For BlackRock, Circularity Is Off to a $900 Million Start

Global asset manager BlackRock recently announced that its investment fund focused on the circular economy has raised $900 million since its launch just a year ago, ballooning from BlackRock’s initial seed money of $20 million.

Circularity is one important part of the ESG investing story

Sustainability was always going to be a central theme of 2020 after environmental challenges took center stage at events such as the World Economic Forum’s annual meeting at Davos. Nine months after that event, despite the disruptions resulting from the COVID-19 pandemic, there has been a remarkable shift of capital moving to ESG (environmental, social and governance) funds and investments.

Remarking on the quick growth of BlackRock’s new circular fund, Evy Hambro, the fund’s principal manager, has called its progress “encouraging.”

Beyond the financials, this BlackRock fund signals the environmental benefits that could result as the world undergoes a transformation to the circular economy. The Ellen McArthur Foundation (EMF), which helped BlackRock develop this fund, stated recently that a move to a circular economy could generate 45 percent of the cumulative emissions cuts needed for a 2050 net-zero economy.

Yet, there is much to do, warned Dutch think tank Circle Economy. In a report released at the Davos meeting earlier this year, the group found only 8.6 percent of the economy worldwide is currently circular.

A circular economy fund, as defined by BlackRock

The BlackRock fund, called the BGF Circular Economy, invests in companies of various sizes, with packaging, chemicals, electronics, fast moving consumer goods and forest products making up a substantial percentage of the fund. Currently its top three holdings are Ball Corp (3.75 percent), an aluminum packaging company; the Dutch conglomerate Philips (3.38 percent); and Microsoft (3.37 percent).

The fund’s managers group equities into three categories: adopters, enablers and beneficiaries, all of which are based on their companies’ place within the circular economy. BlackRock defines companies that are setting targets on circularity within their own operations as “adopters.” This grouping of companies, which represents almost half of the businesses in which the fund has invested, includes such brands as Nike, L’Oreal, Coca-Cola Partners, Nestlé and Trex. Companies innovating on circular solutions are categorized as “enablers,” while companies that benefit from circularity are categorized as “beneficiaries.”

According to BlackRock, all companies that make up this fund are first screened using the firm’s ESG criteria to ensure the entire fund measures up as “sustainable,” and to increase the likelihood of compelling risk-adjusted returns.

Considering recent trends in the equities markets during the first half of 2020, funds with a sole or partial focus on the circular economy performed on average 5 percent better than Morningstar category benchmarks, according to a recent EMF report.

Can large caps lead on the circular economy?

Doubts will persist whether companies focused on circularity can also contribute to economic growth. And there are questions about whether legacy companies can fully pivot toward a circular business model.

Back in 2016, Michael Molitor, who at the time was a senior fellow at the Ray C. Anderson Foundation, discussed the challenges in creating a circular economy. He noted that institutional investors mainly invest in safe, large, predictable, low-growth companies. Many of these large but low-growth companies are attempting to contribute to a circular economy, said Molitor — and four years later, many of these companies are included in BlackRock’s circular economy fund.

On that point, a 2015 joint study completed by EMF and the McKinsey Center for Business Environment suggested a shift toward the circular economy, which could boost resource productivity, could actually help these companies improve their competitiveness, revenues and innovation.

Rob Kaplan, writing for Forbes, expressed concerns over the BlackRock fund’s launch last year as he believed companies in the portfolio were not actually innovating on recycling, waste, and alternative materials for “truly circular solutions” that could transform the value chain.

The circular economy keeps gaining momentum

According to EMF, the number of funds with a focus on the circular economy has increased ten-fold since 2016. Meanwhile, these funds’ total assets under management (AUM) jumped six-fold, from $300 million in 2016 to over $2 billion in early 2020.

The business case for circularity is evident, as EMF noted 13 percent of Philips’ revenues in 2019 were tied to circular solutions. In the European Union, the Joint Initiative on Circular Economy launched last year to support circular economy investment and aims to invest 10 billion euros into circular economy projects by 2023. Hence BlackRock may be onto something.

This $900 million fund may only be small compared to Europe’s circularity initiative, and it's certainly tiny compared to the estimated $100 trillion in global assets under management. And at last count, BlackRock disclosed the total assets within its portfolios to be worth over $6.8 trillion, making that circular economy fund one drop in the firm’s massive bucket. Nevertheless, the fund’s jump in popularity, and its bet on the potential for large cap companies to embrace circularity, could mark the beginning of circular business models becoming the rule, not the exception.

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