduce cost and risk, and leverage first-to-market brand opportunities.
6. Diversifying operations
Participating in the circular economy can help to diversify a company's operations when it comes to the design and production of products. This is because in the circular eco-system, companies use old materials to create new things and design products with longer lifespans. This value recovery can be further developed and implemented at scale for greater economic gain.
Conclusion
The circular economy is often seen from a GHG emission reduction perspective, but it can also offer economic benefits. Shareholders can leverage these benefits when looking for growth investment opportunities or opportunities for existing investee companies to reduce expenses. Implementing a circular economy model can help companies achieve financial savings by recapturing wasted value. As investors continue to look for return additionality, they can encourage companies to implement circular economy practices, which could improve financial returns while contributing to positive environmental changes.
[1] Clark, G.L., Feiner, A., & Viehs, M. From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. 2015. (Accessed in June 2024.)
[2] Clark, G.L., Feiner, A., & Viehs, M. From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. 2015. (Accessed in June 2024.)
[3] Ellen MacArthur Foundation, “Financing the Circular Economy: Capturing the Opportunity” (2020). (Accessed in July 2024.)
[4] European Environment Agency, “Growth without Economic Growth” (2021). (Accessed in June 2024.)
[5] https://www.justsalad.com/reusablebowl (Accessed in July 2024)
[6] https://marriott.gcs-web.com/news-releases/news-release-details/marriott-international-eliminate-single-use-shower-toiletry (Accessed in July 2024.)
[7] https://www.hyatt.com/world-of-care/en-US/caring-for-the-planet#waste-circularity (Accessed in July 2024.)
[8] https://www.ihgplc.com/en/responsible-business/waste (Accessed in July 2024.)
[9] Chris Versace, Mark Abssy for Nasdaq, How Millenials and GenZ are driving Growth behind ESG, September 2022. (Accessed in July 2024.)
[10] Report from the Commission to the European Parliament, The Council, The European Economic and Social Committee and The Committee of the Regions on the implementation of the Circular Economy Action Plan, 2019. (Accessed in June 2024.)
[11] United Nations Environment Assembly of the United Nations Environment Programme, March 2022. (Accessed in June 2024.)
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank.
® The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.
TDAM Connections at a Glance:
You might also be interested in:
TDAM Talks Podcast
Thought Leadership
Market Commentaries