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This episode we get a primer on what exactly the term ‘circular economy’ means, why it goes beyond recycling and the economic levers behind creating a sustainable system. Dan Yungblut, Head of Research and Chair of the ESG Investment Committee at Scotia Global Asset Management is our guest.
Key moments this episode:
1:08 — What is a circular economy?
1:19 — How the circular economy goes beyond just recycling
2:02 — How long the idea has been around
2:30 — How the circular economy is being built into policy
3:01 — Two big pieces of policy that create incentives for reusing plastics
3:18 — What is extended producer responsibility?
5:37 — What can we learn about the circular economy from kids toys?
6:19 — What needs to happen for a circular economy to take hold?
7:48 — “There’s no such thing as a sustainable product, only a sustainable system.”
8:48 — Why is the circular economy on the radar of an asset management firm?
11:19 — What’s on the horizon for the circular economy
12:29 — What all this means for consumers' bottom line
Transcript:
Stephen Meurice: ‘Circular economy’ is a term you’ve probably heard more and more in the last few years. To put it most simply, it’s a different way to think about reducing waste. And we’re not just talking about recycling. It’s a much more holistic approach.
Dan Yungblut: I like the line that there's no such thing as a sustainable product, only a sustainable system.
That’s Dan Yungblut. He’s our guest this episode.
DY: So, you have to think about the full lifecycle of it. You could have a product that’s designed to be fully reused or every component can be recycled. If you don’t have the infrastructure in place to do that, it's just going to go to landfill anyway.
One thing driving the creation of that infrastructure? Market forces. Dan is the Head of Research and Chair of the ESG Investment Committee at Scotia Global Asset Management. This episode he’s going to explain what exactly the circular economy is. And how businesses and investment firms fit in. I’m Stephen Meurice and this is Perspectives.
Dan, Thanks so much for joining us today.
DY: Thank you. My pleasure.
SM: So maybe let's start in the most obvious way and that is: what is a circular economy?DY: Sure. It's an economy where all the stakeholders coordinate their consumption of resources to try and reuse those resources as many times as possible to help reduce waste.
SM: So, is it kind of an evolution of ‘reduce, reuse and recycle?’
DY: So those are big components of it, but really it goes far beyond just recycling. The other big component is that if you're a consumer company designing your packaging and products, you're going to engineer those with recycling in mind. And that's a key part of your design. Not just, “I'll just put a product out there and hopefully we can try and reuse it as much as possible. And we try and get the recycling infrastructure in place.” All parts of that whole loop have the full cycle in mind.
SM: So that you're thinking about that at the very outset of creating a new product or creating a process within a business.
DY: Exactly.
SM: Okay. So how long has this idea been around?
DY: The earliest reference I think people can find is in the 1960s, there were a few books. It's only really come to prominence in the past 10, 15 years. And the first mention I can see in a real concerted way is the European Union had their new plan, Circular Economy Action Plan, in 2015. And they’ve since had various versions and in North America we're not quite getting there, but we're starting to get there in bits and pieces in different legislation and policy.
SM: Right, so at this point it's being built into actual policy. How does that work?
DY: Yeah, it starts to create standards for companies when they're designing products, create liabilities for when they put a product out there. How does that get recycled, processed and then reused over the full cycle? You're creating those responsibilities from the start. And the European Union had a more coordinated action plan, but we're starting to see that in North America. And I think the best example right now is plastics and packaging. And the two biggest examples we have there are, one is called extended producer responsibility. And the other is minimum recycled content. And so those two are really going to help create those incentives and recycling infrastructure to be built to make sure we're reusing plastics as much as possible.
SM: So, extended producer responsibility, I guess that means making producers responsible for the waste that results from the products that they sell.
DY: Yeah, we're seeing small scale examples. In Toronto, TerraCycle has a loop project where you refill your shampoo bottles, things like that. But they're small scale. To really build this at an industrial scale across the economy, you need a full-out recycling infrastructure in place and companies, you know, incentivized to help feed into that. Right now, the estimate is only 9% of our plastic waste is actually recycled.
