Private banks show increased interest in circular economy

Article originally published in PWM

Could the circular economy model, which aims to reduce waste and use resources more efficiently, provide consistent returns for investors while reducing environmental degradation?

As the COP29 global climate summit gains pace in Azerbaijan, private banks are stepping up their bets on the “circular economy”.

This cycle, where materials never become waste, and nature is regenerated, is fast becoming a megatrend, according to consultancy Deloitte.

In a circular economy, products and materials are circulated through processes such as maintenance, reuse, refurbishment, remanufacture, recycling and composting. Companies including Ikea and US-based Republic Services play a role in minimising waste by reusing and repurposing products and materials and encouraging more reuse and recycling.

This differs crucially from our current “linear” economy, where we take materials from the Earth, make products from them, and eventually dispose of them as waste.

In contrast, a circular economy stops waste from being produced in the first place. As it helps tackle climate change and other global challenges, it has attracted considerable recent interest among academics, regulators, economists and investment experts.

“We are seeing a broadening and maturing of the concept,” says Felix Philipp, Head of Circular Economy Research at Lombard Odier Investment Managers. “Where in the past it was primarily focussed on recycling, more and more of the upstream strategies, such as reuse, repair and service models, are now becoming more prevalent,” he adds.

Swiss bank Lombard Odier recently won the award for Best Branding in Private Banking (Europe) for their campaign titled ‘Nature’s Regenerative Power’ at PWM’s Global Private Banking Awards.

Where in the past it was primarily focussed on recycling, more and more of the upstream strategies, such as reuse, repair and service models, are now becoming more prevalent

The world population consumes in excess of 100 billion tonnes of materials each year. More than 90% of all extracted materials are used and wasted. This ecosystem is increasingly viewed from an economic angle – to create value and attract clients – and taking into account geopolitical risk, requiring “derisking” of supply chains, according to Mr Philipp.

Nature-based solutions and financial returns

Many experts claim a link between nature-based solutions (NBS) and financial returns. A WWF report highlights “Bankable Nature Solutions” for generating financial returns while benefiting ecosystems and communities. It claims these projects, which often include elements such as sustainable agriculture or reforestation, can provide consistent returns for investors while reducing environmental degradation.

NBS schemes can help “reduce and regenerate some of the negative impact caused by our current, linear and extractive economic model,” says Mr Philipp. “We need to increasingly shift to these NBS, reduce use of virgin- and fossil-based materials, and increase use of renewable and regeneratively grown resources.”

Read also: COP29’s call to action: transforming finance and business models to support biodiversity

Not only can NBS regenerate “natural assets”, including peatlands, forests and oceans, but they can also source financial returns for investors and project developers who sell carbon credits or regeneratively grown materials, he claims.

These investments can also mitigate risk, by protecting financial returns, and keeping intact the ecosystems which support economic activity.

One step beyond

But this approach is also associated with key challenges, with some investment experts believing a holistic view is necessary, rather than a sudden switch to a circular philosophy.

“Even if we achieve a circular economy tomorrow, we would have already lost 73% of our wildlife populations,” says Yi Shi, client portfolio manager and engagement specialist at Pictet Asset Management, referencing the 2020 Living Planet Index Report, which indicated an exacerbating trend in global biodiversity loss.

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Given that 50% of the world’s GDP is dependent on ecosystem services, restoring nature and reviving our ability to service the economy – involving pollination, water, food and timber – are vital to ensuring a sustainable future, he adds.

Transitioning away from the current economy requires consideration of the social impact. “Long-term conservation and restoration of nature requires a stable and resilient society,” says Mr Shi.

Read also: The 10 principles of a circular economy

Pictet Asset Management’s new strategy, Pictet-ReGeneration, claims to take a “novel approach” by investing in economic transition “beyond the circular economy”, bringing together themes of a circular economy, biodiversity restoration, and social empowerment.

“This means we allocate impact capital into solution providers that help our economy become more circular,” he says, advocating empowerment of societies to “better shepherd our economy’s transformation towards a regenerative state.”

Untapped potential

Those advocating the transition to a circular economy agree that the road will be rocky one.

According to Deloitte's Circularity Gap Report 2024, the circular economy is gaining popularity but falling short of action. The share of secondary materials consumed by the global economy has decreased from 9.1% in 2018 to 7.2% in 2023 – a 21% drop over five years.

“We believe we are just starting, nearing the inflection points,” says Lombard Odier’s Mr Philipp. “As such, there is still a large untapped circularity potential across many sectors,” he believes.

Regulatory frameworks and targeted investments are proving indispensable to catalyse the shift toward a circular economy. Institutions including the European Investment Bank (EIB) are channelling capital into initiatives across recycling, biogas production and sustainable packaging.

The share of secondary materials consumed by the global economy has decreased from 9.1% in 2018 to 7.2% in 2023 – a 21 per cent drop over five years

These efforts signal broader alignment of financial flows with circular economy objectives, fostering innovation and market growth. But, the circular economy has not thrived as policymakers hoped. According to a report by the Independent European Environment Agency (EEA), the circular material use rate increased by just 0.1% annually between 2011 and 2021. In other words, recycled waste is not being reused as much as it should be.

Recently, the European Commission implemented a plan to reduce waste and encourage sustainable consumption. It stated the EU should double its use of recycled materials from 11.7% in 2020 to 23.4% by 2030.

“Plastic and packaging have traditionally been one of the focal sectors, certainly for public awareness but also for regulation and corporate commitments,” says Mr Philipp.

Caring and sharing

More and more sectors are looking at their resource footprint and how they can transition to circularity. “In fashion, for example, the fast-paced nature of trends often leads to overproduction and waste. Embracing circular economy principles could help promote sustainable materials and recycling practices,” he says.

On the other hand, the construction sector has “vast potential” for reusing materials and optimising resource use, but it often “lags” in integrating these practices due to traditional methods. The electronics industry faces challenges with e-waste the lifecycle of products. They can make “substantial progress” by focussing on design for longevity and recovery, according to Mr Philipp.

The construction sector has “vast potential” for reusing materials and optimising resource use, but it often “lags” in integrating these practices due to traditional methods

The “shared economy” is “gaining attention” as companies transition from selling products to offering services, according to Martin Conroy, senior portfolio manager at KBI Global Investors. “For example, brands are leasing products instead of selling them outright, which promotes reuse and reduces waste,” he adds.

Positive foundations lie ahead for the circular economy, according to Lombard Odier’s Mr Philipp. “We will see a more widespread adoption, where it is not a dedicated, individual strategy but part of core business strategy.”

Ultimately, the next generation will play a role in this crucial transition, and they have an appetite for sustainability. A study by Lombard Odier and Capstone Millennials pinpointed five core priorities for the younger generation, one of which was sustainability.

“The utility function of the newer generation is changing… they want to save for the future, but they also want to ensure they have a future to enjoy,” says Georgios Sakoulis, head of investment teams and lead portfolio manager on the GMO Horizons Strategy, which also looks at the circular economy approach. “What we do cannot even have a hint of greenwashing,” he warns. “That would mean we’ve failed.”