Investment opportunities in innovative circular enterprises

The Futurecraft Loop trainer model of Adidas is hip and completely recyclable. Adidas makes the model of one type of material, without glue. This makes recycling easy; when the shoe returns to the manufacturer at the end of its life, it is ground into pellets and used to make new shoes. Judith Sanders, investment strategist at ABN AMRO MeesPierson, sees more and more examples of companies that take a circular approach. “They design their products so that as few valuable raw materials as possible leak away during production, use and reuse. The waste from one product becomes the raw material for another.” Many companies realise that the traditional, linear production chain is not sustainable in the long term. “Mining raw materials, producing, consuming and throwing away is not sustainable. We are depleting the earth's natural resources as consumption increases at an ever-faster rate due to the growing world population and rising prosperity.”

This circular approach has several advantages. In a circular economy, environmental damage is limited, as is the use of raw materials. Better for the planet, and also for companies and their shareholders, Sanders believes. Sustainable choices therefore go hand in hand with financial arguments. Governments make companies pay heavily for waste disposal, for example. “Companies that save and reuse raw materials are also more resistant to raw material scarcity and price increases.” A topical subject within the energy transition, for example, for producers of electric cars. Only just enough metals, such as lithium, cobalt and nickel are extracted for the production of rechargeable batteries to meet current demand. Due to the increasing demand, the price of these raw materials is also rising. “While it is precisely the affordability of electric cars that make the switch more attractive for consumers. That is necessary to accelerate the energy transition.” Sanders cites as an example the success of the electric version of the popular Ford F150 truck. After its introduction in the United States, the truck was ordered 45,000 times for the equivalent price of €26,615. “This is reason enough for the industry to invest heavily in the technology to make the recycling of batteries more efficient and less labour-intensive.”

Circular entrepreneurship makes companies less dependent on the availability of new raw materials, which can contribute to their profitability and attractiveness to investors. It is no coincidence that the way companies produce and deal with raw materials is taken into account when selecting investments for ABN AMRO's sustainable funds. Circular entrepreneurship can strengthen a company's reputation; its brand value increases. We see that a good sustainability policy makes a brand more attractive. In the Global Consumer Insights Pulse Survey by consultancy PWC, 29% of respondents said they would buy brands that promoted sustainability. Circular business is in line with the increasing demand from consumers for sustainable products. Sanders: "We are all making more and more sustainable choices about what we buy. Young consumers in particular take this for granted.”

Besides opportunities, there are also challenges around circularity for companies. Sanders: “It costs companies time and money to start producing differently. Sales can also drop because of the increasing lifespan of circular products.” A new method to bind customers to a company for a longer period of time seems to have been found in products-as-a-service. Here, the customer does not become the owner of the product, but only pays for its use. An example is Signify, which does not sell lamps but 'light' to airports such as Schiphol Airport. Signify remains the owner of the LED lamps and takes care of maintenance and replacement. Lift manufacturer Mitsubishi also focuses on circularity with this business model and now rents out lifts. The lift in the Circl pavilion at the ABN AMRO head office and in a new residential tower in Amsterdam remain the property of the manufacturer. The “owners” pay an amount for the use of the lift via the service costs. The manufacturer maintains the lift and ensures that the parts are reused in thirty years, at the very end of their service life. Sanders: "An additional advantage of products-as-a-service is that the supplier retains ownership of the product, which encourages smart reuse and sustainable design.”

Judith Sanders is an investment strategist at ABN AMRO MeesPierson. She is an experienced investment specialist with a special focus on SRI.