Statistically speaking, every European consumes roughly 14 tonnes of raw materials and causes around 5 tonnes of waste per year on average. These figures very clearly drive home the importance and the potential of the circular economy when it comes to ensuring a sustainable future. With this in mind, the circular economy must be included in the Future Transformation Topics defined by Raiffeisen Capital Management.

Future Transformation Topic "Circular economy"

Therefore, a team of six investment experts led by Thomas Bichler, fund manager in the Multi-Asset Strategies team, has been concentrating on the impact that the transition to a circular economy will have on the investments and the investment process of the fund company.

Enormous consumption of resources

“Take, use, and dispose”

In order to illustrate the necessity of a paradigm shift towards a circular economy, it is probably best to take a look at the current – linear – economic system. In this system, raw materials are extracted and then processed into products that are used by consumers and finally thrown away or disposed of. For the company that produces the product, the responsibility for the product ends after the sale and is transferred to consumers, who are now accountable for the disposal. This system of “take, use, and dispose” is extremely resource-intensive and is thus not viable for the future.

Circularity means that the value of the product is preserved

The goal of the circular economy is to keep products and materials in the economic cycle for as long as possible. This means that, in contrast to the so-called throw-away society, products remain in use for as long as possible, can be repaired, and that their components can be reused and recycled as easily as possible when products reach the end of their lifecycle. In other words, we want to move away from the “throw-away society” towards a “reuse society” or at least a “return society”. “One concept that we are particularly fond of with regard to our investments is the so-called value hill. In the past, the predominant view was that added value is only created during production. This means that after the product is sold, its value is reduced by way of wear and tear. The goal of the circular economy is to preserve the value of products for as long as possible. Naturally, this has a major impact on various companies and industries,” explains Thomas Bichler.

“Circularity strategies go far beyond the topic of recycling. Central problems related to the circular economy already have to be considered during the product development phase. How can products be developed that consume fewer resources during production, that last as long as possible, that are easy to repair, that can be reused, and that ultimately allow the energy to be recovered at the end of the product lifecycle? These are the much-cited ‘Rs’: reduce, reuse, repair, and finally recycle and recover,” elaborates Bichler.

EU working to create regulatory framework

The circular economy is a particularly important pillar of the EU’s Green Deal and plays a key role in decarbonisation and achieving climate neutrality by 2050. In mid-July 2023 the European Parliament voted to strengthen the draft for the Ecodesign for Sustainable Products Regulation (ESPR). Among other things, the draft passed by the Parliament prioritises sustainability requirements for products that are particularly harmful to the environment such as metals, textiles, furniture, and detergents. In addition, a ban on the destruction of unsold textiles and electrical and electronic equipment is set to be introduced. If the draft is approved by the relevant institutions, products will have to be energy-efficient, durable, repairable, reusable, and recyclable in future if they are sold on the EU single market.

Companies that follow the principles of circularity can benefit from the following advantages:

• Security for the raw materials supply (lower supply risk, reduction of dependency on raw materials, competitive advantages for scarce raw materials)

• Cost advantages through resource efficiency and recycling (i.e. carbon tax)

• Companies less exposed to fluctuations in commodity prices

• Regulations impact companies less or not at all (i.e. plastic tax)

• Companies are attractive for sustainable investments and thus profit from capital flows towards sustainable business models and ultimately from lower capital costs

Structure and differentiation from other Future Transformation Topics

The team focused on the three following aspects in the analysis of the Future Transformation Topic of the circular economy:

• Focus on areas with high material use and high waste volumes

• Areas with high carbon emissions – i.e. areas that are crucial for climate change and/or where major impacts on companies are to be expected

• Business models that will benefit from the trend towards circularity

The focus point of “building/construction/construction materials” is one of the key sectors in terms of both material use and carbon emissions. Here, there are numerous overlaps and links to other Future Transformation Topics, particularly to the two teams of “Raw Materials” and “Infrastructure”. Particularly when it comes to construction, Austria still has plenty of catch-up potential. It is at the top of the list in Europe when it comes to land use. Every day in Austria, some 11 hectares of fields and meadows, i.e. around 16 football pitches, are utilised. The target that has already been in place for many years is a maximum of 2.5 hectares. Two more focus points are “packaging/packaging solutions” and the area of “electronic waste”. Here, companies are feeling the impact of the regulation to a particularly high degree and they are also a focus of our analysis with regard to high waste volumes. There are also overlaps with the Future Transformation Topics of “raw materials” and – with regard to electronic waste – “technology”.