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ESG In Conversation: How do Businesses, Governments and Investors Fit into the Circular Economy?

Posted on June 29, 2023

Morningstar Sustainalytics
Morningstar Sustainalytics

 

 

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Episode Summary

Host:

  • Curtis File, Editorial Manager, ESG and Sustainable Finance

Featuring:

As global leaders gain a more nuanced understanding of climate change, they are looking at the circular economy as a potential solution to mitigate their impact. In a circular economy, organizations aim to prevent waste throughout the value chain instead of relying solely on recycling. This approach involves sharing, leasing, reusing, repairing, and recycling materials and products for as long as possible. Proponents say the approach comes with huge potential upside. The Ellen MacArthur Foundation, for example, projects that a circular economy could reduce greenhouse gas emissions by 25%, create 700,000 jobs, and save US$200 billion per year by 2040.1 But the path to achieving those goals is far from clear, and it will require an all-hands-on-deck effort.

In this episode of ESG in Conversation, we’re exploring the question: how do businesses, governments and investors fit into the circular economy? You’ll hear from Juliette Goulet, a seasoned sustainability practitioner from the Ellen MacArthur Foundation, about the challenges of implementing a circular economy. You’ll also hear from Wayne Hubbard, CEO of ReLondon, about putting the circular economy into practice in London, England. Joris Laseur and Jonathan Kellar from Morningstar Sustainalytics’ stewardship team also join to discuss the role investors play in helping businesses reduce their waste and implement circular business practices.

Key Moments

00:02Introduction to the Circular Economy
00:16Implementing the Circular Economy in London, England with ReLondon
10:04Investor Approaches to the Circular Economy
11:49Putting the Circular Economy into Business Practice
13:28The Challenges of Sustainable Implementation
16:43Seizing the Opportunities of the Circular Economy

 

Transcript

00:02Curtis File: Growing up in the nineties in Canada, public service announcements about recycling were everywhere. We even had superheroes.
00:16CF: And we had all these cheesy but catchy jingles.
00:25CF: But now it's 30 years later and we're still trying to close that loop -- also known as the circular economy. Recycling programs have helped, but they haven't been overly effective at reducing waste. So why didn't all those PSAs work?
00:41Juliette Goulet: One of the reasons is that there is a too strong focus on recycling. Really. Like, recycling is part of the circular economy, can be a solution, but the issue is that it's often used as a synonym for circular economy. But recycling should come as a last resort.
00:58CF: That's our friend and Morningstar Sustainalytics alum, Juliette Goulet.
01:03JG: Hi, I'm Juliette Goulet. I'm a project manager in the Plastics Initiative at the Ellen MacArthur Foundation.
01:11CF: The Ellen MacArthur Foundation is a charity that was established in 2010 with the aim of accelerating the transition to a circular economy, which goes far beyond just recycling. Juliette explains it best.
01:23

JG: So, a linear economy is an economy where we extract resources, we make products and use them. So yeah, so it's this very like extractive economy without thinking about like reusing resources. And if we look at the circular economy, then it really puts a very strong focus on design. The design of the project, what we call upstream, so that unnecessary materials are eliminated, or the product or packaging are designed to be reused.

We often use an analogy, actually, that: if you have water running down the top and flooding your bathroom, the first thing that you would do is not reaching out for the mop. You would first turn down the tap.  And this is similar for the circular economy. The first action that we should take is really to reduce the amount of part of materials being used.

So, yeah, so recycling can be part of the solution but should come as a resort.

02:22CF: I'm Curtis File editorial manager with Morningstar Sustainalytics and your host for this episode of ESG and Conversation. The podcast where we ask big questions about ESG and use interviews, research and storytelling to uncover the answers. In this episode, we're asking how do businesses, governments and investors fit into the circular economy?
02:54

CF: As investment and corporate leaders around the world continue to gain more sophisticated understanding of the impacts of climate change, many are eyeing circular business models as potential solutions to mitigate their impact.

In circular economy business models, organizations try to stop waste from being produced in their value chain from the very start, rather than attempting to simply recycle what they can at the very end of their products lifecycle. A true circular economy involves sharing, leasing, reusing, repairing and recycling existing materials and products for as long as possible. Proponents say that it comes with a lot of potential benefits. The Ellen MacArthur Foundation, for instance, says that by 2040, a circular economy has the potential to reduce greenhouse gas emissions by 25%, create 700,000 net additional jobs and generate savings of $200 billion U.S. per year.

With such promising upside, why then, has it been challenging for businesses to adopt circular business models?

