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Governments globally have introduced incentives and constraints on business operations that penalise the worst, most unsustainable behaviour and reward the best.
As a result, a company’s sustainability credentials have become a key risk factor for investors to consider and many of the most compelling investment propositions currently are those companies addressing the world’s sustainability needs.
In tandem with this growing imperative, and an investment industry that has rotated to meet it, the ideas and language surrounding sustainability have become significantly more nuanced.
It is no longer enough to simply limit one’s carbon footprint or reduce water use in a supply chain; instead, new sustainable concepts have emerged to capture the many different facets which companies and society need to improve in order to protect the planet for the future.
One such notion is the circular economy. The World Economic Forum defines the circular economy in part as “an industrial system that is restorative or regenerative by intention and design.”
Put more simply, in the past natural and man-made resources were extracted, turned into products and then disposed of at the end of their lives.
The environmental impact of this has been felt worldwide, from floating refuse ‘islands’ in the Pacific to poisoned water supplies in the United States and everything in between, the by- and end-products of our consumption model have become a key source of planetary harm.
In contrast, the circular economy describes the notion of either recycling and reusing existing product, while reducing the usage of materials in the production phase that cannot be reused or recycled later on.
Investing in the circular economy
One fund that views the circular economy as a central investment theme is Jupiter Green (JGC). The trust has been investing in companies which are developing and implementing solutions for the world’s environmental challenges since 2006, and as such has followed the evolution of notions such as the circular economy closely.
Jon Wallace, the trust’s manager, explains that the circular economy is highly differentiated across different end markets and by business models addressing various parts of the product lifecycle.
He believes that an allocation to a range of circular economy companies is vital to capturing the full momentum behind this sustainable trend.
For example, Norwegian company Borregaard is a new allocation in the trust’s portfolio, capturing the earlier stages of the circular economy. It substitutes petrochemicals in beauty products and packaging, making these products much less toxic when disposed of, while helping to lower the carbon impact of the products by phasing out fossil-fuel based ingredients.
As a ‘bio-refiner’, its solutions use by-products of the paper industry, meeting two stages of the circular economy – the removal of damaging chemicals that cannot be recycled, and reusing waste from another industry. Borregaard is a market leader, with the ability to choose which markets to expand into. As a result, its stock price has almost doubled in the twelve months to 19/04/2021.
Looking near and far
Another company offering some of the circular economy’s most vital solutions is Befesa. The $2.5bn company recycles hazardous waste and dust from ‘electric arc’ furnaces used in the steel industry.
As these furnaces use much less energy than those more traditionally used in the industry, they are in high demand. However, they also still produce significant harmful waste. Befesa processes and recycles that waste so that it is less damaging to the environment at the point of disposal.
Befesa is a prodigious example of how the process of investing in sustainable stocks should not be one-size-fits-all. Although the steel industry remains relatively unsustainable, Befesa’s solution offers a near-term improvement on its previous operations while an alternative to steel is sought.
This reflects the delicate balance in sustainable investing; to successfully tap into the returns driven by sustainability, investors must consider companies that are solving the incremental challenges of improving sustainability, as much as those innovators creating new, emerging technologies.
A virtuous circle
It is this precise approach to sustainable investing, emphasising companies coming up with effective sustainable solutions, that makes Jupiter Green a complementary to many of the more generalist global funds, which may consider low carbon investments but typically do not look more deeply at sustainability issues.
Jupiter Green has a keen focus on small- and mid-cap companies, which are nimble enough to continue evolving their solutions as environmental challenges also evolve. This produces a distinct combination of innovation and sustainability within the portfolio.
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