Circular Economy: The dawn of a new era

Key takeaways on the new drivers for the Circular Economy:

1. New political blocs and deglobalization are also changing the land­scape for the Circular Eco­nomy.
2. The scarcity of critical raw materials could drama­tically worsen – fueled further by sustainable trends like energy transition and electri­fication.
3. By keeping essential resources within the system, the Circular Economy can make a signifi­cant contribution to supply security and econo­mic indepen­dence. We anticipate strong growth in circular business models.

The protracted struggle for a peace agreement highlights the issue: In the Iran conflict, the supply of raw materials through the Strait of Hormuz has become the decisive factor. At stake are not only about 20% of the world's oil and natural gas production; the blockade of this maritime route also severely impacts the global supply of diverse materials such as copper, helium, and sulfur for fertilizers. The looming long-term consequences of this scarcity have already led to significant volatility in commodity and financial markets.

Meanwhile, we observe that investments in the Circular Economy sector are showing strong performance in some cases. This seems only logical: Following the principle of "Reduce, Recycle, Reuse, Replace" – the "4 Rs" – the sustainable investment theme decouples economic growth from resource consumption. It is no longer just about protecting the environment and resources: By keeping critical raw materials within the system, the Circular Economy can make an important contribution to supply security and economic independence.

Circular Economy: In addition to regulation, geopolitics is becoming a structural driver

Interestingly, a paradigm shift is also emerging for the Circular Economy. In our view, the investment theme is moving beyond the phase where regulation was the main influencing factor. Environmental laws and government incentives acted as structural drivers for growth and returns; companies addressing sustainability concerns with their products and services benefited from tax breaks or subsidies. Conversely, entities that showed no such ambitions were penalized with CO₂ emission taxes or fines. Globalization and international cooperation served as the overarching framework.

Regulation remains an important driver, particularly in Europe. However, geopolitics is increasingly emerging as a global driving force. As the recent Iran conflict has highlighted, traditional alliances such as NATO or the United Nations are being challenged by the formation of new political blocs. Meanwhile, free trade is increasingly facing protectionist tendencies; the tariff disputes fueled by the U.S. are a prime example. Direct consequences include high volatility in financial markets and the scarcity of strategic raw materials – the latter often intentionally induced and by no means limited to the Strait of Hormuz.

For instance, surveys conducted by the OECD last year show that export restrictions on critical raw materials have increased tenfold between 2009 and 2023 (see charts below). Ores and minerals have been particularly affected. Furthermore, the organization calculates that half of the trade barriers were imposed by countries with significant raw material reserves – notably China, which dominates the rare earths market (according to the International Energy Agency, China controls about 90% of refinery production), as well as India, Vietnam, and Argentina. The power play over raw materials has long since begun.

Circular economy: Trade barriers on critical minerals as drivers

Given these developments, states, companies, and investors have little choice: They are compelled to focus more on economic independence and supply security.

The Circular Economy, which keeps essential resources within the system and counteracts depletion, presents itself as an attractive solution and is likely to gain even more importance from a sustainability perspective. This paradigm shift toward geopolitics as a driver coincides with two other structural trends that are also characterized by their "hunger" for raw materials.

Sustainable trends are hungry for critical minerals. Is the Circular Economy the solution?

One such trend is the energy transition away from fossil fuels toward low-carbon energy sources. As we have previously reported, this shift is in full swing. Gobal investments in clean technologies climbed to an estimated USD 2.2 trillion between 2015 and 2025, according to the IEA. During the same period, investments in fossil fuels dropped by one-fifth to an estimated USD 1.1 trillion. The Middle East conflict is likely to further support the trend toward decarbonization: It is evident that the wind cannot be blocked, and sunlight cannot be bombed.

The energy transition goes hand in hand with another sustainable trend: electrification. Growth is also expected here. By 2050, electricity demand could double or even triple, according to the IEA, not least due to the high energy consumption of data centers, which are springing up worldwide due to the boom in artificial intelligence (AI).

And it is clear: neither the energy transition nor electrification can proceed without critical raw materials, as we have shown in a detailed analysis. For example, large amounts of copper and aluminum are used in power grids. Meanwhile, lithium, nickel, cobalt, manganese, and graphite are crucial for battery performance. It is also evident that photovoltaic systems, wind farms, and electric vehicles generally require more critical raw materials than their fossil fuel-powered counterparts. The rapid proliferation of new technologies for clean and renewable energy could, therefore, lead to an unprecedented demand for these materials. And the current linear economy, with its resource depletion, is poorly equipped to meet this demand.

Consumption of critical minerals for clean technologies (in kilotons kt)

Environmental and climate protection remain strong drivers for the Circular Economy

Investors interested in sustainability can also view the topic of supply security and economic independence in the context of environmental and climate protection: Careful management of natural resources can make a direct positive contribution here and is almost imperative to address their scarcity. According to the Global Footprint Network, about 1.7 Earths would have been needed in 2024 to keep up with consumption. From our perspective, it is clear: Even if environmental issues have currently taken a backseat in some countries, "clean" technologies and the circular economy, with their focus on the "4 Rs," remain crucial for addressing resource scarcity. The recent turbulence in oil and gas markets further underscores this trend.

With a view to protecting our environment and ensuring security of supply, it therefore seems logical to make targeted investments in the four sub-sectors of the Circular Economy. This can indeed pay off, as we expect significant potential here: If the penetration of the economy with circular processes increases from the current 7% to 14% over the next ten years, the circular economy could grow twice as fast as global GDP. The following areas are our focus:

Circular Economy: The "4 Rs" in service of supply security and sustainable resource management

• Reduce Promising investment fields include efficient material use in design and extending product lifespans. Other areas of interest include "zero waste" approaches and solutions that promote the sustainable use of products.
  Company example U.S. semiconductor manufacturer Analog Devices consistently designs its products to reduce emissions, such as those from industrial motors.
• Replace The focus here is on transitioning to efficiently reusable packaging materials like paper and aluminum, producing biodegradable plastics, and replacing harmful chemicals.
  Company example Crown Packaging is a global leader in the production of paper and cardboard packaging as well as beverage cans and has internalized circular processes.
• Reuse Promising areas include business models in the "secondhand & rental economy" and the market for scrap cars, which can contribute to recovering important metals from old vehicles.
  Company example Ritchie Brothers Global, a Canadian platform for reselling scrap vehicles, holds a dominant market position and is currently experiencing double-digit growth rates.
• Recycle Our focus is on closed loops for materials and natural resources like water, as well as so-called biorecycling, the reuse of biological waste.
  Company example South Korean company Sungeel Hitech is a market leader in recycling lithium-ion batteries, such as those used in electric vehicles.

Our conclusion on the importance of the circular economy in the era of geopolitics:

The Circular Economy, through its careful management of resources, can contribute to supply security and economic independence. As such, we believe this investment theme offers significant potential for sustainability-focused investors in an era increasingly shaped by geopolitics. Environmental protection and the fight against the climate crisis remain additional structural drivers.
 

Investment theme «Circular Economy»: Insights