03:51JG: I think the challenge is that, at the moment business interests often take precedence and we seem to live in a kind of illusion that we can continue business as usual by just tweaking on a few things. Like switching to renewable energy while keeping production and consumption similar as it were before, or tweaking the design of the packaging to make it more recyclable. But this is not making changes at the scale and pace needed.
04:20CF: From a bird's eye view, the problem seems unwieldy, to say the least. For businesses and governments to begin implementing circular models, they must first have a clear vision of success.
04:30Wayne Hubbard: It is important that you have a single strategic vision and that whoever carries the out carries it out. You know that they don't really have many options not to.
04:41CF: That's Wayne Hubbard. He's the chief executive officer of ReLondon, a partnership of the mayor of London and the London boroughs to improve waste and resource management. The organization's goal is to transform the city into a leading low carbon circular economy.
04:57WH: At ReLondon we have a theory of change which sets out what we think needs to happen. And the impact that we're after is reducing carbon emissions, but reducing consumption-based carbon emissions. We also have people who can help us, who are what we call enablers like the government, the media, the education sector, so on and so forth. Then we can put together a matrix of how we can deliver some of this activity on a city-wide level.
And then we can apply at the neighborhood level. So that gives us a framework to try and understand this, this complicated and overwhelming problem.
05:35CF: Wayne says that the key to success is to shrink the problem down.
05:39

WH: Where it starts to get really, really interesting. So, London is a city of around 9 million people, which is, you know, if you're sitting here, you think, well, how on earth are we going to change 9 million people? How are we going to reach all those people and make the changes that we need to happen? But interestingly, London has 600 or so high streets – shopping centers I suppose – 600.

And 90% of Londoners live within 15 minutes of those 600 locations. So, if we can deal with those 600 locations and not the 9 million individual Londoners by putting together partnerships of citizens, business, local government and civil society, then we can define a template approach that we can apply to those 600 neighborhoods. And we create circular neighborhoods, or low waste neighborhoods, or sustainable neighborhoods.

06:40CF: But creating these circular, sustainable neighborhoods requires a strong community, and it has to be built on mutually beneficial partnerships.
06:48WH: In London, with our, you know, incredible entrepreneurial and startup culture, we have this wellspring of business. It it's, you know, it's a bit like the, you know, maybe the Silicon Valley of the circular economy. We've supported over, getting towards, 400 businesses. And citizens can, you know, can an opt to go to that retail shop, or borrow a drill or use a reusable piece of packaging. Or, you know, whatever it is. Or share food through an app. Or take advantage of the fact that a restaurant has food at the end of the day that it hasn't sold but is selling off cheap. All of these things are now, you know, possible. Not just because we've supported them, you know, we have, but because we have this in London. We have this interesting crowdsourcing of these solutions. And that means that citizens, local authorities, business and government can look at these range of solutions and start to reduce waste, not because they're trying. But just because they are. Just because these businesses are inherently less wasteful.
And I think that's the kind of that's where the magic happens for me.
08:00
 
CF: But how does this scale up to larger multinational corporations with complex supply chains? There's no one size fits all solution, but the encouraging news is they're already thinking about it.
08:11

WH: A lot of this circular economy, sort of thought leadership, started with the big corporates. And it was big corporates in certain spaces. So, the likes of Renault or Unilever who, and there'll be others, you know, who are making stuff. They're looking into the future and seeing that there's going to be potential disruption there. By geopolitical events, by environmental events, by climate change, by just resource extraction making these materials rare, and therefore it becomes harder to get them, by government regulation, increasing regulation in the EU and elsewhere.

So, these big corporates and starts to think about the circular economy as a viable alternative, as a hedge against all those factors that I just mentioned. So, in a way, the corporates are both a part of the problem and part of the solution, because they're still churning out all this stuff fast fashion, plastics, packaging. All of that still churned out by these big corporates.

But they are, I am absolutely certain they are keenly interested in innovation and developing alternative business models. And desperate, I think, desperate for those business models to be successful and governments to increasingly support the development of those business models.  Because it's not in their interests to have a situation where their supply chains are disrupted that disrupts their business.

09:54CF: Businesses and local governments aren't the only ones taking the circular economy seriously. Investors are also playing a huge role in identifying the right opportunities.
10:04Joris Laseur: Ultimately, it's totally in the interest of the companies that their investors challenge them and hold them to account. Because when longer term profitability is at risk, which it tends to be, I think investors have a role to play to exercise meaningful pressure on the management of companies to keep working towards a circular economy. In this case.
10:30CF: That's my colleague.
10:31JL: Joris Laseur, Associate Director of Sustainalytics Stewardship Services Team.
10:37CF: He's joining me for this episode with our other colleague, Jonathan Keller.
10:40Jonathan Kellar: I'm Jonathan Kellar and I'm a manager in the Stewardship Services team.
10:45CF: From an investor perspective, you're says being active and engaged is the best way to discover new opportunities for sustainability.
10:52JL: It's not great to wait for regulation to adjust the rules of the market. It’s much more positive to look for the business and investment opportunities that contribute to a more sustainable future.
11:03CF: Investors aren't being shy about finding those opportunities with the biggest players in the market.
11:08JL: What we've been hearing from big asset managers especially, is that when considering circular economy as a focus topic, they express interest in carefully selecting industries for us to focus on and to prioritize industries and even specific companies. There's definitely a preference of many public equity investors to prioritize the bigger companies because they represent a bigger weight in their portfolio and if they can have progress there, there's more impact and progress in their portfolio overall.
11:49CF: So, investors are eager and big companies are willing to integrate new approaches. But what does this look like in practice?
11:57

