The BlackRock Circular Economy Fund has raised more than $900m in its first year since launch, indicating the level of client appetite for products that are investing in companies addressing climate change, biodiversity loss and plastic pollution.
In contrast to the linear economy, the firm said, where products are often designed to be used for a short time and then thrown away in a ‘take-make-waste’ system, the circular economy is regenerative by design. The circular economy is built on three principles: designing out waste and pollution, keeping products and materials in use, and regenerating natural systems.
At launch, in conjunction with the Ellen MacArthur Foundation (EMF), BlackRock identified three groups of companies driving the circular economy theme, in which the BGF Circular Economy Fund invests:
- Enablers: Companies that deliver new, innovative solutions directly aimed at enabling the adoption of circularity by businesses and consumers.
- Adopters: Companies that adopt the principles of the circular economy in a manner that has a meaningful and positive impact on their value.
- Beneficiaries: Companies that supply alternative materials or services that contribute to a circular economy.
In order to charter the progress of investee companies’ sustainability targets, the BGF Circular Economy Fund has published its first Circular Economy Sustainability Report, which will be published every six months and produced in conjunction with EMF.
The report highlighted the fund’s management team believe the shift to a circular economy is likely to be driven by the confluence of three key factors: increasing regulation, changing consumer preferences favouring sustainable alternatives and corporate responses to focus on circular practices.
Here, Evy Hambro, global head of thematic and sector investing at BlackRock, answers ESG Clarity‘s questions on the fund’s launch and successes, as well as developments in the circular economy theme.
What was the rationale behind launching the fund?
Over the past few years, the need for change in the global economy has become increasingly clear. The world simply has to move to a more sustainable footprint. Customers are demanding change, regulators are demanding change, governments have seen the need for change and businesses have to evolve. The way this is likely to happen is for businesses to think about themselves in a more circular fashion.
When we looked into this area, we discovered an amazing partner to work with: The Ellen MacArthur Foundation. The idea came to work with it to create a fund in which we could capture opportunities we saw for change – and that change, in turn, would create value for our investors. Hence the idea for launching the circular economy fund.
See also: – BlackRock updates on engagement progress since January ESG pledge
How did you educate investors on the circular economy and how the fund is invested to benefit this?
One way is through live events for clients. For example, I participated with Ellen MacArthur in a virtual interview at BlackRock’s Global Sustainability Summit earlier this year. Second, we have committed to producing a semi-annual progress report on the fund. The aim is to highlight the positive impact made by companies in which we are invested. We track their progress towards sustainability targets and highlight recent circularity commitments.
Can you provide some examples of your most successful enablers, adopters and beneficiaries since launch?
Based on our initial fundamental research, we have divided up our entire universe into three types of exposure: enablers, beneficiaries and adopters.
Enablers are companies that provide innovative solutions, for example new technologies in chemical recycling for plastics, or more automation in supply chains leading to better efficiency, or even compostable materials that are more sustainable alternatives.
Beneficiaries are companies that are benefitting from the world shifting towards a more circular economy. For example, paper packaging companies, or aluminium can producers. Simply shifting from plastic PET bottles to aluminium cans is one of the easiest ways for global beverage companies to achieve their sustainability targets because aluminium is recycled at a far higher rate today versus plastic.
Adopters tend to be firms with some very ambitious targets when it comes to circularity. For instance, greater use of recycled materials, or designing products in such a way that they become more sustainable, or creating superior efficiency in their operations. We are looking to invest in companies that not only have really meaningful targets and are making a significant change to their business model, but also where these efforts are positive for them – for their margins, for their returns and, most importantly, for their valuation.
Can you explain how the fund is linked to the UN’s Sustainable Development Goals (SDGs)?
The SDGs are a plan to build a better world for people and our planet by 2030 and are a call for action by all countries. They aim to promote prosperity while not causing harm to the environment. The goals recognise that addressing social needs, including ending poverty and improving education and health, should go hand-in-hand with economic growth and transitioning to a lower carbon economy to tackle climate change.
Although the SDGs rely on countries’ individual sustainable development policies, companies have an important role to play in addressing these major challenges facing society today through innovation and providing economic solutions.
For longer-term investors such as ourselves, it is especially important that we monitor companies and management teams to ensure they behave in a responsible manner, as we may have exposure to the company for a prolonged period. The companies in which we invest are both benefitting from, and advancing, the circular economy and helping find solutions to some of the biggest problems and challenges society faces.
We also find they have strong alignment with the UN SDGs. For each company held in the fund we map and monitor the exposure to the SDGs. The Circular Economy Fund is aligned with, or is advancing, eight of the 17 SDGs based on company revenue analysis undertaken by the BlackRock investment team. The SDGs to which we believe the fund has exposure are SDGs six, seven, nine, 11, 12, 13, 14 and 15.
How has the circular economy theme progressed since launch?
The BGF Circular Economy Fund has outperformed global markets since launch. In terms of how the theme has progressed, during the initial stages of the pandemic, focus on sustainability more broadly – and plastic pollution in particular – understandably took a back seat with customers and local governments. With hygiene taking over as a bigger priority, disposable plastic goods – from packaging, takeaway boxes, coffee cups to personal protection equipment – gained popularity.
At the same time, in many countries, recycling was temporarily deemed a non-essential service during lockdowns leading to the supply of recycled goods also stalling.
Finally, the rapid decline in crude oil prices pulled down the costs of virgin plastic making it less economical for more sustainable alternatives. However, consumer focus is returning as the restrictions ease and regulatory emphasis on a green recovery will provide a tailwind to the theme in the coming years.
We expect continued focus on responsible consumption and changes in waste practices driven by the confluence of three key factors: increasing regulation; changing consumer preferences favouring sustainable alternatives; and corporate responses to focus on circular practices.
The European Commission hinted that any coronavirus-related stimulus package would integrate the ‘green transition’, which was taken positively by sustainable industry bodies. This bodes well for the fortunes of companies operating in the space, at least those based in Europe.
Sustainable companies have also been some of the most resilient during the recent market turbulence. The large-scale reallocation of capital towards sustainable companies will continue over the long term, as tackling climate change increasingly becomes a priority for investors the world over.
What would you like to see more of to propel this further?
We are in a really exciting time for change. We are seeing more and more businesses looking at how they can be run in a more circular fashion. As a result, we see enormous growth opportunities and new value being created as things are done differently. They’re done differently for the benefit not just of the company but for the consumer, the environment, for all of the stakeholders, and the employees.
The expectations for the portfolio are very strong. The companies we are invested in are typically growing faster than the market as a whole, and they’re seeing unprecedented opportunities being created for them as regulators and customers demand change. This fund should be a significant beneficiary of the ESG tailwinds that are driving markets right now.