SM: Wow.
DY: Which seems strange. Why aren't waste management companies just building the capacity to do that? Right now, they collect plastic waste from your house. They get a stable fee for just putting that to a landfill. And then if they're gonna invest in recycling infrastructure, build a fancy new machine to take that plastic out, they have to then bundle that plastic and sell it as a volatile commodity on the market. So, for them that risk/reward just isn't there. What extended producer responsibility says is that consumer companies, other companies that are creating that plastic waste have to pay a fee to a municipality or some way to help pay for that recycling infrastructure. Minimum recycled content then says your plastic packaging has to have a minimum amount of recycled plastic.
SM: Okay.
DY: So now all of a sudden, a consumer company making packaging, they need to find a steady source of recycled plastic. Then also they're required to pay for that recycling. So, they're gonna contract with waste management companies. So, what those two policies have now done is said, “you're paying a stable fee to a waste management company” and they also have a stable source of demand. You've de-risked it. Now, they have the incentives to go build state of the art plastic recycling infrastructure and hopefully we get well above that 9%. All players in that loop now are incentivized and that's a market solution with a few policy changes to set up that incentive structure. That's plastics, that's the most prominent. We'd want to expand that to other types of materials and goods, but that's just packaging. We haven't talked about design of the products themselves.
SM: Right. So, it’s still sort of a focus on the end of the process, the recycling part of it, as opposed to integrating this thinking to the very beginning of the process. The design.
DY: Yeah. And so, the example I've used to make it simple for everyone. I have a two-year-old daughter. Buy a plastic toy for her. Right now, the plastic wrap and that, the cardboard box. Can put that in the recycling. So hopefully again, we talked about these policy innovations, most of that starts getting recycled. But let's say a wheel breaks on that actual plastic toy. Can't donate it anywhere. There's basically 0% chance that toy is gonna be recycled. That just goes to landfill. Now, what if the toy company had actually designed it so that toy itself, all the different components can be taken apart and then recycled somehow. That would be a circular economy.
SM: I see.
DY: As opposed to just recycling the plastic packaging.
SM: Right. So, what needs to happen for the idea of a circular economy to take hold? You talked about incentives or incentivizing this on the part of business? What specifically do you have to do to make it happen?
DY: I mean, I think we're starting to see, so some of those type of contracts I talked about where consumer companies contracting with waste management, those incentives, we're starting to see those on a big scale. So, I think we've made a lot of good progress on putting the pieces in place we need to. It's just gonna take time. So, I think we're now, at last count, we're at 12 states and seven provinces where we’ve put that legislation in place. Now, okay that's there, companies have to react. You have to start signing contracts. Waste management takes time to build the recycling infrastructure. I think we're starting to gain momentum. That's there, that's just on the packaging. I think let's walk before we run. We're gonna make a lot of progress on that over the next decade. I think we need to really let companies adjust to that. The next step after that is going to be further legislation that's probably, you know, later in the decade to really talk about that design of products. Not just the packaging waste.
SM: You sometimes hear about so called planned obsolescence, really where companies are making products with a sort of predetermined life cycle, I guess in the hopes that people will have to replace them every few years. Is that one of the things that needs to be tackled in order for a circular economy to happen?
DY: I mean, let's leave the consumer complaints that, you know, it's just your manufacturing demand. You know, I like the line that there's no such thing as a sustainable product, only a sustainable system.
SM: What does that mean?
DY: So, you have to think about the full life cycle of it. You could have a product that's designed to be fully reused or every component can be recycled. If you don't have the infrastructure in place to do that, it's useless. It's just gonna go to landfill anyway. You have to have the full system. So, let's say an Apple iPhone. I'm just using that as a good example. If they designed it for every component to be recyclable and we had all the infrastructure in place. So they're saying, “waste management companies, let's collect this and reuse it all.” That could be consistent with the circular economy if you have that full cycle in mind already. If I'm Apple and I'm responsible for the cost of that whole loop, I'm gonna be incentivized now to make that repairable. Because I'm not gonna want to go to that expense myself if I'm responsible, partly responsible for that full recycling process.
