Future Returns: Investing In The Circular Economy

The shift to a global economy based on reusing, repairing, and recycling—instead of making things, using them, and then throwing them away—is gaining traction as a sustainable investing theme.

Today, only 8.6% of the global economy is circular as the world consumes 100 billion tons of materials a year, according to Circle Economy, an Amsterdam-based global impact group.

Closing the loop on how goods are produced and consumed can address the problems created by depleting the Earth’s resources, in addition to the problems of pollution and climate change. According to the U.K.’s Ellen MacArthur Foundation, 45% of global greenhouse-gas emissions are generated by the creation and use of products and food, while the rest is generated by the use of energy.

Rising environmental challenges such as drought, fires, and flooding, in addition to changing consumer preferences and government regulation, are driving companies big and small to break away from a reliance on finite resources and to seek other solutions, says Jessica Matthews, head of sustainable investing at J.P. Morgan Private Bank.

That means, “by 2030, the circular economy could yield up to US$4.5 trillion in economic benefits globally,” she says. The benefits? “Saving 92 million tons of textiles in landfills, 1.3 billion tons of food waste, and 45 trillion gallons of water wasted through food production every year,” she says.

This multi-trillion dollar opportunity is leading growth-oriented, as well as sustainability-minded, investors to pay attention to this growing theme, as the push to create a circular economy drives innovation and new business models.

“Companies are innovating to tackle the challenge,” Matthews says. “That’s why it’s a growth story.”

The private bank currently has about US$12.5 billion in client assets invested in sustainable strategies across 100 funds on its platform, Matthews says. The assets are in all kinds of vehicles, from exchange-traded funds to private equity—and represent a range of investing approaches.

Matthews recently spoke with Penta about the potential for investing in the circular economy today.

The Business Case

What makes the circular economy an investing opportunity is that companies stand to profit more by reusing, refurbishing, and repairing products rather than sourcing virgin materials to make them, Matthews says.

Circular practices already are being used by clothing companies as well as technology and manufacturing companies, the Ellen MacArthur Foundation said in a September report titled “Financing the Circular Economy.”

In 2019, the resale market for fashion, including companies such as the RealReal, grew 25 times faster than the broader retail sector, while Philips, a Dutch conglomerate, reported 13% of revenues resulting from its circular practices.

In addition to major companies that are reforming how they make things—such as Unilever’s pledge to cut its use of virgin plastics in half by 2025—small companies are sprouting up to facilitate the shift, the report said.

Examples include RePack, based in Helsinki, which makes reusable, returnable packaging for products bought online, and Algramo, a Chilean startup, which allows consumers to refill cleaning products made by companies such as Procter & Gamble and Nestlé.

The move away from plastics for packaging is expected to create a US$700 million demand for corrugated cardboard in Europe and the U.S., the foundation said.

Investing Opportunities

According to the Ellen MacArthur Foundation there are 10 public stock funds globally focused on the circular economy, either in full or in part, including BlackRock’s BGF Circular Economy Fund, the Geneva-based Decalia Asset Management’s Decalia Circular Economy fund, and BNP Paribas’s Easy ECPI Circular Economy Leaders UCITS ETF.

There were also at least 10 corporate bonds issued globally with the assistance of major investment banks such as Goldman Sachs, HSBC, and Morgan Stanley, with proceeds either in full or in part dedicated to circular practices, the foundation said. Issuers include Alphabet’s US$5.75 billion sustainability bond (with a circular economy component), Daiken Corp.’s JPY5 billion (US$46 million) bond, and Owens Corning’s US$450 million bond.

Private market equity, debt, and venture capital funds are also on the rise—there were 30 funds as of the first half of last year, up from three in 2016, the foundation said.

At J.P. Morgan, Matthews is evaluating the available public mutual funds and is looking to bring one on its platform. Since many of the companies involved in the circular economy today are in niche businesses, “you have to be careful about how limiting you are in your universe,” she says.

Public funds focused broadly on companies with the best environmental, social, and governance practices also buy stocks of corporations on the leading edge of the circular economy, even if these companies—such as Unilever, Adidas, and Nike —don’t represent a distinct circular economy story.

J.P. Morgan is also looking at private markets. Similarly, the bank has found more opportunities to invest in the circular economy through funds that look at sustainability broadly, Matthews says. For instance, the bank has invested with a private venture firm focused on sustainability and climate solutions that has invested in a company working to create cold-pack packaging with less Styrofoam.

“Where [the circular economy] becomes more widely adopted and seen is in being favoured in broader sustainability portfolios,” Matthews says, adding that ESG managers doing fundamental research today will find themselves looking at some of the trends around circular, because “they are still underappreciated by the market.”

Apple and its suppliers aim to build more than 50 million iPhones in India annually within the next two to three years, with additional tens of millions of units planned after that, according to people involved.

If the plans are achieved, India would account for a quarter of global iPhone production and take further share toward the end of the decade. China will remain the largest iPhone producer.

Apple has gradually boosted its reliance on India in recent years despite challenges including rickety infrastructure and restrictive labor rules that often make doing business harder than in China. Among other issues, labor unions retain clout even in business-friendly states and are pushing back on an effort by companies to get permission for 12-hour work days, which Apple suppliers find helpful during crunch periods.

