An original deep-dive article by Longrun Capital

<aside> 💡 This article was written and published in March 2023. In September 2023 an updated publication on the planetary boundaries was published in the journal Science Advances DOI: 10.1126/sciadv.adh2458

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Table of Contents

• Introduction
• Circularity, Sustainability and the Sustainable Development Goals
• Circular Economy Basics
• How Circular Economy and Sustainability fit together
• EU Taxonomy
• CE and Investment Decisions
• Crunching the numbers
• Conclusion
• Sources

Introduction

Investing with a long-term perspective requires an understanding of what systematic changes we may see in the future, and making educated guesses about when they may occur.  The climate crisis is already here and the urgency to reach net zero carbon emissions and limit global warming to 1.5°C has never been greater. Countries across the globe are experiencing the consequences as weather extremes and disasters are becoming more frequent due to climate change. Within only the first 10 months of 2022 costs associated with climate change-related weather disasters like Hurricanes Ian and Fiona, flooding in Pakistan, South Africa, and Australia, and droughts in Europe, Brazil, and China, reached nearly $40 billion dollars, and damages in many places will take years to repair [1]. Models and predictions of what the climate and weather of a warmer world will look like are frequently seen in the media, but the extent of changes we must make in our economies to avoid worst-case scenarios is less straightforward. The 1987 WCED Bruntland Report [2] defines sustainable development as, “…development that meets the needs of the present without compromising the ability of future generations to meet their own needs”, and while the term has become much more nuanced and comprehensive over the years, this definition still serves as a foundation for understanding sustainable development. In 2015 global goals for sustainable development were set to help achieve long-term sustainable development [3]. To limit climate change we will need to live sustainably, achieve a fossil-free system, and stop our extractive and wasteful habits which have led to us exceeding the planetary boundaries [4,5]. To live within these boundaries, we must use fewer resources, and use what we do have with consideration and care. Sustainable living through circularity will be built on new kinds of business models and innovative approaches to complex and multifaceted challenges. As investors, we will need to re-frame our ideas about cost and waste, and what growth means, and be prepared to approach evaluations with a fresh mindset.

Circularity, Sustainability and the Sustainable Development Goals

Increasing human impact on biodiversity, water, and climate means we must fundamentally change the way we think about resources and the impact our behaviors have on the planet. The concept of planetary boundaries, which was first developed by Rockström et al. (2009) [5] describes “quantitative planetary boundaries within which humanity can continue to develop and thrive for generations to come… Crossing these boundaries increases the risk of generating large-scale abrupt or irreversible environmental changes”

Figure 1: The Planetary Boundaries as updated in 2022. Novel entities include environmental pollutants and plastics. Biosphere integrity is measured in extinctions per million species-years (E/MSY) as a stand-in for measuring genetic diversity loss, and the not yet quantified biodiversity intactness index (BII) that is described in detail in Campbell et al. (2017) [6]. Biogeochemical flows refer to phosphorus (P) and nitrogen (N). P and N cycles have been profoundly altered by human activities as both elements are extensively utilized in industry and as fertilizers in agriculture [6]. Graphic was designed by Azote for Stockholm Resilience Centre, based on analysis in Persson et al (2022) [7] and Steffen et al (2015) [8]. Attribution: CC BY4.0.

93% of the materials in today’s economy are wasted, lost, or unavailable for reuse.9 We already consume more resources than the planet can sustainably provide, and we are aware that the transition to renewable and green energy sources will require significant amounts of primary resources which will inevitably come at an ecological cost. How can we make the necessary green transition to limit warming without further violating the planetary boundaries? This is where sustainability and circular economy come in.

A circular economy (CE) is perceived as a sustainable economic system where economic growth is decoupled from the resources used by reducing and recirculating resources and materials [10].  CE activity can reduce resource consumption by focusing on efficiency, value-retention processes, and waste minimization and in so doing drive changes in production patterns and/or consumer behavior [11]. However, CE alone is not enough to achieve living within the planetary boundaries and often does not encompass the social aspects of sustainability. The transition from a linear economy where only 7.2% of our resources are cycled back into the economy at the end of their useful life [9] to a CE where we think about circularity from the get-go should, therefore, help us build a more sustainable world that is in line with planetary boundaries. It's important to note that CE and sustainability are separate concepts, but CE can be a valuable tool in transitioning towards a more sustainable society [12].