Opportunities in the Circular Economy

Existing global systems for economic growth rely on a linear "take-make-waste" approach to production, consumption and disposal. Consequently, as energy and materials are not recovered, resources are continually extracted and undue environmental harm in the form of pollution, biodiversity loss, and climate change is the norm. But a circular model can provide an alternative, as it decouples economic growth from finite resource extraction.^{1, 2} A circular economy system seeks to minimize waste, reuse existing products and recover materials.

In Calvert's view, companies that utilize this system can reap financially material benefits while also solving for their environmental goals. For example, feedstocks derived from recycled materials can increase supply chain resiliency, reduced production waste can lower costs, and new business models can connect consumers with previously used goods. In addition to these financial benefits, declines in materials extraction and waste can lead to significant environmental benefits through the mitigation of biodiversity loss and lowering of carbon emissions.

Gaining exposure to the circular economy

We believe investors can benefit from aligning themselves with a circular economy. Among the ways other stakeholders are involved include:

• Consumers are more aware of the environmental footprint of their choices, leading to changes in consumption and increased demand for innovative sustainable materials.³
• Corporations increasingly understand the need to expand offerings to meet consumer's environmentally conscious demand. In non-consumer facing sectors, as growth accelerates, meeting both demand and environmental objectives becomes increasingly challenging without significant changes to existing extraction/production models.
• Local legislating bodies, like California, are progressively introducing waste-aware regulations such as extended producer responsibility laws.⁴ These laws begin to price the externalities of waste by introducing penalties for non-compliance.
• National entities now recognize that securing stocks of the critical materials necessary for the energy transition is a prerequisite to energy security.⁵
• Internationally, nations are coming together to draft a legally binding agreement to address the plastic lifecycle with moderate progress made in 2024 and more work expected to continue in 2025.⁶

Against this backdrop, Calvert has identified four sub-themes that offer investors exposure to the circular economy. Our research analysts have developed nuanced frameworks that are unique to sector business models and aim to uncover issuers that have financially material exposure to circular economy themes. We describe each and offer an example below.

1. Waste Collection, Management and Transformation - Gathering, recycling, and transforming used materials for reuse

   Waste management companies are well positioned to recover the economic value of discarded metals, glass, paper, and plastic. Companies that operate landfills can also create new revenue sources by converting harmful methane emissions into renewable natural gas (RNG).

2. Sustainable Materials - Product/Business model is materially utilizing or producing recycled/recyclable materials

   Aluminum packaging producers are positioned to capture shifting consumer preferences. Aluminum is the most recycled form of beverage packaging at approximately 70% globally and contains a higher percentage of recycled content than alternative substrates (plastic and glass),⁷ which may make it attractive to environmentally-conscious consumers.

3. Asset Lifecycle Management - Business models or practices that extend the useful life of assets or increase asset utilization rates thereby reducing waste and resource consumption

   Rental and sharing business models allow a relatively small quantity of goods to be used more frequently in the service of a greater number of consumers. Increased asset utilization can reduce the absolute demand for raw materials, thereby reducing environmental impact.

4. Leaders - Product design or use incorporates circular principles for materials selection and waste minimization

   Consumer packaged goods companies can appeal to customers' environmental consciousness by utilizing bio-based, recycled, and/or sustainably sourced content in their products and packaging. By extension, these companies expand the marketplace for Sustainable Materials and can help strengthen the circular networks for materials moving through the economy.

Bottom line: As the world becomes increasingly resource-constrained, pollution-minded, and environmentally regulated, we believe the circular economy can present investors with the dual benefit of financially material business opportunities while solving for core environmental goals. Our identified sub-themes and nuanced company identification aim to provide investors with circular economy access points.