The circular economy: an investment theme of the future
01.10.2019 | Group
Investing in businesses that are taking firm action to promote the circular economy can be a choice that pays off in the long term. Here’s why with Sébastien Soleille, Head of Energy Transition and Environment at BNP Paribas' CSR Department and Bertrand Alfandari, Head of ETF marketing and index solutions at BNP Paribas Asset Management.
What is the circular economy?
Sébastien Soleille: The so-called ‘linear’ economic model, which follows a 'take-make-dispose’ pattern, is not viable in the long term as a counter to an ever-increasing global population, a raft of non-renewable energies (metals, minerals, fossil fuels, etc.) unable to keep up with demand, and a limited ability to regenerate renewable energies (land, forest, water, and so on). So the entire economic sector must move towards a new model of production and consumption related to what we call the circular economy; the circular economy consists in extending the life of products, reducing waste, reusing waste as a new resource and developing the principles of leasing and sharing.
the entire economic sector must move towards a new model of production and consumption related to what we call the circular economy.
What are the challenges of the circular economy?
S. S.: The challenges of the circular economy are global, which is why this issue has become one of the key concerns of governments and the European Commission. The main challenges of the circular economy are to improve waste management, reduce greenhouse gas emissions and revise the principle of planned product obsolescence. This means learning to share, rent, reuse, refurbish and recycle to a greater extent right across the board. Investing in this theme and therefore in businesses that are committed to adopting the right reflexes when it comes to the circular economy opens up performance prospects over the long term.
The challenges of the circular economy are global.
What is the BNP Paribas Group doing in this area?
S. S.: BNP Paribas is committed to the circular economy in many ways, including:
- working on its own practices: reducing paper consumption and buying recycled paper or paper from sustainably managed forests, recycling more of its own waste and optimising the processing of IT equipment at the end of its life;
- financing circular economy players: we support businesses that are actively involved in the circular economy (Simone Lemon, a restaurant that reduces food waste, and Phenix, which helps companies tap into the potential of what they throw away, to name but two);
- developing product-service systems (leasing) via our leasing offer (Arval and BNP Paribas Leasing Solutions), on using an asset rather than owning it (asset use optimisation);
- working with leading players: we have partnered, for instance, with the Ellen MacArthur Foundation and the French National Institute for Circular Economy (INEC).
Is the regulatory and political framework conducive to such developments?
S. S.: These issues have received a significant amount of political attention in recent years, particularly in the European Union and in France.
The European Union has considerable legislation on the circular economy, including a circular economy action plan launched back in 2015. In March 2019, the European Commission published a report on the implementation and effectiveness of the 54 actions included in the plan.
In France, a law dedicated to the circular economy is currently being discussed in parliament. It is primarily designed to complement the measures included in the 2015 Energy Transition Act. However, discussions are spirited and some people feel the bill doesn't go far enough.
The regulatory and political framework is therefore moving in the right direction but there is still much to be done.
Photo: Sébastien Soleille
What is the role of asset management in the circular economy?
Bertrand Alfandari: At BNP Paribas Asset Management, we are committed to the businesses in which we invest: we engage in dialogue with them and vote at their general meetings because concern for the environment is the core focus of our investment strategies.
In a rapidly changing world, the circular economy will play a major role in safeguarding natural resources and our planet.
BNP Paribas Easy’s indexing is regularly cited for its ability to develop pioneering environmental or ESG investment solutions such as that of the circular economy. In a rapidly changing world, the circular economy will play a major role in safeguarding natural resources and our planet. The BNP Paribas Group supports the transition to a circular economy in three ways: it finances those who are active in the circular economy and particularly those who innovate; it develops product-service systems through its leasing offer, and it takes positive action through its own practices.
How does one invest in companies that are active in the circular economy?
B. A.: The ECPI Circular Economy Leaders Equity Index® offers a new investment angle for those who wish to invest in the circular economy. This euro-denominated index replicates the stock market performance of 50 major global corporations selected by analysts as being equipped to seize the opportunities and meet the challenges of a circular economy model. Some of these corporations are in sectors that naturally fall within this type of economy, such as recycling or renewable energy.
Others can also be included in the index’s methodology if they are seen to be moving their current model towards that of the circular economy, such as industries that generate high CO₂ emissions or consume raw materials. In April of this year, BNP Paribas Asset Management launched the world’s very first circular economy-based ETF: the BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF tracker (ISIN code: LU1953136527). It is listed in euros and traded continuously on Euronext Paris. It comes with an expense ratio of 0.30%.
Can you give some examples of companies that are active in the circular economy?
B. A.: The circular economy is increasingly being adopted by major global corporations that see it as an opportunity for growth and innovation.
Nike, a company specialising in the manufacture of sporting goods, incorporates the principles of this economy. It was chosen for the ECPI Circular Economy Leaders Equity Index (the index underlying the brand new ETF in the BNP Paribas Easy range) because of its commitment to double its business with half the impact. Nike also won the ‘Circulars Award’ in 2016 for its efforts to combat waste. The company is focused on eliminating waste through more efficient design and manufacturing technologies. In 2015, 54 thousand tons of factory waste were transformed into high-end materials to be reused in Nike footwear and apparel. For example, Nike uses recycled and Better Cotton-certified polyester (cotton grown according to the Better Cotton Initiative standard system) that optimises energy and water efficiency.
Another key player in the transition to a circular economy is IBM. For more than 30 years, the company has operated an IT equipment recovery unit that processes nearly 30,000 devices each week. More than 99% of the end-of-life IT equipment and product waste returned to IBM is reused or recycled.
In a completely different field, Caterpillar, a heavyweight in the construction sector, promotes circular economy principles through its remanufacturing and rebuild programmes, which overhaul components and machines rather than simply repairing or replacing them. This reuse of parts reduces waste and minimises the need for additional raw materials needed to produce new parts. Through remanufacturing, Caterpillar states that it makes ‘one of the greatest contributions to sustainable development – keeping non-renewable resources in circulation for multiple lifetimes’.
Another example is Heineken, the world's second biggest brewer, which is also a leading player when it comes to recycling. It has a recycling rate of 97% for co-products, packaging and industrial waste.
In France, LVMH, Kering and Schneider Electric have also taken an active stance.
The circular economy is increasingly being adopted by major global corporations that see it as an opportunity for growth and innovation.
There is only one ETF in the world on this theme. Can you describe it in a few words?
B. A.: A new tracker has just been integrated into the BNP Paribas Easy range that replicates the ECPI Circular Economy Leaders Equity Index built by ECPI, an Italian index provider that has specialised in ESG indices for more than 20 years. Although the index was created in July 2017, there were no ETFs on this theme at that time. The index comprises 50 global large-cap companies, selected for their participation in the circular economy. They are divided into five categories: circular supplies, resource recovery, product life extension, sharing platforms and product as a service (meaning an emphasis on product use). The 50 companies come from many different industry sectors because although the index excludes arms and tobacco-related businesses, the selection is still wide-ranging. It includes such companies as LVMH, Kering, BMW, Cisco Systems, Schneider Electric, Caterpillar, IBM, and Vestas Wind, a Danish wind turbine manufacturer.
Photo: Bertrand Alfandari
The above securities are for information purposes only and should not be considered as an investment recommendation.
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