Thematic Funds: Boost for the Circular Economy Thanks to New Recycling Regulation

Since February 11, it is game on. On this key date, the European Packaging Regulation (PPWR) came into force. It applies to packaging and packaging waste in the EU and sets binding and highly ambitious targets. For example, packaging must be designed for recycling by 2030 and be recycled at scale by 2035. The provisions will become generally applicable in the member states from August 12, 2026.

Investors interested in thematic funds and the sustainable investment theme of the circular economy should take note. In addition to responding to environmental pollution, resource scarcity, and the struggle for economic independence, regulation also proves to be an important growth driver for the investment theme.

What is the significance of the 4Rs for the circular economy, and how are they reflected in PPWR?

To recap: The currently prevailing linear economic model is increasingly being questioned due to its environmental impact and the scarcity of natural resources. The circular economy offers a way to address this imbalance. Following the motto of the 4Rs "Reduce, Recycle, Reuse, Replace" (see below), the paradigm shift could help decouple economic growth from raw material consumption and unlock additional potential. As it turns out, the PPWR regulation could help address several of the Rs.

4R: The circular economy concept, which is important when investing in thematic funds

How can the PPWR directive support the circular economy?

PPWR will considerably change how packaging is designed, consumed, and disposed of in the EU across all value chains.

• Promote sustainable packaging: The volume and weight of packaging will be reduced, and limits for high-risk substances will be set. Such limits will also apply to the forever chemicals PFAS from 2026.
• Reduce packaging waste: The PPWR intends to reduce the amount of packaging waste generated in the EU, introduce restrictions on what packaging can be used, and promote reusable and refillable packaging solutions. From 2030, target values will apply to avoid packaging waste, with special attention to waste from online commerce. Moreover, there will be a ban on single-use packaging such as plastic packaging for groups of goods, fruits and vegetables, and lightweight plastic carrier bags.
• Recyclable packaging: Manufacturers must meet targets for the recycling content of packaging, and by 2030, all packaging must be designed for recycling. The recyclability of packaging will be expressed in performance classes. The PPWR aims to make all packaging on the EU market recyclable in an economically viable way by 2030.
• Standardize labeling: Harmonized labeling requirements in the EU, standardized indication of the recycled content of packaging.

Which actors are held accountable by PPWR in favor of recycling and the circular economy?

The main burden falls on the private sector, particularly the packaging and import goods industries. They have to design packaging to be recyclable in the future, and the conformity of new packaging will be checked before market introduction. Single-use packaging is heading towards a ban, bringing the search for sustainable alternatives to the forefront. Economic actors are responsible for achieving reuse targets across the entire supply chain.

Meanwhile, the EU member states are required by the regulation to set national targets for waste reduction, recycling rates, and reuse and to enforce violations of the regulation. For example, by the end of 2025, member states must recycle 75% of the paper and carboard packaging, 70% of glass, 50% of aluminum and plastic. Moreover, by 2029 member states must collect and separate over 90% of the single use PET bottles and beverage cans. By early 2030, at least 40% of transport packaging must be reusable.

Net-net, the focus is on reducing the amount of packaging waste: The total amount of packaging waste generated per capita, in each country, should decrease by 5% by 2030 compared to 2018 levels. By 2040, a reduction of 15% is targeted.

Why don't conventional recycling systems solve the problem for the circular economy?

What does this mean for investors interested in thematic funds focused on the circular economy? If the 4Rs (Reduce, Reuse, Recycle, Replace) are taken as the basis, recycling and replacing appear to be the obvious beneficiaries of the PPWR goals.

However, when it comes to plastic, conventional mechanical recycling systems are unlikely to meet the ambitions of the regulation. Aside from certain easier-to-recycle products like recovered PET (R-PET, where PET bottles are turned into PET bottles), collecting plastic waste from end consumers is often challenging. Ultimately, even in PET recycling, a significant portion of the product is lost. This could lead to increased demand in the following three areas:

• Advanced recycling solutions: These involve breaking down plastic waste into its chemical building blocks and then reassembling them into equivalent or higher-value end products, including new plastic. Such technologies are still in their infancy; leading companies in this field include the Danish company Novonesis and the French biochemistry firm Carbios. They are working on an environmentally friendly, enzyme-based recycling technology that aims to infinitely recycle not only PET bottles but also polyester clothing.
• Alternative packaging: Paper, aluminum, or biodegradable plastics could benefit from the shift away from ubiquitous plastic. For example, the US company Graphic Packaging Holding Company GPK, which specializes in paper and cardboard packaging, expects additional growth of 2 to 4% for its European business due to the substitution of plastics. The American packaging manufacturer Crown Holdings is well-positioned in aluminum and could be a potential winner in the shift from PET bottles to aluminum cans. The Dutch company Corbion, thanks to a joint venture with the French energy company Total, has become a leading manufacturer of polylactides (PLA), a bio-based (made from renewable resources) and biodegradable polymer.
• Recycling facilities: Companies that build and provide recycling facilities should also benefit from the high planned collection rates. The Norwegian Tomra Group, for example, is a market leader in the production of reverse vending machines (RVMs), which are needed to achieve the collection rates targeted by PPWR of over 90% for single-use plastic bottles and cans by 2029.

Why do thematic funds offer advantages for investing in the circular economy?

Looking at the entire investment theme of the circular economy, packaging is one of several sub-areas. The drivers of the circular economy, of which regulation with directives like PPWR is just one, are subject to constant change. Therefore, when investing in the circular economy, diversification into other sub-areas and in-depth expertise are essential. Accordingly, dedicated and expert-led sustainable thematic funds, such as the "Swisscanto (LU) Equity Fund Sustainable Circular Economy," can offer advantages when investing in this theme.

What are the takeaways for investors interested in the effects of PPWR, recycling, and the circular?

• The EU's PPWR regulation sets binding targets that promote recycling and the circular economy.
• The circular economy, and particularly the companies providing more sustainable packaging, as well as the recycling sector, could benefit from PPWR.
• Diversification and expertise argue in favor of thematic funds when investing in the circular economy.
  

Investment theme «Circular Economy»: Insights