JK: I would maybe like to point to the example of an electronics company, which was part of our target set of engagement companies. So, it integrated a clear, strong and simple statement of integration of circularity into its strategy. Operationally it implemented various circularity measures. So, it sourced 1.7 million pounds of ocean bound plastics in all of the years under review and partnered with a third party on a certification scheme for ocean bound plastics to do with testing, inspection and certification.

And it was also able to point to the fact that 85% of a certain notable brand of products that it put out into the world contained post-consumer recycled contents. It was able to, over a period of 20 years, to use 125,000 tons of recycled plastic, including from its own products that it used in sort for the closed-knit fashion. So, there you can see like a real alignment between strategy, between sourcing, and the results in terms of the products that the company put out into the world, which would have had a significant cost saving in terms of sourcing materials. And also, given the success of this product line that we're talking about, would have made a notable contribution to its bottom line.

13:28CF: But it's not always as straightforward as recycling plastic and celebrating the win. Getting large companies to make changes to their supply chains isn't easy. And even if they have the resources to make changes, it needs to be done thoughtfully to ensure that the solutions aren't creating more problems than they solve. This is a particularly big issue in the supply chains of clean tech and things like wind turbines, electric vehicles and hydrogen fuel cells.
13:53

JL: So, in the business-to-business space, there's some demand because they're big buyers and they're super conscious about their responsibility or reputational risk. And they ask questions, critical questions, like: how is there not terrible labor conditions in the supply chain, or how is there not a lot of pollution in the mining? etc. But we're encouraging companies not to wait for customer demand because it's super important that they get this right. Because they are there to replace a problematic industry based on fossil fuels. But if they're not doing it right, they will end up defeating their own purpose and still ripping up the planet.

I think it's by now quite well known that by ditching fossil fuels we need a lot of metals to electrify the economy. And those metals need to be mined. So, we're finding ways to recycle metals forever, but because we're electrifying so many industrial processes, a lot of these metals are many different metals are needed, they need to be mined, refined and that takes disruption of local environments.

And it's very hard to do that in a responsible manner. But our engagements are definitely directed to address that as much as we can.

15:15CF: Juliette has seen some of those same questions arise in the packaging and plastics industries, and there isn't always a clear solution.
15:21JG: This needs to be done very carefully because we do see some companies reducing the amount of plastic packaging by substituting to paper or by using other materials. And actually, there is a very interesting report that I recommend to everyone in the sector to read, really. Because it looks at the action needed in the materials sector – for instance, plastic, aluminum, steel – to be aligned with the carbon budget and to remain under the 1.5 degrees Celsius. Another Paris Agreement. And in this report, they mentioned that the demand for plastic need to reduce by 3% every year to be within the carbon budget. And it's important not to just substitute for paper or other materials such as aluminum as this risk leading to unintentional trade-offs. So, for instance, this would create more competition for land use, which will further destruct habitats and can also lead to increasing GHG emissions.
So, in brief, like there is a need to reduce at the moment all material consumption to decrease the reliance on fossil fuel. But also to reduce the burden that we have on all planetary boundaries.
16:43CF: In researching this episode, there was a lot to learn and understand, because the circular economy really encompasses everything: every level of government, small businesses and multinationals, and complex product cycles and supply chains. It seems impossible to even pick a starting point. In talking to all of these experts, the best advice I've heard for both businesses and investors is to shrink the problem down. And, as Jonathan puts it, look for the opportunities.
17:16JK: In short, the main things I would encourage people to think about when they think about the circular economy is that it's an opportunity and not just a risk mitigation measure. And that it can act as a sort fulcrum for their efforts in relation to many other sustainability issues.
17:45

CF: That's it for this episode of ESG in Conversation. If you'd like more information about investor engagement on the circular economy or plastics, head over to the resource center at sustainalytics.com or reach out to our engagement teams. If you have any questions or suggestions for topics you'd like to learn more about. Email us at [email protected].

Thanks to Juliet, Wayne, Joris and Jonathan for joining me in providing their insights.

 

 References

  1. The Ellen MacArthur Foundation. 2023. “Designing Out Plastic Pollution.” Accessed: June 28, 2023. https://ellenmacarthurfoundation.org/topics/plastics/overview


 

 

 

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