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Circular economy: how to reconcile sustainable development with investment?

Circular economy

BNP Paribas Asset Management
 

Is it possible in today’s world to remain insensitive to climate issues and the increasing scarcity of natural resources? What has become a global source of concern is effectively taking on both a political and a strategic aspect for many private protagonists. This has prompted a specific focus on the circular economy theme, not only by public bodies but also by the investment industry. What lies behind this concept? The idea is to produce goods and services while limiting consumption and the wastage of raw materials, water and energy sources. Challenges in the circular economy, like those of sustainable development are environmental, economic and social.

This subject therefore logically concerns all business sectors and all companies that have decided to seriously address the question of energy transition. Admittedly, it is in all their interests to be concerned about the subject given the extent to which it also interests the investors that may finance their development as well as their end customers.  Moreover, the circle is virtuous since implementing all possible solutions to reduce the consumption of natural resources (via new methods of collecting, recycling and transforming waste into energy or extending the lives of products by banning all types of programmed obsolescence) is how they will be able to reduce their costs, improve their profitability and see their share prices rise. This approach will please investors and savers, whose search for long-term performance is in keeping with this sustainable theme. Indeed, companies that have stolen a march on their rivals in this field will be the best positioned to capitalise on future development opportunities.

Indeed, it is with a view to satisfying high demand from its clients in the area of energy transition that BNP Paribas Asset Management has decided to launch an innovative investment solution: an ETF1 based on a circular economy index (ECPI Circular Economy Leaders Equity Index), designed to be long-term, like the low-carbon ETF marketed by BNP Paribas Asset Management more than 10 years ago and which has seen its assets under management increase substantially in recent years. The circular economy index in question has been put together by the Italian index supplier ECPI. It is concentrated since it only includes 50 equally weighted stocks. All are picked from a universe of large caps (companies with current market capitalisations of more than €15bn). After a five-stage filtering process, the index only covers global companies involved in various segments of the circular economy such as recycling, extending the lifespan of products, sharing platforms, leasing and cloud computing. It is proposed that the stocks in the index be revised every six months.

Which stocks2 does this ETF invest in? Many luxury companies such as LVMH, Kering and L’Oréal. These three companies officially announced their targets to reduce their consumption of resources at a very early date. The automotive sector is also strongly represented through BMW and Honda. This sector has been working for several years now on ways to shift vehicle purchasing towards renting, leasing and car-sharing with a view to eco-sharing. In the agri-food segment, Danone, Heineken and Pernod Ricard are also all included. These industrial groups are very active in promoting reusable plastics and recycling certain products and materials. A group like Caterpillar has also engaged significantly with the issue. It is encouraging the principles of the circular economy through its programmes to upgrade and rebuild its components. As such, machinery is updated rather than simply repaired or replaced.

Based on the index’s performance over one year (+16.4% at end-April), having been created in July 2017, we note that it outperformed the MSCI World index over the same period (growth of +14.79% over one year) with similar volatility. This is proof that a virtuous stance towards the environment can pay off. More than just a green investment, this ETF above all helps addresses a real societal issue. This is especially true since the subject is clearly set to gain momentum as the planet’s resources continue to deplete, against a backdrop of high population growth and an improvement in measurement tools focused on sustainable financing.  There is a collective interest in the subject. The circular economy is therefore another way of producing and consuming that concerns all stakeholders in society. Companies that have understood these challenges and implemented this strategic transition will clearly have a sustainable competitive advantage. Investors now have the option of following this trend thanks to this new circular economy ETF.

 

 

1 Exchange Traded Fund.

2 The stocks above are mentioned for information purposes only and should not be considered as an investment recommendation.

The investments in the funds are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay, the funds described being at risk of capital loss.
For a Complete description and definition of risks, please consult the last available prospectus and KIID of the funds. Investors considering subscribing to a fund should read carefully its most recent prospectus and KIID that can be downloaded free of charge from our site easy.bnpparibas.com
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Investments in the aforementioned fund are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Asset Management Holding.