As industries look to adapt and decarbonize in order to meet net-zero targets, we take a look at opportunities in a circular economy
It has become increasingly clear that decarbonising our economic activities is critical to making a substantive climate change impact. While the public’s focus on net zero ambitions has typically centered around energy production and consumption, manufacturing and industry is equally crucial to this effort–representing nearly 20% of our total global greenhouse gas (GHG) emissions (see Exhibit 1 below).
Historically, most conversations surrounding decarbonisation have focused on the supply side of the equation, reducing emissions from energy-intensive manufacturing processes. However, concentrating on the demand side–how a more circular supply chain could facilitate a more efficient use and reuse of materials–is being increasingly evaluated. We believe that by using less materials, shifting to lower carbon heat sources and recycling more, we can narrow the gap to help achieve our net zero goals.
Implementing circular economy principles first gained prominence with sectors such as fashion and packaging, who have been deploying innovative products and encouraging reuse and recycling solutions. But hard-to-abate sectors like industrial manufacturing have lagged. In previous papers, we’ve examined why the circular economy is crucial to sustainable growth, analysing how high inflation, climate change and changing regulations are driving corporate interest towards the sector.
In this paper, we take a look at how circular economy principles are driving transformation in our industrial landscape, appraising investment opportunities for those who wish to participate in this trend.
Circularity in manufacturing: a focus on the materials
When examining EU consumption, the production of steel, plastic, aluminium and cement accounts for 75% of all industrial emissions, equating to a whopping 564 million tonnes of CO2 (MtCO2) as of 2015. That’s nearly as much as the entire country of Canada emitted in the same year.2 Without demand-side solutions, these carbon-intensive materials are expected to reduce their emissions by a mere 6% come 2050.3
Decarbonising production is very difficult for these sectors, but the good news is that circular principles can significantly help. According to one estimate, implementing circularity in business models, reusing materials and improving product efficiencies can reduce annual emissions from these four materials by 56% by 2050.4 Recent global surveys by Nielsen and Deloitte found that 73% of consumers are willing to change their consumption habits to reduce their carbon footprint,5 with 56% expressing a willingness to pay a premium for sustainable products.6
As we sustain the manufacture of steel, aluminium, and plastics, we continue to accumulate stockpiles that can be re-circulated, avoiding the emissions associated with producing more virgin materials. 75% of steel, 50% of aluminium and 56% of plastics can be recycled and reused in industrial processes, and doing so has the potential to reduce emissions by 32% by 2050.7
Innovations in manufacturing and supply chains
There is a growing focus on recycling and using sustainable and circular materials as the transition to a low-carbon economy continues. A recent BloombergNEF report identified 178 global projects, partnerships and investments in this area in 2Q 2023, and found that low-carbon production–focused on green steel and bioplastics manufacturing–accounted for 40% of activities (see Exhibit 3). This was followed by recycling and material conversion at 26%, as new plants were announced in Europe and the US. On the whole, Europe is actively spearheading circular economy activities and investments, responsible for 53% of all projects. The Americas is trailing behind at 26%.8
Exhibit 3: Number of projects involved in recycling and using sustainable and circular materials
Additionally, as companies make increased efforts to decarbonize, the market for low-carbon steel, chemicals and cement is expected to reach $100 million by 2030s.10 With electric vehicle production set to expand,11 the supply of batteries available for recycling will follow, creating another economic case for circular supply chains. By 2040, McKinsey estimates global annual revenues from the battery recycling value chain are expected to grow beyond $95 billion.12
What does this mean for investors?
It is clear that the market for low carbon products will continue to increase, as will the pressure on companies to take steps to decarbonise their supply chains, including the re-use of materials. This represents a significant opportunity for investors to participate in what is being termed as the “fourth industrial revolution.”
Private markets provide one of the best ways to access these opportunities. VC funding for sustainable material startups continues to be significant. BloombergNEF estimates that over $1.8 billion of investment was made in sustainable material startups in the first half of this year.13
Exhibit 4: Venture capital funding for sustainable material startups as of 3Q 2023
Learn more
We see circular economy solutions as attractive opportunities for growth and innovation, as industries from fashion to steel look to adapt their business models and decarbonise. Call your JP. Morgan team to learn more about the possibilities available to you.
1 (Eurostat GHG emissions, 2023)
3 Material Economics, “The Circular Economy – A Powerful Force For Climate Mitigation”. 2018. Note: the business-as-usual scenario uses 2015 as the baseline year
4 Sustainable Materials Market OutlookMaterial Economics, “The Circular Economy – A Powerful Force For Climate Mitigation”. 2018. Note: the circular scenario estimate for 2050 emissions is compared to the business-as-usual scenario
5 https://www.nielsen.com/insights/2018/what-sustainability-means-today/#:~:text=In%20a%20recent%20Nielsen%20global,their%20impact%20on%20the%20environment.
6 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/process-and-operations/purpose-premium-pov.pdf
7 https://www.sitra.fi/app/uploads/2018/06/the-circular-economy-a-powerful-force-for-climate-mitigation.pdf.
8 BloombergNEF, 3Q 2023 Sustainable Materials Market Outlook
9 Ibid.
10 OutlookMaterial Economics, “The Circular Economy – A Powerful Force For Climate Mitigation”. 2018. Note: the circular scenario estimate for 2050 emissions is compared to the business-as-usual scenario
11 BloombergNEF, “Long-Term Electric Vehicle Outlook 2023,” January 2023.
12 “Battery recycling takes the driver’s seat”, McKinsey, March 13, 2023.
13 BloombergNEF, 3Q 2023 Sustainable Materials Market Outlook
