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Waste is responsible for 1.6 billion tons of CO2 annually
Across the globe, investments are being made to facilitate necessary change to ensure sustainable development, reduced emissions and economic growth. Waste management issues and the moves towards a circular economy therefore creates great investment opportunities for DNB Renewable Energy.
Globally, we produce 0.74 kilograms of waste per person per day. About 70 % of this waste is not processed at all, and a large amount of what is processed is not done so effectively or sufficiently. As waste is responsible for 1.6 billion tons of CO2 annually, or approximately 5 % of global emissions, waste is a significant environmental issue. [1] In addition, solid waste also takes up valuable physical space. The drivers behind the push towards the circular economy are the same as those we have seen for renewable electricity production over the last few years - political decisions leading to new regulatory directives, increased focus from consumers on environmentally friendly products and services, corporate social responsibility, and last, but not least, economic factors.
Circular economy is a central component of EU’s 750 billion Euro COVID-19 recovery package
Economic factors supporting the circular economy are central, as change tends to occur at a faster pace when it is also economically profitable. We have observed the same story in regards to renewable energy – as renewables became cost-competitive, the technologies saw exponential growth. Waste is an important input for production processes that allow more environmentally friendly production by reducing the need for primary inputs.
There are several similarities between the circular economy and the emergence of renewable energy:
1) The EU is in the driver’s seat, while other regions follow shortly after
2) The circular economy supports local economies, because value and job creation happen locally
3) Local energy security
Unfortunately for some industries, the world is about to become more closed off after a long period of globalisation. However, the slowdown in globalisation will most likely lead to changed political interests, which in turn could be beneficial for the circular economy. For example, more local business has the potential to improve trade balances, something which will become increasingly important as many countries are struggling with strong negative economic development. In addition, a large number of newly created jobs will require relatively low levels of education, something which also has political value. In our opinion, political factors will accelerate the transition towards a circular economy which, in turn, will have positive implications for the holdings in the DNB Renewable Energy portfolio.
In March 2020, the EU’s new action plan for the circular economy was announced. In May, the EU presented a 750 billion Euro COVID-19 recovery package plan to rebuild the economy. The transition towards a circular economy is a central component of this. The EU estimates that the circular economy can increase GDP by 0.5 % and create an estimated 700,000 new jobs. [2]
DNB Renewable Energy’s holdings are well positioned to benefit from the transition to the circular economy
The EU’s new regulation classifying green economic activities, also called the “EU taxonomy”, has now been adopted into European law. The transition towards a circular economy is a central component of the taxonomy and could potentially drive funding into investments contributing to this. This therefore represents an additional positive catalyst for the holdings in the DNB Renewable Energy portfolio.
The EU’s focus on sustainable economies could also provide an ESG premium, a premium we are yet to see, thereby leading to a positive repricing of the DNB Renewable Energy portfolio. Moreover, some waste management businesses have previously been viewed as unattractive due to the perception that these simply pick up and dispose of waste. A better understanding of these businesses may be an additional driver of positive repricing.
Moving forward, the industry will become more sophisticated as focus shifts from waste reduction to how to make use of waste, either via reuse, recycling, energy generation or as landfill. High barriers to entry will be positive both for performance and price multiples. In addition, there will be new sources of income related to the products themselves and through the payment for carbon emissions (i.e. through “carbon quotas”).
DNB Renewable Energy has invested in these themes over a long period of time. At present, the fund is exposed to the circular economy through the below positions:
AMG Advanced Metallurgical Group – The company delivers a range of critical materials whereby a substantial portion is sourced from recycled materials. In particular, the company’s emphasis on the recycling of vanadium from catalysts used in refineries is unique and central to the circular economy theme.
Ceco Environmental – Environmental solutions for an industry that, among other things, contributes to waste collection.
Constellium – The company delivers environmentally friendly lightweight materials for the transportation and bottling industries. The company is particularly strong in regards to its utilisation of recycled aluminium.
Darling Ingredients – Can be seen as the mother of the circular economy. The business is based on collecting waste from the food industry, and transforming this to fuel, food and feed for livestock.
Derichebourg – One of Europe’s largest players within the collection and processing of waste (with a special focus on metals).
Hoffmann Green Cement – Production of environmentally friendly cement made of biproducts from other industries.
Huntsman – recycling of plastic bottles for production of polyurethane, which is a key material for the green transition.
Quantafuel – Producer of synthetic fuel and chemical products based on plastic waste.
Renewable Energy Group – Produces biofuel based on waste.
Xebec Absorption – Delivers equipment that enables the transformation of waste to renewable gas.
In the future we anticipate the establishment of a myriad of recycling markets, resulting in new opportunities for many of our positions. For example, the emergence of electric vehicles will create demand for the reuse of batteries, along with other inputs, such as rare types of soil where Lynas (one of the fund’s positions) is an industry leader.
[1] https://openknowledge.worldbank.org/handle/10986/30317
[2] https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940
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