A new model that facilitates investment in the circular economy | opinion | Currently

Wealth manager Candriam has developed his own investment-oriented model that measures corporate circularity. This is intended to enable investors to make decisions about the allocation of their capital that promote the transition to a circular economy.

This year, Earth celebrated Earth Overshoot Day on July 28. Therefore, in just the first seven months, our economy consumed as much of the world’s natural resources as possible that could be replenished in an entire year. This date comes early every year. By 2050, we will be consuming three planet Earths per year. It is time to stop this trend. The circular economy is a strong brake in this regard.

Today’s global economy largely follows a linear process: take, use, use, and throw. On the other hand, in a circular economy, the need for new natural resources is minimized and non-biodegradable waste is avoided. Your goal is to refurbish merchandise rather than throw it away: reuse, renew, recycle, and share. In addition to reducing resource consumption and reducing mountains of garbage, the circular economy has another side effect: It helps achieve CO2 reduction goals, especially in large areas of housing, transportation, food and agriculture.

A new model to support investment decisions

For investors, the transition from a linear economy to a circular economy presents tremendous opportunities. However, the circular economy is very complex in practice. There is still no universally accepted definition, and thus there is a lack of generally accepted guidelines. The first frameworks are already in place, for example from the Ellen MacArthur Foundation or the World Business Council for Sustainable Development. Both provide companies with a measure of their cycle. However, the models are designed to improve their circular economy, not for investment purposes.

Candriam wants to ensure more transparency and comparability here and has developed its own framework for circular investments based on publicly available information. The goal is to provide a comprehensive model that enables investors to identify and support a company’s exposure to a more circular economy.

Investing in circular companies requires a score based on different metrics but expressed by a single number (score). One reason for this is to allow companies to be compared within their sectors and across sectors. Another reason is to overcome some data quality issues. To evaluate circular, evidence must be gathered from the company’s activities, historical achievements, and commitments, and these items must be supplemented by one’s assessment of circular references.

To assess, firms are not assigned to sectors, but to six circular value chains: housing/infrastructure, mobility, food, products/consumables, healthcare and communications/IT. The companies are then evaluated based on a series of criteria in three broad areas, the results of which are summarized in the overall score. Rating on a scale from 1 to 10.

Results, commitment and vitality

This assessment is at the heart of the circular economy framework in Candriam. Their results represent 60% of the overall rating, as they are particularly important for the transition to a circular economy. Less consumption, recovery, extended use and engagement play a central role here. Every company, regardless of its contribution to the circular economy, must contribute to at least one of these four circular outcomes.

Circular participation affects the overall score by 20%. For this purpose, commitment is determined by taking into account the company’s strategy, investment and use of resources and focus or communication of management. The remaining 20 percent is provided by circular dynamics. It creates a link between the historical and strategic results and the company’s future progress in the circular economy. To provide a dynamic view, it assesses the credibility and ambition of the company’s circular commitments and whether recent achievements in the circular economy bode well for the future.

This new investment-focused framework, along with individual corporate valuation, aims to enable investors to make decisions about the allocation of their capital that supports the transition to a circular economy.