From Linear to Circular: A Tool to Approach Sustainable Investment Decision-Making

Abstract

Our thesis is inspired by the apparent lack of diversity in environmental indicators analyzed by professional investors, oftentimes, depending highly on greenhouse gas emissions. While emission metrics are crucial in assessing environmental impact, other factors might also be impactful to mitigate climate change and tipping points of the planetary boundaries. We therefore were motivated to investigate if the concept of circularity can be incorporated into investment decision processes, as circularity encompasses the ecosystem in a holistic manner, potentially influencing climate change and planetary boundaries positively. This academic work relied on the extensive research conducted on sustainable investments and circular economy, respectively. However, as the intersection of the two academic fields is underexplored, this thesis takes on an exploratory stance, as it investigated if sustainable investments can benefit from incorporating circular metrics into portfolio design within the consumer goods sector. We conducted 23 expert interviews breaking down the current trends in sustainable investments through practitioners' understanding and incorporation of circularity. The interview findings showcased definition ambiguities of circularity and related absence of data. Drawing upon the interview findings, Life-Cycle-Thinking, and the concepts of Modern Portfolio Theory, the study thereon proposes a ‘Circular Investment Tool’ (CIT). Conclusively, we tested the CIT, by constructing a portfolio resulting in 39 eligible companies. Findings revealed that while the circular portfolio did not financially outperform sectoral benchmarks, it demonstrated comparable performance and high resilience in times of volatility.