The aim, scope and opportunities of a circular economy

We do not guarantee the accuracy of this transcript.

Voice: This podcast is for professional investors only.

Berit Gehring (BG): Hello and welcome to our series of three short podcast episodes about the circular economy. My name is Berit Gehring, and my guest here today is Natalie Falkman, our senior portfolio manager of the Circular Economy Equity Strategy. Today, I really want to talk to her about the basics, why we really need this circular economy and what it actually means. In parts two and three of the podcast, we then will talk about how you can invest into circular economy and why it is an attractive investment theme. But first of all, welcome, Natalie. Really great to have you here today.

Natalie Falkman (NF): Hello, Berit and thank you so much for your interest.
BG: Yeah, and there is big interest indeed. Circular economy. It's a really big buzzword. I feel everybody seems to be talking about it company that always saying how they are going circular. So why is it such a hot topic?

NF: First, I have to agree circular economy is a hot topic. I think it is because there is a rising understanding that circular economy is an important piece of the puzzle when it comes to creating a more sustainable and more long-term future for us today. In our current economy, we produce, consume and grow in an unsustainable manner. And if we don't want to drastically reduce our living standards and stop growing our economy, we need to rethink. And I believe we need to change in many ways how we consume, grow and produce. So if we really serious about becoming a more long-term sustainable society, transition to circular economy is really a need to have not just a nice to have.

BG: All right, but what does circular economy actually mean?

NF: I would imagine that the first thing that comes to mind for many people when we start talking about circular economy is waste management or recycling activities. Recycling is very important for circular economy, but circular economy is much more than that. It's much broader. In essence, circular economy is a different economic model that decouples economic growth from the use of new resources, and especially when it comes to scarce resources. And by doing that, circular economy allows to significantly reduce emissions pollution and waste generation.

BG: Well, that sounds like three really great benefits, but how does circular economy actually do that? You mentioned that it's a different economic model, but then what kind of economic activities belong to the circular economy?

NF: So there are quite many areas of activities that can be defined as circular. We usually group them in three categories and we also call them the three pillars of the circular economy. The first pillar centers around design of products and also processes. And what we strive to do with the design is to design for repairability and upgradeability for long, useful lifetime of physical assets. We also want to “design out” unnecessary materials both in products and in processes, and we want to “design in” sustainable resources. Actually, 80% of the environmental footprint of a product is determined already in this very early design phase. So design plays a very central role in the circular economy. And then the second pillar is, or the second group of activities is about prolonging the useful lifetime of physical assets and products and also about using them more intensively, because if we do that, we need much less products. And the last pillar is about utilizing renewable, recyclable compostable materials and also about regenerative practices.

BG: It seems to me a bit that nowadays every company wants to be seen as green or as sustainable and therefore also as circular. But when you look at companies and activities, where do you draw the line between what is circular and what is really not part of the circular economy?

NF: I believe that you raise a very valid point for me. There are some business models where circular economy poses a threat rather than opportunity. For example, businesses that aim to sell large volumes of cheaper products. Often these products are used for shorter time periods before they break or before they become obsolete. So I would say, for example, fast fashion is the business area and business model that is not really aligned with the principles of the circular economy. I can also give you a very concrete example of another business area which is selling drinking water in plastic bottles. It's not part of the circular economy principles, so I hope that gives you an idea of what types of models and areas do not really fit in the circular economy.

BG: Absolutely. Yes. And thank you very much. I think my key takeaways from this short discussion is that circular economy really seems to be a need to have if we want to save more resources, reduce the waste and also achieve our climate goals. And also that companies from many different industries have a key role to play in our transition to the circular economy. Thank you for listening. Be sure to tune into parts two and three of our Circular Economy podcasts too. You'll find them all on our website.

NF: Thanks for joining this podcast. Please tune in next time as well.

We do not guarantee the accuracy of this transcript.

Voice: This podcast is for professional investors only.

Berit Gehring (BG): Hello and welcome to part two of the series of three short podcast episodes about the circular economy. I am Berit Gehring and my guest once again is Natalie Falkman, our senior portfolio manager of the Circular Economy Equity Strategy. In part one of the podcast series, we already talked about why we need a circular economy and what this word actually means. Today I want to learn about how we can invest into the circular economy. So welcome, Natalie. It's great to have you here again.

Natalie Falkman (NF): Thank you. Thank you for having me back.

BG: Natalie, in the last session, you already mentioned that the circular economy is a broad theme and that companies from many different industries have a key role to play. If we want to transition to a circular economy, how then do you invest in this broad theme?
NF: So circular economy will hopefully sometime in the future become our dominant type of economic model, but for now it is still in its early days. Therefore, investing in what we call “enablers” is the best way, in my view, to both achieve high thematic alignment but also invest in fundamentally attractive companies.

BG: What do you mean by “enablers”?

NF: Enablers are the type of companies that help their customers to adopt circular practices. And I'm happy to give you a couple of examples. One group of enablers are companies that distribute repair and maintenance components. These companies help to repair different types of equipment, and by doing that, they help their customers to prolong the useful lifetime of their assets. Then we have many enablers in the digital space. For example, providers of design and simulation software, and these software companies help their clients to design more durable goods and products that are easy to repair, easy to upgrade, and then recycle at the end of their lifecycle. And the third example could be of a recycling enabler, a company that produces recyclable packaging or natural ingredients for both food and personal care articles. So there are many attractive enablers and companies to invest in.

BG: Okay. And if you say many, then in which sectors do you find most of these enablers?

NF: At least today, there are relatively more enablers in the industrial materials and technology sectors, while there are relatively fewer in, for example, consumer and finance areas.

