Real Assets
The Circular Economy and Infrastructure Investment
Article
Jun 13, 2022
We recognized early that renewables were part of the investable infrastructure universe—and would be a growing infrastructure investment opportunity. Today, we believe select waste management companies in listed markets are on track for a similar trajectory thanks in part to the global evolution toward a circular economy.
A significant uptick in waste generation is resulting in a drive to turn today’s linear economy into tomorrow’s circular economy. In a circular economy, a finished item, rather than being discarded, is returned to the product cycle through recycling, repair, redesign and/or reuse. As a result, a circular economy minimizes both raw materials use and the creation of pollution and waste. We believe select waste management companies, given their vertically integrated business models, are in prime position to benefit from this transition.
While waste management companies have traditionally not been considered infrastructure, they tend to share many characteristics with traditional infrastructure companies, such as limited competition and contracted, inflation-linked cash flows.
Their vertically integrated business model of collection, sorting, disposal, recycling and incineration activities makes these companies a natural backbone for a circular economy. For example, these companies are able to turn waste into clean fuels such as renewable natural gas. Companies involved in these activities can create lasting competitive advantages due to ownership of irreplaceable assets, such as landfills or energy-from-waste plants.
This is especially true as economies increasingly become circular. Policymakers globally are seeking to make their economies circular, as focus on curtailing climate change grows at the same time that waste generation is increasing amid population growth, increasing urbanization, rising consumption, and traditional recycling’s slow uptake. In addition, rising costs for natural gas are making the renewable gas created by waste management firms more cost competitive.
Against this backdrop, we believe the outlook for the waste management industry is bright. Significant private investment will be required to further build out recycling and sorting infrastructure, while larger players in this fragmented industry may roll up smaller competition through accretive transactions that may improve financial returns. Read more on our views in the full Real Assets Monthly.
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