PGGM, the second largest pension fund in the Netherlands, has traditionally invested in all the usual money-makers, like oil companies, big pharma, and corporate giants. But in 2015, it took a dramatic step. By the end of that year it had allocated €8.9bn in what it calls “solutions for sustainable development.” In other words, it put billions into investments with the express intention of addressing systems-level social and environmental challenges: building housing for low income communities, developing water-saving technologies and new energy infrastructure, all while still earning competitive returns.
This solutions-oriented way of investing wasn’t a one-off project, nor was it simply meant to be good public relations (although it was). It is part of an increasingly popular approach to return a reasonable profit while simultaneously making a positive impact on the world. Specifically, PGGM has focused its solutions-oriented investments on climate change, water and food, and healthcare; mirroring its beneficiaries’ career concerns.
At the same time, PGGM has joined a group devoted to growing the circular economy: the practice of finding clever ways to more intelligently use our limited (and often costly) resources like energy, land and materials. This group, the Circular Economy 100, convenes businesses, emerging innovators and governments to collaborate and share insights on how to move away from the traditional waste-ridden linear economy toward one that is restorative by design.
Efforts by the World Economic Forum, the Global Impact Investing Network, United Nations-backed Principles for Responsible Investment, McKinsey & Company, the Ellen MacArthur Foundation, and a host of others are catalyzing and strengthening investor and business activity around the circular economy and its environmental systems-level implications.In the report titled “Investing in the new industrial r-evolution: Insights for asset owners and managers financing the circular economy” Link we examine the emergence of this new industrial revolution.
The report highlights the rise of two complementary forces. The first is the realization among corporations that the linear approach to manufacturing is inefficient and unsustainable, and that a shift towards a circular approach (focusing on renewable energy, re-use of what would previously be considered waste products, and the sharing economy) is necessary and inevitable. A second, broader trend is the growing demand for investment products that simultaneously provide financial returns and address social and environmental challenges on a global scale—what we call “systems-level investing”. To fully realize the power of these two trends, investors need to embrace circular economy practices more fully within the context of system-level environmental considerations.
Today, many of the measurement and reporting frameworks available for impact-oriented investing or ESG integration do not transcend simple measurements of pollution outputs or tons of wastes recycled to give proper weight to things like product design that maximizes product life cycles or business models that embrace service-based approaches and convert consumers into users, closing the circle of material use and promoting overall efficiency. In a circular economy, products and materials are made from either pure, non-toxic consumable materials (biological nutrients) or durable materials (technical materials) and are designed to be easily disassembled, enabling easy repair, reuse or refurbishment.
For example, the Dutch carpeting and floor-products company Desso, with its commitment to “Cradle to
Cradle” manufacturing, uses toxin-free manufacturing materials and has optimized its carpets for disassembly, collection and the redeployment of materials. The Swedish clothing retailer H&M provides vouchers to customers who return used clothing and partners with I:CO, an international company specializing in the reuse and recycling of used clothes, to see to it that these clothes are reused or recycled. The Netherlands-based electronics giant Philips leases lighting and healthcare equipment to customers, enabling products and components to be refurbished for use in new sales cycles.
To help grow the circular economy, investors need resources and information to help them identify and streamline their investment processes. The Ellen MacArthur Foundation is taking an important step in this direction with its development of circularity indicators around its core Material Circularity Indicator (MCI). Such efforts can help standardize metrics—and can be applied to new products, reporting, external assessments and ratings.
With these components in place, investors could better utilize various key investment activities—investment beliefs statements, security selection and portfolio construction, engagement, targeted investment programs and manager selection—to develop an investment policy or special targeted investment program that prioritizes the circular economy.Doing so would serve to open up a number of circular economy investment opportunities that deliver competitive financial returns alongside measurable social and environmental impact. For advocates, this means smart, affordable capital to finance their efforts. These circular economy investments can be found in different sectors (e.g. manufacturing, water, agriculture) and asset classes (e.g. public equities, private equity, venture capital, fixed income, real estate), offering both diversification and system-level impact opportunities.
The transition from today’s linear ‘take-make-dispose’ economy to one that is circular is creating an unparalleled opportunity for corporations and their supply chain partners to capture new sources of value – it also has the potential to do the same for investors as they attempt to respond to demand for investments that address systems-level social and environmental challenges while also generating a financial return.
The road is long, but the need is urgent. The time is now.
William Burckart is the President and COO of The Investment Integration Project (TIIP), and a visiting scholar at the Federal Reserve Bank of San Francisco. Jamie Butterworth is a Founding Partner of Circularity Capital and former CEO of the Ellen MacArthur Foundation.