The Next Steps Towards a Circular Economy

The concept and acceptance of moving toward a circular economy have grown significantly in the last several years. While definitions vary, most focus on maximizing the value of materials, products, and other resources (i.e., water, energy) that circulate in the economy by maintaining them in the economy for as long as possible while also minimizing the consumption of materials and the generation of waste.¹

The Ellen MacArthur Foundation has been a primary source of information on and driver of circular economic principles and practices, synthesizing many schools of thought (i.e., Cradle to Cradle, Biomimicry, and more). A circular economy moves beyond our take-make-waste industrial model and works toward designing products to eliminate waste and pollution and to regenerate natural systems. It’s a tall order for our complex global economy and demands a fundamental change within and across industries and stakeholders. It is an equally tall order to imagine achieving carbon emissions reduction and a more sustainable economy without both embracing a circular economy mindset and putting it into practice.

The Circularity Gap Report produced by the Amsterdam-based impact organization, Circle Economy quantifies the circularity rate, which is defined as recovered materials as a percentage of overall materials used in the global economy. Thus, the remainder is the “gap” and what we need to close. The Circularity Gap Report estimates that the global circularity rate remains at less than 10%.² This may seem low, and it is. Putting circular economics into practice is challenging work, made even more difficult in light of COVID-19 impacts. The report also shows the major contributors along Resource (fossil fuels, minerals, ores, biomass, and waste), Process, Produce, and Provide stages, or in linear economy terms, “take-make-waste” functions. As investors, this breakdown helps us focus our questions and assessments on the most challenging area and/or those with the most potential for improvement on an industry and company basis. One final point is that the Circularity Gap Report for 2021 focuses explicitly on how a circular economy can mitigate the carbon emissions gap. We appreciate this work as it helps expand the potential opportunities to fix our environmental problems, in part by broadening mindsets and efforts beyond carbon reduction via fossil fuel reduction. While fossil fuel reduction is critical, we need as many doors opened as possible.

In terms of next steps for advancing the circular economy, we consider water a critical variable to add to the framework, as has been done with carbon emissions. Water, a necessity for life itself, is a key natural resource, maybe the key natural resource and input for almost everything we make and use. In discussing corporate efforts to reduce consumptive and non-consumptive water use over the past decade, setting targets and achieving or exceeding them have lowered some costs, but often it is energy cost savings that outstrip any savings in actual water costs. This is because water costs are low (until a crisis unfolds) and energy use and costs are often more significant in moving, storing, heating, and/or cooling water. Incorporating water specifically may also assist in identifying climate solutions that could actually increase risks to quality, quantity, or resilience of water in specific watersheds. If greater water usage, especially in stressed watersheds, is drawn upon to meet carbon targets, are we moving forward in our goals to achieve a greater circular economy? Clearly integrating efforts within and across companies and other stakeholders is worthwhile.

We are supportive of efforts to focus on watershed management and stewardship. This often brings agricultural and industrial entities to the table. Significant water loss due to inefficient irrigation and water-quality issues through runoff as well as extraction of freshwater above replenishment rates are critical agricultural issues. Pollution from utility, industrial, and extractive industrial activities often occur and compete within watersheds. The Alliance for Water Stewardship (AWS) is a global program that teaches and certifies best practices for watershed management and stewardship. While AWS in North America is still at early stages, it is encouraging to see the methodologies being put into practice and improved upon as more companies accept the challenges. We think that these watershed discussions and the mounting pressures for carbon reductions have the potential to move the needle on creating and adopting more circular manufacturing practices, thus achieving sustainability targets without exacerbating unintended consequences. Such discussions might also provide specific examples of balancing interests amongst various stakeholders in a particular watershed, thereby addressing social concerns. Lastly, costs of solutions need to be a part of these discussions. A focus on energy and water, particularly in agriculture, would also bring to light more cost effective, nature-based solutions. That in itself, would be a huge step forward.

Article by Lydia Miller, Senior Vice President and Portfolio Specialist with Dana Investment Advisors and focuses on the Firm’s Sustainability and ESG investment strategies. Prior to joining Dana, Lydia was a Managing Director at Big Path Capital (formerly Watershed Capital Group, a certified B Corporation). She was a Managing Director at UBS where she managed a global sustainability equity fund. Lydia is an advisor for Equarius Risk Analytics LLC and guest lectures at various universities on topics related to sustainability and portfolio management. Lydia graduated summa cum laude from the Pennsylvania State University and has an MBA in Finance and International Business from the University of Chicago.