As previously highlighted, The Amity International Fund Team believe that there is a strong positive correlation between sustainable development, innovation and long-term value creation. The team therefore seeks to invest in those companies that are harnessing innovation within their everyday business to solve the most pressing environmental challenges.
According to The UK Design Council, 80% of the ecological cost of a product is set at the design stage1. In other words, a products environmental footprint is determined before it is even created. Our existing economic model is built around the framework of linearity, where natural resources are extracted as input materials for the manufacture of products which are then used and eventually discarded. The ‘take-make-waste’ (linear) approach is not a sustainable approach for the earth’s finite natural resources. In contrast, and as defined by the Ellen McArthur foundation, a circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems2. Companies that factor in circularity in their business model are able to play a major role in safeguarding natural resources and transform the way we currently use natural resources and support a transition to a low-carbon economy.
The apparel and textile industry is one of the largest industries in the world, both in terms of annual revenue (over $2.5 trillion pre-pandemic) and environmental degradation. Over the last 20 years, there has been a twofold increase in the amount of clothing produced, despite a global population increase of only 28%3. Consequently, there are a number of negative environmental and social externalities associated with the industry. These include greenhouse gas (GHG) emissions from textiles production, which total 1.2 billion tonnes of CO2 per annum, more than those of all international flights and maritime shipping combined4. The textiles industry also relies mostly on non-renewable resources, 98 million tonnes in total per year, including oil to produce synthetic fibres, fertilisers to grow cotton, and chemicals to produce, dye, and finish fibres and textiles. Textiles production also uses around 93 billion cubic metres of water annually, contributing to problems in some water-scarce regions5. The economic value of these negative externalities is difficult to quantify, although the Pulse of the fashion industry report estimated that the overall benefit to the world economy could be about €160 billion ($192 billion) in 2030 if the fashion industry were to address the environmental and societal externalities6.
Adidas (EdenTree Investment Management holding), one of the largest sporting goods company on the planet, is addressing these challenges by harnessing technologies such as artificial intelligence, digital design software and 3D printing tools to enhance the sustainability, efficiency and economics of its production process, while also improving the quality and durability of its products7. The adidas brand mission is to be “the best sports brand in the world, with the best service and experience and in a sustainable way.” Consequently, the company is committed to sustainability, as evidenced by its strategic partnership with Parley for the Oceans (using marine plastic waste to replace virgin plastic) and product initiatives such as FutureCraft (footwear made from 100% recyclable thermoplastic polyurethane) and PrimeGreen (a performance fabric that contains no virgin plastic). And staying within the adidas group, the firm’s Reebok subsidiary has developed plant-based (algae, eucalyptus and natural rubber) running shoes, which sustains important features such as breathability, support and water resistance, without the use of animal and petroleum-based products8. Overall, at a group level, in 2019, 50% of all polyester used for adidas’ apparel and footwear ranges was recycled polyester. By 2024, the company aims to replace all virgin polyester with recycled polyester in all products where a solution exists. By 2030, adidas aims to reduce the company’s carbon footprint by 30% (as compared to 2017) as part of the Fashion Industry Charter for Climate Action.
Another important aspect associated with circularity, it the generation and transmission of energy required to power these innovations. According to OECD estimates, energy, transport, building and water infrastructure make up more than 60% of global greenhouse gas emissions9. Furthermore, approximately $6.9 trillion of infrastructure investment is required each year from now through to 2030 to meet the climate and development objectives laid out in the Paris Agreement (to limit global temperature increase to well-below 2°C and towards 1.5°C above pre-industrial levels). One company seeking to address this is Schneider Electric (EdenTree Investment Management holding), which specialises in energy management and automation. The company develops products, solutions and services that enable the transition to a cleaner and more renewable planet. Schneider Electric has also identified circularity, not only as a responsibility but a source profit, utilising recycled content and recyclable materials in its products, prolonging product lifespans through leasing and pay-per-use and has introduced take-back schemes into its supply chain. For instance, since 2012, the company has increased the amount of waste recovered through operational activities from 8% to 95%10. Circular activities now account for 12% of the company’s revenues and are projected to save 120,000 metric tons of primary resources between 2018–202011.
The environmental impact of our existing economic framework centres on the unsustainable notion of linearity. As the strain of human consumption on the environment becomes ever more apparent, it is encouraging to find companies utilising innovation in their everyday activities that designs out waste and pollution, in order to boost the circularity of their business model. By re-designing production and distribution methods, these companies can not only improve their environmental footprint, but they can also enhance the strength and durability of their financial profile, becoming less dependent on volatile input costs such as commodities and raw materials. Through their practice, these companies can also incentivise consumers to changes their consumption habits, which should in-turn reduce the strain placed on our natural capital. We therefore see a strong positive correlation between sustainable development, innovation and long-term value creation. At EdenTree Investment Management, our investment framework seeks to invest in companies that positively impact the planet and society, while at the same time ensuring that we remain on the right side of disruptive forces that impact business models, sectors and global economies more broadly.
1. UK Design Council - https://www.designcouncil.org.uk/sites/default/files/asset/document/ZWS%20PDR%20Design%20CE%20Action%20Plan%2020.05.15.pdf
2. Ellen MacArthur Foundation - www.ellenmacarthurfoundation.org/circular-economy/concept
3. CDP - https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/005/367/original/CDP_Water_Apparel_Report_September_2020.pdf?1602059378
4. International Energy Agency, Energy, Climate Change & Environment: 2016 insights (2016)
8. Reebok - https://www.reebok.co.uk/blog/438228
9. OECD - https://www.oecd.org/environment/cc/climate-futures/policy-highlights-financing-climate-futures.pdf
10. Schneider Electric https://sdreport.se.com/en/circular-economy-highlights