Apple and its suppliers, led by Taiwan-based Foxconn Technology Group, generally believe the initial push into India has gone well and are laying the groundwork for a bigger expansion, say people involved in the supply chain.

Apple is emblematic of a move among companies worried about over dependence on China to move parts of their supply chains elsewhere, most often to Southeast Asia and South Asia. Diplomatic efforts by the U.S. and its allies to block Beijing’s access to advanced technology and strengthen ties with New Delhi have accelerated the trend.

The first phase of a Foxconn plant under construction in the southern state of Karnataka is expected to start operating in April, and the plant aims to make 20 million mobile handsets annually, mainly iPhones, within the next two to three years, said people with direct knowledge of the construction plans.

A further iPhone-producing mega plant is on Foxconn’s drawing board with capacity similar to the one in Karnataka, although the plans are still in a nascent stage, the people said.

Apple has also chosen India as its site for a manufacturing stage for lower-end iPhones to be sold in 2025. In this stage, known as new product introduction, Apple’s teams work with contractors in translating product blueprints and prototypes into a detailed manufacturing plan. Until now, that work was done only in China.

Combined with plans for expanded production at an existing Foxconn plant near Chennai and at another existing plant recently bought by Indian conglomerate Tata, these developments signify that Apple intends to have the capacity to make at least 50 million to 60 million iPhones in India annually within two to three years, said people involved in the planning.

Annual capacity could grow by tens of millions of units after that.

Foxconn indicated its commitment to India by announcing on Nov. 27 that it was investing the equivalent of more than $1.5 billion in the country, money that people familiar with the matter said would include production for Apple. The announcement didn’t mention the iPhone or name specific locations.

Global iPhone shipments last year totalled more than 220 million, according to research firm Counterpoint, a number that has remained steady in recent years. Because almost all iPhones are made in either China or India, China will continue to account for well over half of iPhone output.

Apple has faced challenges in China this year beyond trade tensions with the U.S., including the Chinese government instructing some officials not to use iPhones at work.

“India’s trust factor is very high,” said Ashwini Vaishnaw, India’s information technology minister.

This year, for the first time, India-made iPhones were introduced on the first day of global sales of the latest model, eliminating the lag with China-made phones.

Supply-chain executives say hourly wages are now significantly lower in India than in China, but other costs such as transport remain higher, and labor unions sometimes resist rule changes sought by manufacturers.

In May, the chief minister of Tamil Nadu state, where Foxconn’s flagship Chennai plant is located, said he would withdraw regulations allowing a 12-hour workday, weeks after the state passed an amendment authorising the longer hours. The chief minister, M.K. Stalin, attributed the decision to opposition from labor activists.

Karnataka state has stood by a decision earlier this year to extend the workday to 12 hours, up from a previous limit of nine hours, though companies must seek approval to do so. A state labor official, G. Manjunath, said new rules also allow companies to employ women on overnight shifts without seeking government approval.

After years of battling local-content rules and other red tape, Apple this year opened its first retail stores in India. Abhilash Kumar, an India-based analyst at TechInsights, said the top-of-the-line iPhone 15 Pro Max was selling well in the country, though it costs about $700 more than in the U.S.

Apple is also making progress in India toward building a network of core suppliers, long a strength of Chinese manufacturing. Officials said this week that Japanese battery maker TDK would build a new factory in India’s Haryana state to manufacture battery cells to power Indian-made iPhones. A TDK spokesman declined to comment.

The moves don’t mean Apple and its suppliers are leaving China. Apple Chief Executive Tim Cook has traveled to China twice this year, stressing the country’s importance as a production hub and consumer market. He visited Luxshare, a China-based assembler that is taking a bigger role in the China portion of iPhone assembly.

On social media, Apple has assured Chinese consumers that iPhones selling in authorised channels are made in China. At an industry event in Beijing that Chinese premier Li Qiang attended in late November, Apple’s booth stressed the company’s business with Chinese suppliers.

Foxconn Chairman Young Liu said in November that China would continue to account for the largest share of Foxconn’s capital investment next year.

Liu has visited India at least three times in the past year and a half, meeting Prime Minister Narendra Modi and other officials. People involved in the planning said Modi’s home state of Gujarat in the west was one possible site of a future Foxconn plant. Meanwhile, the company has other projects in the works in the southern half of the country for electronic components and a plant likely to focus on making AirPods for Apple.

The plant in Karnataka state is under construction on 300 acres of land near the airport in Bengaluru, a southern city that is considered India’s tech hub. Officials involved in the planning said Foxconn has secured approval to invest nearly $1 billion in the plant and is seeking the go-ahead to put in an additional $600 million or so.

Combined with other projects, Foxconn’s investments in the state are likely to reach around $2.7 billion, they said.

Some iPhones are also made at a plant near Bengaluru that India’s Tata Electronics agreed in October to buy from Taiwan’s Wistron. Tata Group is the first local company to take on manufacturing iPhones.

“Apple has created an additional spoke in its India strategy by roping in the country’s largest business group—Tata—to be a part of its manufacturing system in addition to Foxconn,” said India’s junior information-technology minister, Rajeev Chandrasekhar.

—Shan Li in New Delhi and Selina Cheng in Hong Kong contributed to this article.

Future Returns: Investing In The Circular Economy

Supplier Foxconn plans to build more factories and give India a production role once limited mostly to China