Economic growth and human development are inextricably linked to demand for natural resources, as raw materials are an input into almost every sector of the global economy. Consumption drives economic growth, but the linear economic model that exists today of ‘take-make-consume-dispose’ is almost certainly not sustainable. The extraction, processing, use and disposal of finite natural resources deeply affect the planet’s climate, environment, and underlying resource supply.
The central premise of the circular economy is to break this ‘take-make-consume-dispose’ pattern by keeping products, commodities, and resources ‘in the loop’ for as long as possible. Creating integrated production and supply chains that reduce, reuse, repurpose, recycle, and remanufacture will ultimately maximise our resource efficiency and better align economic value creation with long-term ecological wellbeing.
In this month’s letter, we examine the key differences between the traditional ‘linear’ economic model and a circular economy. We discuss how Australia stands to benefit from adopting a circular economy, as well as some of the investment opportunities available in this space.
“Meeting the needs of a growing and increasingly affluent population will require material extraction to double by 2060 under historical trends.”
In the linear economy that we know today, economic growth is strongly linked to raw material use. Indeed, according to the Organisation for Co-operation and Development (2020), global materials extraction has doubled between 1990 and 2017 and is expected to double again by 2060.
The linear model of production and consumption is built on ‘take-make-consume-dispose’. For example, miners take metals from the ground, and this material is manufactured to make a fridge. Once the fridge reaches the end of its useful life, it is considered waste and moved to landfill. But the extraction, processing, use and disposal of natural resources deeply affects the planet’s climate, environment, and underlying resource supply.
Our economy favours a linear model, which is not sustainable with increasing consumption and rising populations
The key difference between linear and circular economies is the treatment of raw materials, including fossil fuels, metals, plants, and animals. In linear economies, economic growth is strongly linked to raw material use. But this is an unsustainable model over the long term, as most resources are finite and need time to replenish themselves for future use. In a world with increasing consumption and rising populations, economies which are not considering circular initiatives expose themselves to significant risks.
Circularity: A model of production and consumption that is designed to decouple economic growth from the consumption of finite resources.
Not only does the one-way production model of a linear economy cause significant strain on finite resources, it also contributes to significant amounts of waste. Current consumption requires the environmental resources of 2.3 planets, according to the World Business Council for Sustainable Development. The linear model fails to acknowledge a key issue, which is that natural resources are limited and need time to regenerate to make new resources available for future consumption.
On a planet with finite resources and a growing population, we have little choice but to move towards a circular economic model. Achieving a circular economy lies at the heart of the United Nations' Sustainable Development Goal (SDG) 12: Responsible Consumption and Production. This SDG calls for action to address waste, raise resource efficiency, improve supply chain accountability, and ultimately work toward a more sustainable future.
In circular economies, ‘material footprint’ refers to the total amount of raw materials used to meet final demand for consumption and investment.
The concept of a circular economy is grounded in the ideas of sustainability and resource efficiency, and seeks to keep products, commodities, and resources ‘in the loop’ for as long as possible.
The central premise of the circular economy is to break the global ‘take-make-consume-dispose’ pattern of growth in order to reduce the environmental impact of production and consumption and eliminate waste. Circular economic concepts seek a closed-loop system, not only to minimise waste and enhance sustainability, but also to keep raw materials in productive use for longer to enhance productivity.
The focus is to ‘reduce, reuse, repurpose, recycle, and remanufacture’ to create integrated production and supply chains, ultimately maximising resource efficiency.
Ultimately, a circular economy represents a shift away from the linear model that we know today. Moving away from the status quo requires a clear understanding of the direct benefits and costs of circular opportunities, but also the indirect and flow-on effects to the broader economy.
In circular economies, ‘material footprint’ refers to the total amount of raw materials used to meet final demand for consumption and investment (Commonwealth Bank of Australia (CBA) (2023), Beyond economics). It is an indicator of the pressure put on the environment to support economic growth and to satisfy the material needs of the population. Since 2010, the world has seen a significant increase in its material footprint, driven by rising populations, increased consumption, and demand for materials. The global material footprint has seen a 70% increase since the year 2000 and 113% increase since 1990.
Without collaborative and concerted effort, the global material footprint is projected to grow to 190 billion metric tonnes by 2060, according to the United Nations. Even more alarming is that the global material footprint is rising faster than GDP growth and population growth. In other words, there has been no significant decoupling of material footprint growth from either population or economic growth since 2000. In order to reduce the strain on our natural resources, it is imperative we reverse that trend.
In its report, How circular is Australia’s economy, CBA estimates Australia’s circularity rate to be around 5%, compared to the world economy at 9%. The circularity rate is the amount of materials that are recycled, reused and recovered relative to materials used.
By global standards, Australia’s circularity rate is low, which highlights the long journey ahead if Australia is to decouple economic growth from its material footprint. Increasing Australia’s circularity involves a reduction in the use of ‘newly’ extracted materials; it does not imply a reduction in the ‘use’ of materials.
In the transition to increased circularity, economies like Australia, which are dependent on extraction and the export of raw materials, may be at more risk of disruption than economies that use materials for manufacturing.
