The principles of the circular economy are gaining ground among asset managers and investors.

Using natural resources more efficiently and cutting waste and pollution in the supply chain is the basic premise of the circular economy. Companies have been applying such methods for years to make their products and services more sustainable and to boost profits. It is also gathering steam as a goal of impact investing.

A new report out today from New York investment firm Cornerstone Capital Group suggests that investing in the circular economy is poised to become a central theme in impact and sustainable investing. In a report titled Intentional Design: Embracing the Circular Economy, the firm said that “forward-thinking asset managers are increasingly incorporating circular economy considerations into their investment process", and that “pure play” circular economy investment vehicles, though rare, are coming into use.

The area got a boost earlier this month when the world’s largest asset manager BlackRock partnered with the Ellen MacArthur Foundation to launch its first circular economy fund. The eponymous UK-run foundation, launched a decade ago by the long-distance yachtswoman and campaigner, will provide the asset house with guidance on its investment methodology.

BlackRock co-fund manager Sumana Manohar said initial investments would primarily be in the fashion, plastics and food and drink sectors, with technology and mining firms to be added later. She acknowledged that the circular economy was not a new business interest but it has been “quite nascent as an investment theme”.

BNP Paribas is another asset house singling out the circular economy as a discrete investment proposition. In April this year, it launched what it called “the world’s first circular economy-based ETF” issued in euros on Euronext Paris.

Bertrand Alfandari, ETFs head of business development, said the French firm is helping to develop circular economy solutions in three ways: by financing those who are active in the circular economy, particularly the innovators; developing product-service systems through its leasing offer, and through its own company practices.

There is little disputing that waste has become a visceral issue. China drew attention to the problem last year when it banned imports of foreign plastic waste, leaving many developed nations scrambling for other South East Asian countries to pick up the slack. Plastics choking our oceans has perhaps become the defining image of our age of consumption.

On the investment side, Cornerstone concedes that these are “early days" for the circular economy as an abiding theme. Progress, it said, has been hampered by the fact that new business models based on circular design don't have a long enough track record for some investors, and many of the companies innovating in the sector are still early stage and private.

But the firm said that routes are growing to support circular economy efforts, such as private equity and project finance which supports companies building circular supply chains and increasing community-recycling rates. Also, public equity and funds are investing in growth companies providing solutions to environmental risks, such as climate change, resource degradation, and scarcity. It also flagged up public equity and debt funds focused on identifying businesses that can best adapt to the risks and opportunities posed by climate change; and venture capital funds that invest in early stage sustainable consumer goods companies, advanced recycling technologies, and similar services.

Accenture estimates that the benefits of a circular economy could reach $4.5 trillion by 2030. The global consultancy firm has identified five main business models contributing most to the transition that are shown in the graphic below:

Source: Accenture, ECPI, BNP Paribas Asset Management.

In today's report, Cornerstone examines a range of sectors that are under resource stress and profiles a number of companies adopting circular economy practices into their supply chain. Big brand examples which include Walmart using sensors to monitor and reduce waste in the perishable foods supply chain, Apple using robots to dismantle and reuse precious components in its product lines, and consumer giant Procter and Gamble teaming up with e-commerce platforms to encourage refillable packaging for many household staples. Below these behemoths, there are case studies of more nimble privately-held innovators whose technology is largely underpinning these changes.

The fashion industry comes in for some of the sharpest criticism. The fact that fast-fashion chain Forever 21 filed for bankruptcy earlier this year was in part due to a growing awareness among younger generations of the industry’s environmental impact. Besides large amounts of oil going into producing synthetic fibers, fertilizers to grow cotton, and chemicals and dyes to finish off fabrics, the industry uses massive amounts of water. It takes roughly 500 gallons of water to produce one pair of jeans, the report said. The $260 billion global luxury goods market also comes under fire, particularly on the apparel side. Cornerstone noted that high-end brands are notorious for destroying unsold products as a way to maintain exclusivity through scarcity.

Hermes is another investment manager that has stepped up conversations about a circular economy with companies, and advises investors on how they can support its development.

“As with all sustainability issues affecting the global economy, the transition to a circular model will require co-ordinated action from consumers, governments, NGOs and businesses. But investors also have a key role to play in creating a sustainable economic future,” Hermes said. This includes engaging with companies on improving resource efficiency, waste reduction and maximizing recycling – within their own operations and throughout their supply chains; engaging with policymakers and industry bodies to support regulations or incentives which encourage circular production; and by investing in businesses with good return prospects which demonstrate a clear commitment to the principles underpinning a circular economy.