Are financial markets aware of the importance of the circular economy?

Moving the economy from a linear model (take, make, dispose) to a circular model that decouples economic growth from resource use has increasingly become the center of attention for economists, policy makers and academics. The three pillars of the circular economy (reduce, reuse, and recycle) are a must to sustain economic development and rare resources for current and future generations. Adopting a circular economy model will affect all parts of the value chain; starting from product design and ending with disposing of used products.

Therefore, it is imperative that players in the economy including participants in financial markets, whether they are businesses or equity investors, be aware of the importance of adopting the circular economic model to accelerate the move. Hence comes the importance of this paper to investigate whether financial markets are discounting information relating to the circular economy in stock prices or not. The challenge of investigating this issue is that macro indicators of a circular economy are still under development, however, some of the current economic, social and environmental indicators can be used as proxies to measure how far the economy has moved toward the circular model. Examples of the indicators used include production and consumption of raw materials and waste, waste management, reuse and recycling of raw materials, competitiveness and innovation, and resource productivity.

Using cross country data on European Union (EU) countries from Eurostat, this paper examines, at a macro level, if proxies for a circular economy have an impact on investor’s valuations of stock prices as reflected in the returns of the aggregate market index. Panel data methods; fixed effect and random effect models, are used to estimate the relationship. The results are expected to identify markets that have exhibited greater implementation of circular business models achieving higher market valuations and higher returns.