From Linear to Circular: a necessary shift

Public regulators and private organizations in the profit and non-profit sector are increasingly recognizing the unsustainability of the current economic model, and they are coming to agree that the way to decouple economic development from resource and environmental degradation, is by shifting from a Linear to a Circular Economy (hereafter CE). CE describes an economy where products and resources are maintained in use, and where waste and pollution are minimized by design, by reorienting consumption and production patterns to regenerate Natural Capital.

As a company, and as a member of the Intesa Sanpaolo Group, we believe that a global transition to CE is necessary to avoid an irreversible depletion of natural resources, and to get to the net zero target of carbon emissions by 2050. We further acknowledge that asset managers have a fiduciary duty to play a twofold ole to support CE: on the one hand, as active investors, we should engage companies in embracing CE; on the other hand, we need to integrate the estimated financial consequences of the shift to CE into our investment process. However, this role clashes with the lack of a taxonomy and of shared KPIs; though companies, regulators and the financial industries have taken major steps towards the creation of a common language in the field of sustainability, this language is not yet tailored to measure CE from the perspective of an investor.

We contribute to this dialogue by proposing the framework we have developed and implemented. Our approach is modular and adaptable, in that it assesses the degree of circularity of companies across three dimensions: the production process, the business model and the quality of the initiatives adopted. Precisely, within each dimension, we identify and grade the categories of actions that can be undertaken, and we show how they can be weighted to reflect the specific characteristics of a business. Moreover, we only make use of publicly available data, which makes our approach replicable and applicable to any public company.

In this paper, we provide a sample analysis of companies in a global equity index, which confirms that our framework effectively makes it possible to categorize and compare the approaches of different companies. Two main results can be underlined:

• companies are currently focused on the transformation of the production process, though new business models are starting to emerge;
• we estimate that the degree of circularity of public companies, operating in sectors highly dependent on raw materials, and with a market for physical products, is only 0.794, which indicates a considerable margin for further improvements.

In what follows we first explore the limit of the current economic system and the opportunities and challenges of CE. We then illustrate the theoretical basis of our framework and how it can be used in practice, after which we present the results obtained from the analysis of companies in a global equity index. Finally, we explain how we integrate CE into investment decision-making, and we discuss the current limitations of our approach.