In the transition to increased circularity, economies like Australia, which are dependent on extraction and the export of raw materials, may be at more risk of disruption than economies that use materials for manufacturing. For example, Australia extracts a large amount of materials via mining and agriculture, while China uses a large amount of materials in manufacturing. Further, Australia is at risk from disruption as other countries adopt more circular initiatives. Governments in China, South Korea, and Japan have announced that their economies will be net-zero carbon emitters by 2060, 2050 and 2050 respectively. To meet their targets, they will reduce their imports of carbon-intensive energy sources like coal, oil and gas. These three countries are major importers of Australia’s mining exports. Therefore, Australia’s exports could be at risk when governments choose to reduce their-carbon intensive imports. To increase circularity from its current low levels, Australia needs to reduce the use of newly-extracted materials and consider innovative and transformative ways of doing so.
In its report, Potential economic pay-off of a circular economy, KPMG writes that “circular activities and processes not only extend the usable life of products but also extend their value, create new jobs and raise economic growth”.
It suggests that a circular economy in food, transport and the built environment represents a potential economic benefit for Australia of AUD 23 billion in GDP by 2025, and estimates that by 2047-48, the benefit of a circular economy will likely create an additional 17,000 full-time equivalent jobs for Australia.
To position itself on a global scale, Australia needs to consider circular initiatives from both a macro-economic and micro-economic perspective. As consumer sentiment and awareness of these issues grows, the circular economy has the potential to give us the tools to tackle environmental challenges, as well as provide us with the ability to encourage economic growth, increase jobs, and enhance our prosperity.
“Circular activities and processes not only extend the usable life of products but also extend their value, create new jobs and raise economic growth.”
The investment case for circularity really depends on the size and magnitude of the four key drivers outlined below. It is also important to recognise that circularity remains in its nascency and to be fully implemented in economies does come with risks. We see the below four drivers of circular initiatives:
In the following table, we have identified companies that may benefit from or contribute to the advancement of the circular economy. This is not a list of recommendations—the following companies have been identified to be considered as a company with circular economy thematic attributes.
| Listed companies | |
Amcor ASX: AMC | Actively addresses customers’ desire for more recycled materials in packaging. |
| Brambles ASX: BXB | Focuses on a circular share and reuse model, to be inherently low carbon. |
| Ecolab NYSE: ECL | Develops and offers services, technology and systems that specialise in treatment, purification, cleaning and hygiene of water. |
| Waste Management, Inc NYSE: WM | A comprehensive waste and environmental services company operating in North America. |
Xlylem NYSE: XYL | Offers equipment and services for water and wastewater applications that address the full water cycle from collection through distribution and reuse. |
| Managed funds | |
AB Global Sustainable Thematic | Global equity sustainable thematic strategy with exposure to companies that are focusing supply chains toward circular economic initiatives. |
| TT Global Environment Fund | Global equity environment strategy with 5% exposure to companies specifically focusing on circular economy initiatives. |
| BlackRock Circular Economy Fund * | One of a kind strategy, investing in well-positioned global companies poised to capitalise on the circular economy transition. The fund was created in partnership with the Ellen MacArthur Foundation, whose mission is to accelerate the transition to a circular economy. |
| Private markets | |
Who Gives a Crap | 100% recycled toilet paper, paper towels, and tissues, which donates 50% of profits to help build toilets for those in need. |
| Samsara | An Australian start-up that has the ability to return plastic polymers back into their original virgin monomers, thereby closing the loop to make plastic infinitely recyclable. |
Sources: LGT, LGT Crestone, UBS. * Currently not available on approved product list.
We have also developed a Quick guide to the circular economy, which provides a summary of how the circular economy encourages economic growth, how various countries around the world are implementing the fundamental elements of a circular economy, and some of the opportunities investors can take advantage of. Please ask your investment adviser for a copy of this guide.
It is important to recognise that circularity remains in its nascency, and its full implementation in economies does come with risks.
As expected, at the start of 2023 equity markets have been relatively volatile. Both shares and bonds rallied in January on hopes of a soft landing, then gave back some of their gains in February as a result of more resilient macro data and the possibility of higher-than-expected interest rates.
Inflation volatility is likely to persist—Inflation is falling near term. But fading impacts of globalisation, structurally tight labour markets, and geo-political impacts on supply chains suggest less deflation and more inflation.
A return to ‘normal’ interest rates—Peaking inflation is likely to foster a near-term peak in central bank hikes. But stickier inflation than over the past two decades is likely to limit a return to near-zero interest rates.
Geo-political volatility likely to be enduring—Russia’s invasion of Ukraine has ended a long period of benign globalisation. Ongoing decoupling of leading edge technology, political and trade alignment, as well as military and energy security, are all key potential drivers of growth and profits.
Diversification may matter more—In a world of heightened volatility and fewer long-cycle trends, it is important to maintain portfolio diversification, avoiding over-exposure to individual markets, sectors and other specific return drivers. Unlisted investments are likely to grow in favour.
The energy transition—As the world faces a trade-off between net-zero commitments, cost, and energy security, it is setting the scene for both old and new forms of energy to play a role.
Sustainable investing—As the world becomes more connected, it is also becoming more socially aware. The intersection of finance and sustainability will govern a reallocation of capital.
The search for income—The exit of “zero-bound interest rates” has resulted in a resetting of income expectations across all asset classes, from equities to fixed income, to income-generating alternative unlisted assets.
Deglobalisation—Brexit, trade wars, COVID-19, and Russia’s invasion of Ukraine have up-ended a relatively harmonious world order, with impacts spanning geo-politics, military spend, supply chains and demographics.
| What we like | What we don’t like |
| Equities | Companies with pricing power/resilient revenues Later-cycle defensive exposures in the consumer staples, telco and utilities sectors Emerging markets due to China re-opening, improving earnings and better valuation metrics |
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