The asset manager for a changing world
poppies_couple_country_bike_1440x300
  • Home
  • The circular economy: an investment theme for the future

The circular economy: an investment theme for the future

Isabelle BOURCIER
 

Investing in companies that are committed to the circular economy could be a profitable choice over the long term. Explanations.

Understanding the circular economy and its value creation

At a time when we are dealing with the accumulation of waste, especially plastic waste, the waning of natural resources (raw materials and non-renewable energies) and a growing world population, more and more companies are turning to a new business model that aims to produce goods and services in a sustainable way. This is called the circular economy.

Initiated 10 years ago, this approach is soundly based and aims to optimise the use of natural resources by completely rethinking the choice of materials and the manner of their use, while limiting the wasteful consumption of resources (raw materials, water, energy) and indeed the volume of waste produced. The circular economy also gives companies the opportunity to reduce their costs, by creating new and more virtuous production models in the context of preserving our planet’s natural resources.

The circular economy therefore depends on a new model of production and consumption that involves the sharing, renting, reuse, repair, renovation and recycling of materials and products. In this way, the product life cycle is extended.

In practice, this means reducing waste by putting in place a more responsible economic model upstream of the production chain. Subsequently, end-of-life products can be reused, creating additional value (“reduce – re-use – recycle”).

The circular economy represents a break from the traditional linear economic model: “produce – use once – discard”.

 

Companies involved in the circular economy

The circular economy is being increasingly adopted by large international companies, which see it as an opportunity for growth and innovation.

NIKE, a specialist in the manufacture of sporting goods, integrates the principles of this economy. It has been selected in the ECPI Circular Economy Leaders Equity index (the index which underlies the newly launched ETF in the BNP Paribas Easy range) for its commitment to double its activity while halving its environmental impact; NIKE won the Circulars Award 2016 for its efforts in the fight against waste. The company focuses on waste disposal through more efficient design and manufacturing technologies. In 2015, 54 000 tonnes of factory waste were transformed into high-end materials and reused in sports shoes and clothing. For example, NIKE uses recycled polyester and Better Cotton certified (cotton grown according to the Better Cotton Initiative standard system) which optimises energy efficiency and the use of water.

Another key player in the transition to a circular economy is IBM. For more than 30 years, the company has run a computer hardware recovery unit, re-processing nearly 30 000 devices each week. More than 99% of IT and IT waste returned to IBM at end of life is reused or recycled.

In a completely different field, CATERPILLAR, a big player in the construction industry, promotes the principles of the circular economy with its re-manufacturing and rebuilding programmes through which components and machines are fully overhauled rather than simply repaired or replaced. This re-use of parts reduces waste and minimises the need for additional raw materials to produce new parts. With this system, CATERPILLAR claims “to contribute significantly to sustainable development by maintaining non-renewable resources in circulation over several life cycles“.

Another example, HEINEKEN, the second largest brewing company worldwide, is also a reference in terms of recycling. Its recycling rate of products, packaging and industrial waste is estimated at 97%.

In France, LVMH, Kering and Schneider Electric are also actively involved in this process.

All the securities referred to in this article are mentioned for information purposes only and their inclusion should not be considered as an investment recommendation.

 

The ECPI Circular Economy Leaders Equity Index

The methodology of the ECPI Circular Economy Learners Equity Index, built by the Italian index provider ECPI, which has been working on environmental, societal and governance (ESG) integration for more than 20 years, is based primarily on ESG criteria. Companies are drawn from a worldwide list and then selected for their participation in the circular economy and listed under several categories: circular design, material recovery, product life extension, sharing platforms and product offering including services (such as Cloud storage, leasing) and exchange of goods. The index selects a final list of 50 companies (including those mentioned above) with the largest market capitalisation, while maintaining diversification in sectors considered eligible by ECPI analysts. This index excludes arms and tobacco activities.

 

How to invest in the circular economy

Investors wishing to invest in this theme could turn to passive management, allowing them to reproduce at a lower cost the performance of the ECPI Circular Economy Leaders Equity index which, on 30 August 2019, posted a performance of +8.50% over one year1, the index having been created in July 2017.

BNP Paribas Asset Management has therefore enriched its range of ETFs with the BNP Paribas Easy tracker ECPI Circular Economy Leaders UCITS ETF listed on Euronext in May 2019. This tracker replicates the ECPI Circular Economy Leaders Equity Index. It allows investors to be exposed to the performance of 50 international large-cap stocks selected for their active participation in the business model based on the circularity of goods, materials and commodities.

 

ECPI Circular Economy Leaders Equity Index

ECPI Circular Economy Leaders Equity Index

Source: Bloomberg, performances as of August 2019 (back-test from December 2010 to August 2017)

Calendar performances: 2011: -5.32%; 2012: +17.44%; 2013: +17.47%; 2014: +20.74%; 2015: +10.75%; 2016: +11.23%, 2017: +9.87%, 2018: -3.88%

 

Features of BNP Paribas Easy UCPI Circular Economy Leaders UCITS ETF

 

ETF name Isin code  Code Distribution policy Annual management fees* Currency SRRI*
BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF LU1953136527 REUSE Capitalisation 0.30% EUR 5

Source: BNP Paribas Asset Management, 30 August 2019

Asset Manager: BNP Paribas Asset Management Luxembourg

*Risk and reward indicator (SRRI): 1: lowest risk.  7: highest risk. The higher the risk, the longer the recommended investment horizon.

BNP Paribas Easy is a Luxembourg-registered SICAV compliant with Directive 2009/65 / EC. Investments in the fund are subject to market fluctuations and the risks inherent in investing in securities. The value of investments and the income they generate may rise as well as fall, and investors may not fully recover their investments. The fund described presents a risk of capital loss. For a definition and a fuller description of the risks, please refer to the prospectus and DICI of the fund available free of charge at: www.easy.bnpparibas.fr. Past performance does not guarantee future results.

1 Past performance does not guarantee future results

On the same subject:

Investments in the aforementioned fund are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Asset Management Holding.