SM: Right. So – you work for an asset management firm. That’s basically a company that invests people’s money for them. How did this become part of your work?
DY: So, I chair an ESG Investment Committee and I've taken a lead in our ESG Initiatives.
SM: And just for our listeners who might not know, ESG is environmental, social and governance factors, is that right?
DY: Exactly. So, for us, from an investment lens, ESG themes are becoming a lot more prominent. But if we just think about consumer companies, other companies exposed to some of this coming legislation for minimum recycled content, things like that. Also, reputation risk. Increasingly brands and industrials and consumer companies have to be seen to be acting responsible. And that long-term directly impacts the strength of your brand, revenue, cash flow and ultimately financial and investment performance. We're looking for companies that are embracing this, well prepared. If a company is not on top of this, one: we're concerned about how great management is and whether they're really on top of their business. But two: they're gonna have to spend to build new facilities, redesign products, things like that. And if they leave it till the end, till they're forced to, their brand’s probably already taken a hit, but that's a lot of cash outflow all at one time. So, we want companies to be proactive on this. But also, think about waste management companies, they build a new recycling plant that's state of the art. That's an attractive risk/reward opportunity. And we're engaging a lot with some of these waste management companies to help build that infrastructure, give them money to do that. So there's one, a risk for our existing companies, but also an opportunity there for attractive investment returns. Giving companies capital to help embrace the circular economy and facilitate it.
SM: And are you hearing more of your clients ask about and be interested in ESG generally, and the circular economy specifically.
DY: So, the short answer is yes. Getting a lot more questions. Still seeing, you know, open questions about how much investors understand and where they're willing to put their money towards. But we do have some sustainability focused products that are getting a lot of interest where we are absolutely, not just investment risk return, but focus on companies that are embracing themes like responsible consumption. Where circular economy is a huge part of that. And that's fully in our objectives and that's what our mandate is focused on.
SM: So, market demands are such that you need to become something of an expert so you can answer those questions on the part of your clients.
DY: Absolutely crucial across the board, but it's, you know, client’s one thing, but also I think it's part of our fiduciary duty to be on top of trends like this that are impacting companies across the board.
SM: So, what do you see on the horizon when it comes to circular economy? I know this is a long-term play, really. But what do you see coming up in the next couple of years? And what do you hope to see?
DY: Yeah so, one: I think we're starting to see the legislation put in place that is going to help create the market incentives to really help drive a circular economy, at least on packaging and plastics. Already seeing good momentum. As that starts to grow, I think we have learnings and start to expand that to other parts of the economy. And then hopefully down the road again, we expand that to design the products. But it's also the average consumer, the average voter is on top of these issues. It's pushing governments to try and do something. But I think also in a circular economy, you know, outright bans of certain single use plastic, things like that — not necessarily always the best solution. Let's be thoughtful about this, engage with industry and consumer companies, what is the best solution to have that full closed loop? There could be better solutions. Is the issue really just the use of those single plastics or is it full system? So, it's also, more thoughtful and informed policy making with voters and consumers really driving the demand for that.
SM: Right. I think some people might hear all this and think that inevitably this will translate to higher prices for consumers.
DY: Not necessarily. Out of the gates, it could be a little bit higher in the short run. But — plastic is such a prominent example — to get new, virgin plastic is still cheaper than to get recycled plastic. But that's at our current scale. And so again, only 9% of plastic gets recycled. What if we get to 50? Now we have economies of scale in the amount of recycled plastic being produced. You have all the processes in place and you tend to get efficiencies that come with that scale. And so now the cost of recycled plastic could be on par and you can close that gap. And if we try and reuse, redesign products could actually help reduce cost for that consumer company long term, all the other things being equal and really actually make it a net benefit to consumers.
SM: All right, Dan thank you so much for joining us. That was a really interesting overview of this subject that I'm sure we're going to hear a lot more about.
DY: My pleasure.
SM: I’ve been speaking with Dan Yungblut, Head of Research and chair of the ESG investment committee at Scotia Global Asset management.