BG: And besides these enablers, is there anything else that you invest in?

NF: Well, since circular economy is still in its early days, enablers constitute the majority of our holdings. But we also invest in a group of companies that we define and call circular champions. Champions are companies that are sector leaders when it comes to adopting circular practices and methods. And in many cases, these champion companies are pushing the entire value chains in the right direction. So they're very often very instrumental when it comes to transitioning their sectors to become more circular.

BG: And Natalie, can you give us an example of such a champion?

NF: Happy two champions can be found in different sectors. One example can be a food retailer that is committed to substantially reduce food waste and packaging waste. Such a company usually works with its suppliers to achieve these goals, but also helps creating a sector infrastructure to reduce food waste and packaging waste overall.

BG: To sum up. Enablers for the circular economy are where you find most investment opportunities for the theme today. And these enablers really come from different industries. Also, as you mentioned, industrials, technology and materials are the sectors most strongly represented. And then you also invest into the champions of circular economy practices.
Thank you for listening. Be sure to tune into part three of our Circular Economy podcast or listen to Pod one. If you haven't yet, you'll find all of them on our website.

Thanks for joining this podcast. Please tune in next time as well.

We do not guarantee the accuracy of this transcript.

Voice: This podcast is for professional investors only.

Berit Gehring (BG): Hello and welcome to part three of this series of short podcast episodes about the circular economy. My name is Berit Gehring and my guest once more is Natalie Falkman, our senior portfolio manager for the Circular Economy Equity Strategy. In part one of the podcast series. We had talked about why we need a circular economy and what it actually means in part two. We then spoke about how to invest in the circular economy. Today I want to focus on why we should invest in the circular economy and whether or why it is an attractive investment theme. So, Natalie, thanks for being here once more.

Natalie Falkman (NF): Thank you. It's great to be here again.

BG: Let's start off right away. When I hear themes or thematic investing, I immediately think about growth. Is that also the case for the circular economy theme.

NF: And the transition to a circular economy is a structurally growing area, so companies that support this transition will in general grow faster than the underlying economy, the global GDP. In addition, as investment theme, circular economy is naturally underweight sectors that many investors usually define as value. For example, energy, commodities, financial area. However, I do not really look at the theme from the value versus growth factor perspective. For me, value investing really means investing in attractively valued stocks. Not overpaying for a company I believe is as important in generating long-term attractive returns as selecting fundamentally sound and good business.

BG: All right. And you said its growth theme is growing stronger than the underlying or broader market. Global GDP. What's driving the growth in the circular economy theme?

NF: The transition to a circular economy supported by a number of strong growth factors. And I can give you a couple of examples. New regulations is one very important driver, and it could be local regulations, it can be regional, but the direction is very clear. Companies, consumers and also governments themselves are forced to implement more sustainable production and consumption practices and methods. Impact on the real economy can also actually come from the financial sector, steering financial resources and flows towards more sustainable investment areas. The European Taxonomy is one such large regulatory framework that I believe will have a great positive impact on sustainable investments. Another driver that supports the transition to a circular economy is of course the technological development. Better and better technologies make it possible for us to continuously improve our resource efficiency.

BG: How about consumers? I hear from more and more people that really many are now trying to also shop more responsibly.

NF: I agree, and actually I recognize myself in that. So changing consumer preferences is a very important, positive driver. Today, consumers more and more require products with cleaner labels and also with a lower environmental footprint. And I would also like to add another driver that has an unintentional benefit, I would say, for the transition to a circular economy, and that is the constrained supply chains and also inflation that lead to rising input costs. And what that means is that equipment owners today rather rip and refurbish their equipment and their physical assets instead of buying new ones. And maybe they'd rather rent and lease than buy and own. So altogether, this means that companies that enable the transition to circular economy will grow faster in general than the underlying economy itself.

BG: Nataly I'm curious, before you joined Robeco in early 2022, you were running a global equity strategy, right? And now I'm wondering how has this kind of helped or prepared you for managing a circular economy focused thematic strategy?

NF: So global funds, they are broad and flexible by design. A global fund in most cases actually have a toolbox to perform well relatively to the market, both in good times and in more challenging times. Circular economy, since it refers to a broad economic model, is also quite broad and flexible. So a circular economy investment mandate allows us to look for fundamentally attractive companies in different sectors and different geographies. It also gives the flexibility to position the strategy depending on, for example, market visibility and market transparency. I also believe that in today's global world, portfolio managers of any mandate or strategy need to understand global value chains rather than being an expert in a specific sector or for a separate geography. So the fact that I have managed a global fund before, I believe provides me with a very relevant experience for now managing the circular economy strategy at Robeco.

BG: All right. Thank you for these insights. I think what I take away from today is that circular economy is an attractive investment theme with growth driven by regulation, by technological progress, as well as changing consumer preferences. But also there's current and maybe unintentional drivers such as inflation and the supply chain constraints.
Thank you for listening. This is the last part of our Circular Economy podcast series. You will find all three parts on our website. And, of course, if you have more questions, simply reach out to us at Robeco.

Voice: Important information. This publication is intended for professional investors. The podcast was brought to you by Robeco and in the US by Robeco Institutional Asset Management, US Inc, a Delaware corporation as well as an investment advisor registered with the US Securities and Exchange Commission. Robeco Institutional Asset Management. US is a wholly owned subsidiary of Orix Corporation Europe, N.V., a Dutch investment management firm located in Rotterdam, the Netherlands. Robeco Institutional Asset Management BV has a licence as manager of UCITS and Aifs for the Netherlands Authority for the financial markets in Amsterdam.