Investing in the circular economy

Since the industrial revolution, our economy has followed a linear “take, make and dispose” model, generating wealth by consuming finite resources. Although cheap energy and resources fuelled its success throughout the 21st century, recent price rises and increased volatility have brutally reversed that trend. But whilst the context has changed, the system remains the same.

It’s time, many business leaders and politicians argue, to shift towards a circular, regenerative economy, one that ensures, through careful product design and management, and adapted business models, that the very idea of waste is phased out. A circular economy ensures we make the most of our precious and limited resources by reusing or remanufacturing products that would have once ended up on the scrapheap. It makes both environmental and economic sense, and businesses and investors stand to gain a lot from this safe, long-term and sustainable model.

In a world of dwindling resources, where the cost of raw materials is rising as demand outstrips supply, companies that fail to separate their revenue from commodity constraints will become increasingly vulnerable. However, innovative businesses that find ways of adapting to this new reality and consciously transition away from linear, volume-based growth can look forward to a future of sustained, long-term success. If you had the choice of buying shares in a company that relies solely on virgin raw materials or one that has built a take-back system into its business model to feed its remanufacturing operations, which one would you choose?

Investors are already seeing the potential of the circular economy, both in the short term and in the promises it holds as a coherent long-term model. They appreciate that companies embracing the circular economy have worked out future costs and adapted their business models to ensure sustained growth, perhaps by moving away from a sales-based model towards service-based contracts. Such businesses make more sense from an investment perspective.

In recent decades, the term “investment” has mostly been a mere byword for fast commercial transactions, losing all its long-term implications – a fundamental distinction that the circular economy can help clarify by gradually putting the future back into investment. For certain, the deafening noise made by the financial system’s meltdown still rings in our ears, but as economist Nicolas Bouzou writes in his latest book about tomorrow’s economy, “You can hear the tree fall but not the forest grow.” The circular economy could help plant the seeds of that much-needed growth.

Read the World Economic Forum’s new report on the Circular Economy 

Read more blogs for the World Economic Forum’s Annual Meeting in Davos 2014.

Author: Ellen MacArthur is founder of the Ellen MacArthur Foundation  and is participating at the World Economic Forum’s Annual Meeting 2014 in Davos.

Image: Workers inspect a wind turbine used to generate electricity at a wind farm in Guazhou, 950km (590 miles) northwest of Lanzhou, Gansu Province. REUTERS/Carlos Barria