- “Circular economy” refers to an economic model that emphasizes cycles of reuse, recycling, and repair versus a linear model of extraction, consumption, and disposal.
- Adapting business models to be less resource intensive may create opportunity for environmental and economic benefit.
- In a circular economic model, pollution and waste are minimized, products and materials are used longer, and natural systems are more able to maintain health and regenerate.
More than 100 billion tons of resources enter the economy every year, ranging from metals, minerals, and fossil fuels to organic materials derived from plants and animals.1 Of this, just 8.6% gets recycled and used again.2 The utilization of resources has tripled since 1970 and could double again by 2050 if “business as usual” continues.3
Moving away from “take, make, and waste” modelsThis resource-usage trend implies the overall material intensity of economic growth worldwide remains high and that most businesses are still relying primarily on linear “take, make, waste” models. However, adapting business models to be less resource intensive may create opportunity for environmental and economic benefit. As a potential solution, the “circular economy” refers to an economic model that emphasizes cycles of reuse, recycling, and repair versus a linear model of extraction, consumption, and disposal.
In a circular economy, products are designed with goals of efficient resource use, extended usage life, and improved ability to repair or recycle and reuse material components. Pollution and waste are minimized, products and materials are used longer, and natural systems are better able to maintain health and regenerate. While some of the inherent design challenges are significant, the eventual reward is great: A circular economy approach presents potential for economic growth to be decoupled from ever-increasing natural resource use, including the related negative impacts on environmental and social systems.
Within the context of increasing resource constraints, global warming, and still-rising worldwide demand for goods, circular economy design principles and business structures offer immense opportunities for the creation of new processes, practices, and businesses with meaningful benefits. The Platform for Accelerating the Circular Economy has identified 21 key solutions that offer potential to decrease resource extraction by 28% and to reduce greenhouse gas emissions by 39%.2
Circles within the circle: Understanding all parts of the business modelsWhile the circular economy is often presented as a single loop, we, as fundamental analysts, aim to understand all parts of the business models of companies we research. Therefore, we find it is helpful to illustrate the “circles within the circle” to uncover more functionally specific insights. For example, before a product is even created, it is possible to design it for modularity, reuse, and ultimate decomposition. Sharing-economy solutions, rentals, and resale offerings focus on extending the useful life of products within the consumption phase. And repair and recycling practices create different flows between the inputs phase and ultimate decomposition or disposal, lowering ongoing use of raw materials and waste rates.
Circular economy model
The circular economy offers multiple intervention points
Sources: Putnam Investments, Ellen MacArthur Foundation
We view the circular economy as one of the most far-reaching frameworks for the development of sustainable solutions. To learn more, read our research paper, Toward a circular economy, which offers comprehensive analysis and discusses the topic in greater detail.
1 [Subscribers only] National Geographic, “Here’s how a ‘circular economy’ could save the world," February 18, 2020.
2 The Circularity Gap Report, 2020
3 United Nations, Global Resources Outlook, 2019.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon as research or investment advice regarding any strategy or security in particular.
This material is prepared for use by institutional investors and investment professionals and is provided for limited purposes. This material is a general communication being provided for informational and educational purposes only. It is not designed to be investment advice or a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. The opinions expressed in this material represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the material. Predictions, opinions, and other information contained in this material are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
This material or any portion hereof may not be reprinted, sold, or redistributed in whole or in part without the express written consent of Putnam Investments. The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC and Putnam Investments Limited®.