Where the circular economy and Donald Trump's policies converge

At first glance, reconciling the policies of US President-elect Donald Trump with those of the circular economy would seem to be an impossible task. In his election rhetoric, Donald Trump has explicitly opposed sustainability and environmental issues, which are typically associated with the circular economy. However, we believe that his ‘America First’ approach, which puts national interests above all else, calls for less dependence on global trade and more domestic jobs, could prove to be a favourable tailwind for the circular economy.

The sell-off offers opportunities

However, the nervousness on the stock markets may show that this view is not yet widespread. The market reaction suggests that demand for green investments has fallen against the backdrop of possible deregulation and expected budget cuts under the new administration since Trump's election in early November last year.

But such market reactions often present opportunities: This could be a good time to look for relatively undervalued quality stocks, which corresponds to our approach to managing our sustainable thematic investments. This is all the truer given that the circular economy is an investment theme of global significance with long-term structural drivers. It is therefore by no means dependent on current US policy alone. But the future of the circular economy does not appear so bleak in terms of the Trump administration's medium-term influence either.

A closer look reveals that its political foundations are surprisingly consistent with the concerns of the circular economy. In our opinion, there is a good chance that the valuations of companies with solid fundamentals will recover once the new administration has taken office and it becomes clearer how political rhetoric actually translates into day-to-day government business.

The following three factors give cause for optimism. First, most key drivers of the investment theme remain intact. Second, some of the demands of ‘America First’ coincide with the goals of the circular economy; and third, the fear of deregulation is unlikely to have a big impact on the transition toward the circular economy.

1. Moving from the environment to resource scarcity and economic independence

Our linear economic model is being increasingly challenged due to its environmental impact and the scarcity of natural resources. The circular economy offers a way to address this imbalance: the paradigm shift towards the four Rs – Reduce, Recycle, Reuse, Replace – could help decouple economic growth from raw material consumption and leverage additional potential.

In addition to tackling resource scarcity, circular economy models offer two other key advantages (see graphic below). On the one hand, the transition from a linear to a circular economy can also promote economic independence for states and can, secondly, lead to the reshoring of business processes and the creation of local jobs. On the other hand, while the focus on scarce resources and less dependence on foreign powers are clear priorities in Trump's programme, there are more uncertainties elsewhere.

The President-elect has personally referred to man-made climate change as a ‘hoax’. He also wants to withdraw from the Paris Agreement on climate change together with the USA. According to the environmental law firm Beveridge & Diamond, Trump is likely to want to distance himself from international efforts such as the UN Plastics Agreement.

At the national level, some environmental protection regulations could be relaxed and the budget of the Environmental Protection Agency (EPA) cut. Delays in international agreements or domestic recycling mandates are also possible. However, we believe that the impact on the circular economy will be limited.

2. Tailwinds thanks to ‘America First’?

According to his announcements so far, it is to be expected that Trump will start his programme with trade tariffs. Reportedly, goods from China are to be subject to import duties of 60%, and imports from other countries to tariffs of 20%, even if the final decisions are likely to fluctuate depending on bilateral discussions and votes in the congress.
This should actually be good news for the circular economy in the US. After all, if the costs of imports rise, the relative value of domestically produced and recycled products increases. What's more, the expected inflationary effect of higher tariffs would boost practically all aspects of the circular economy in the US.

This is obvious in the case of recycling, for example. Now that steel imports from China have come under particular fire from Trump's policies, scrap metal recyclers in the US see their chance. The stock market has already anticipated an increase in the volume of orders. On election day, prices in this segment rose by an average of 14%. Similar effects could be expected for the recycling of batteries for electric cars; if tariffs on the raw materials needed to produce them, such as lithium, which is mainly mined abroad, are increased, the incentive to recycle will also increase.

Another ‘R’, "Reuse", could also benefit from more expensive imports: more expensive imports could prompt American consumers to buy second-hand goods and have goods repaired instead of throwing them away. It is also conceivable that high-quality products from domestic manufacturing could outstrip imported "disposable" goods. This new demand could then actually lead to the creation of new jobs in the US, which is one of Trump's main goals.

3. New regulation rather than deregulation

Trump is also a vocal supporter of deregulating the US economy. This should give investors interested in the circular economy investment theme pause for thought, as new regulations are an important structural driver. But here, too, it is worth taking a closer look. A comparison by the consulting firm EY (see graphic below), for example, shows that regulations on the circular economy in the US are only in the early stages. Here, change is mainly due to private sector initiatives and evolving consumer behaviour.

Maturity of circular economy legislation

The relatively few laws affecting the circular economy are unlikely to be overturned any time soon. Regulatory change is generally a slow process, and it is not clear which legislative changes would have sufficient support given the narrow Republican majority in the Congress. In addition, these programmes are typically overseen by local governments. For example, the policy process for setting recycling targets has been primarily at the state and local level. However, there are a number of measures at the national level, such as parts of the Inflation Reduction Act (IRA) (see box below) or the limits on 'forever chemicals' PFAS, that are relevant to the investment theme and in the crosshairs of the new administration.

All of this suggests that the next four years will be characterised more by re-regulation, i.e. an adjustment of existing laws, than by the elimination of regulations. This is encouraging, but it would still be a missed opportunity: the bottom line in the US would be a status quo and thus a standstill.

Active management of circular economy portfolios required

To summarise: the circular economy is a very broad investment theme. It is influenced by secular drivers, of which environmental protection is only one. Economic independence, local job creation and consumer protection are at least as important. The various drivers ensure that the topic advances, but the pace of change is subject to change. The US has been a laggard regarding circular economy regulation and this will likely carry on during the forthcoming presidency.

It also means that our investment ideas in the country were not driven by regulatory decisions but rather by the emergence of profitable circular business models. From an investor's point of view, it is all the more important to keep an eye on these changes. Investing in the sustainably managed equity fund ‘Swisscanto (LU) Equity Fund Sustainable Circular Economy’ is one way of addressing the issue.

Investment theme «Circular Economy»: Insights