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Businesses at the forefront of the circular economy

Five investment professionals highlight firms contributing to a more circular world

Today marks Global Recycling Day, celebrating the critical role recycling plays in preserving precious primary resources and securing the future of our planet.

Recycling represents a key pillar of the circular economy – a model of production and consumption that advocates sharing, reusing, repairing, refurbishing and recycling existing materials and products for as long as possible. Here, five investment professionals share businesses contributing to a more circular world.

Befesa is an emerging global leader

Hywel Franklin, manager of the Mirabaud Discovery Europe Fund

Befesa is a German-listed industrial processing business focused on the management of waste materials. The company is a pioneer in the development of industrial processes for the circular economy and is an emerging global leader within the management of steel and aluminium waste products.

Its raison d’être is to reduce the environmental impact of industrial waste by recovering valuable materials and reintroducing them into the production process. While Befesa may not be classified as a large company, it is a clear market leader in European steel dust recycling, with a market share of 45-50%.

In the near term, the strongest growth contributor to the sector will likely be China. Demand remains in its infancy at present, but the country has the potential to become at least the same size as the European market over time. Over the next few years, as Befesa’s Chinese production capacity comes online, it will extend its position into new markets, helping improve circularity in construction globally.

Second-hand market is growing fast

Rebecca Craddock-Taylor, director of sustainable investment at Gresham House, says:

The fashion industry has a devastating impact on our planet and our societies and is estimated to be responsible for around 10% of global carbon emissions. This industry is therefore a key candidate to apply the circular economy to reduce its impact and the tide is now beginning to turn. Research by GlobalData Market Sizing has shown that the total second-hand market is set to grow 11 times faster than the broader retail clothing sector by 2025. This growth will be driven by new tech-based businesses making it easier for individuals to sell clothes they no longer use or to rent new clothes.

A good example of a company that provides a second-hand shopping platform is Depop. It was started in 2011 and has grown to a platform of over 30m users worldwide. It was bought by Etsy in 2021 for $1.6bn and is primarily used by individuals under 26. This highlights the changing preferences of younger generations when it comes to purchasing clothes. Recently, Depop also started working with HURR, a wardrobe renting platform, offering users the ability to buy second-hand clothing and rent new clothing, both of which have less impact on the environment and apply a circular economy model to reduce fashion related waste.

Ultra-fast fashion: Extending the lifetime through resale

Philip Gottschalk, analyst at Trium Capital

The fashion industry accounts for 8% of global greenhouse gas emissions and 20% of wastewater production. The manufacturing of a single pair of jeans consumes 7,500 litres of water. The average British person consumes 30kg of apparel per year.

But what makes things worse is a large proportion of this is avoidable. Under the paradigm of ultra-fast fashion, most of the apparel consumers throw away has not reached its useful life – they could have been reused or recycled.

This is what German fashion platform Zalando aims to promote, as part of a new circularity strategy that is best-in-class in the industry. The aim is to extend the lifetime of 50 million fashion articles by 2025, through four pillars: sustainable design and manufacture, responsible use, reuse and recycling. The biggest contributor is currently the resale of preowned products. This shows sustainability and business can be symbiotic.

Recycling plastics is a mega-trend

Hilde Jenssen, head of fundamental equities at Nordea Asset Management

With governments taking aim at reducing pollution, there is mounting pressure on the private sector to take action. Many investors are demanding companies improve recycling practices and disclose multi-year waste reduction goals.

Recycling plastics is a megatrend which is likely to endure for many years to come. While companies grapple with investments, execution and transparency around recycling programmes, regulations are likely to become more stringent.

This megatrend will produce winners and losers, separating companies with a sustainable business strategy from those without. One appealing company is Tomra, which has developed a sensor-based sorting system enabling customers to extract higher-purity fractions from recycling and waste streams, in order to maximise both yields and profits.

Engaging to increase circularity

Therese Kieve, stewardship analyst at Sarasin & Partners

One of the key challenges to a lower-waste world is fast fashion – an accelerated version of the fashion industry, which produces huge numbers of new clothes at a price point encouraging regular purchases.

The fashion industry is the fourth most polluting industry – after housing, transport and food. It uses more water and generates more greenhouse gas emissions than all international flights and ships combined. Moreover, the clothing industry’s carbon footprint is growing significantly – with CO2 emissions estimated to reach nearly 2.8 billion tonnes a year by 2030. If the fashion industry continues on its current path, it could use more than 26% of the global carbon budget required for a 2°C pathway by 2050.

Concerted action from companies and governments will give us the best chance of a sustainable future. As investors, we also have an opportunity to encourage better behaviour. While our exposure to fashion companies in our client portfolios is limited, we are engaging with those we own to increase circularity within the industry and protect vulnerable stakeholders.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...