Finance and circular economy

How finance can help the transition to a circular economy

As consumers turn their backs on conspicuous consumption, business models that reward a circular approach are primed for growth

Constraints on materials are leading investors to look for companies that embrace circular economy practices amid increasing awareness of the value of sustainable business models. Escalating commodity prices are adding to consumer pressure, favouring commercial models that emphasise resource reduction, reuse and recycling, according to François Travaillé, Europe Small & Mid-Cap and Climate Equity Fund Manager at HSBC Asset Management.

“We believe companies with those business models are more likely to succeed as they will have more visible inflows and will depend less on the price of external resources,” Travaillé says. “The early movers will stand to gain the most.”

Circular economy practices “are being increasingly perceived as value accretive”, says Bénédicte Mougeot, Head of Climate Equity at HSBC Asset Management. And this re-evaluation of value is still underway. “For the moment, the circular economy risk premium is not fairly priced.”

Capital inflows into circular economy businesses are often driven by corporate environmental, social and governance (ESG) policies. But companies embracing circularity may have plenty to offer investors beyond their sustainable credentials. Consumer preference for brands and products with a clear and meaningful feel-good statement can enhance the growth prospects of circular economy-based businesses versus their traditional peers.

The rise of fashion retail rental

In 2019, for example, fashion retailers focusing on second-hand clothes grew 25 times faster than the broader retail sector, according to Emily Healy, Finance Initiative Lead at the Ellen MacArthur Foundation.

Research suggests that the purchase of 100 second-hand garments can displace the production of 85 new garments

“Reseller-rental platforms such as Depop, Rent the Runway, The RealReal, Poshmark, Vestiaire Collective and ThredUP have reached billion-dollar valuations in the past two years,” Healy says. And this is based on consumer demand. “Costs are going up. People are looking for cheaper options and there’s also a growing awareness of the environmental impacts of the fast fashion industry. Research suggests that the purchase of 100 second-hand garments can displace the production of 85 new garments.”

The rise of fashion rental specialists mirrors moves in other industries to maximise the use of assets by offering them on a leased or as-a-service basis rather than for sale outright. As-a-service business models first emerged in the software industry, as an extension of subscription offerings, and have since extended to a range of sectors, from automotive to aerospace.

Once a product becomes a platform for service delivery – say, moving things from A to B in the case of a rented van – the company has an incentive to run it efficiently for as long as possible, rather than building in obsolescence so it can sell another product. Customers benefit from such pay-per-use models by having cost-effective access to expensive, well-maintained assets, while companies can reduce churn by having regular customer interactions over the lifetime of a product.

Not just recycling

Healy cautions against equating this directly with circularity – rented scooters, for example, “actually have a shorter life than if someone just bought a scooter and looked after it” – but concedes that when companies retain ownership of a customer asset it can help to reduce the waste involved in creating new products.

“Leasing is a good example,” says Travaillé at HSBC Asset Management. “At the end of the leasing period, you get the product back and you can sell, refurbish or perhaps dismantle it. The product is fully amortised and there is still value in it.”

The beauty of these ideas is that they offer a financial incentive for doing things that reduce the use of resources

Another set of circular-leaning business models looks to derive value from waste products. These underpin the growing recycling industry and are the basis for the voluntary carbon offset market, which was worth $1bn in 2021 but could grow to $35bn by 2030. ¹The beauty of these ideas is that they offer a financial incentive for doing things that reduce the use of resources, rather than encouraging their depletion in pursuit of profit. “Something we’re exploring is the idea of farmers being paid for ecosystem services,” says Healy.

Such concepts can create new sources of investor value beyond the traditional view of the circular economy, which tends to be focused on the creation of infrastructure for recycling and similar activities. Scheduled to reach almost $392bn by 2026² the waste recycling market represents a circular investment opportunity in its own right – but when compared to the many other ways businesses can improve circularity, it is just the tip of the iceberg.

---

[1] www.ft.com/content/9b02fcf7-9e04-4b71-ad14-251552d5a78e
[2] global-recycling.info/archives/7001

For Professional Clients only and should not be distributed to or relied upon by Retail Clients.

The material contained herein is for information only and does not constitute legal, tax or investment advice or a recommendation to any reader of this material to buy or sell investments. You must not, therefore, rely on the content of this document when making any investment decisions.

This article is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. This article is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe to any investment.

This communication is based on information obtained from sources believed to be reliable but which have not been independently verified. HSBC Global Asset Management (UK) Limited and HSBC Group accept no responsibility as to its accuracy or completeness. Care has been taken to ensure the accuracy of this presentation but HSBC Global Asset Management (UK) Limited accepts no responsibility for any errors or omissions contained therein.

Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target.

HSBC GIF Global Equity Circular Economy is a sub-fund of the HSBC Global Investment Funds, a Luxembourg domiciled Société d'investissement à Capital Variable (SICAV). UK based investors in HSBC Global Investment Funds are advised that they may not be afforded some of the protections conveyed by the provisions of the Financial Services and Markets Act 2000. HSBC Global Investment Funds is recognised in the United Kingdom by the Financial Conduct Authority under section 264 of the Act. The shares in HSBC Global Investment Funds have not been and will not be offered for sale or sold in the United States of America, its territories or possessions and all areas subject to its jurisdiction, or to United States Persons. All applications are made on the basis of the current HSBC Global Investment Funds Prospectus, Key Investor Information Document (KIID), Supplementary Information Document (SID) and most recent annual and semi-annual reports, which can be obtained upon request free of charge from HSBC Global Asset Management (UK) Limited, 8 Canada Square, Canary Wharf, London, E14 5HQ. UK, or the local distributors. Investors and potential investors should read and note the risk warnings in the prospectus and relevant KIID and additionally, in the case of retail clients, the information contained in the supporting SID.

The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Where overseas investments are held the rate of currency exchange may also cause the value of such investments to fluctuate. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Stock market investments should be viewed as a medium to long term investment and should be held for at least five years. Any performance information shown refers to the past and should not be seen as an indication of future returns.

HSBC GIF Global Sustainable Healthcare is an Article 8 fund. Detailed information for article 8 and 9 sustainable investment products, as categorised under the Sustainable Finance Disclosure Regulation (SFDR), including; description of the environmental or social characteristics or the sustainable investment objective; methodologies used to assess, measure and monitor the environmental or social characteristics and the impact of the selected sustainable investments and; objectives and benchmark information, can be found at: https://www.assetmanagement.hsbc.co.uk/en/intermediary/investment-expertise/sustainable-investments/sustainable-investment-product-offering.

www.assetmanagement.hsbc.co.uk

Copyright © HSBC Global Asset Management (UK) Limited 2022. All rights reserved.