Waste management and circular economy have been the focus of Ehong Capital’s impact investment themes in recent years. Around this impact theme, Ehong has invested in the comprehensive treatment of industrial, agricultural and household waste, and the portfolio companies have created significant environmental impact while achieving sound financial returns.

Starting from the 3R principles and the three principles introduced by the Ellen MacArthur Foundation, which are generally accepted in both China and other major economies, this report analyzes and summarizes the common characteristics of Ehong’s portfolio companies in the field of circular economy, elaborates the impact metrics that fully reflect the basic principles of circular economy, and finally focuses on the two core metrics: “Greenhouse gas emissions reduced (tonnes)” and “Improved resource utilization efficiency (%)” while introducing their calculation methods.

The circular economy involves a wide range of sub-industries, and there is a lack of summary and synthesis on the environmental impact of the circular economy domestically and internationally. For example, the GIIN IRIS+ metrics system, adopted by mainstream impact investors in the world, primarily only focuses on the protection and comprehensive utilization of water resources in the circular economy. Therefore, the circular economy impact framework and metrics system proposed by Ehong is exploratory, and some of the conclusions are premature, aiming to start the conversation in the field and provide some reference for peers while discussing the environmental impact in the circular economy.

I.Basic Principles in Circular Economy

The circular economy follows the laws of ecology and economics, takes the efficient utilization and recycling of resources as its core, breaks the traditional production and consumption model of “production – product – waste”, and builds a sustainable cycle of “resource – product – renewable resource”. The development of a circular economy can effectively reduce the processing and manufacturing steps of products, extend the lifespan of materials and products, improve the carbon storage capacity of products, and reduce energy consumption and carbon emissions from the extraction of raw materials, processing of raw materials, product disposal and re-production.

Currently, China and major global economies generally adopt the Reduce, Reuse, and Recycle Principle (the 3R Principles) proposed by the German government in 1996.

  1. The “Reduce” principlefocuses on resource input and usage during production. The principle requires that the input of various types of resources, such as raw materials, energy, and water, are reduced through eco-design and cleaner production, so as to meet the production purpose or consumption demand, and thus achieve resource conservation and carbon reduction in the upstream of the value chain. Reduced resource inputs include direct reduction in the use of quantities and the use of more sustainable alternative materials.
  2. The “Reuse” principlefocuses on the lifespan and utilization efficiency of the product. The principle requires to extend the lifespan of products and materials, improve utilization of products and materials in the production process, so as to achieve the purpose of resource conservation and carbon emission reduction. Specifically, it requires to use the products repeatedly, or continue to use it after repair or refurbishment to prevent the product from losing its use value prematurely. At the same time, product manufacturers are also required to extend the service life of products as much as possible, rather than encouraging consumers to replace them frequently.
  3. The “Recycle” principle focuses on reusing the product after it completes its original use value. This principle requires that the conservation and substitution of primary resources can be realized through waste recycling and comprehensive utilization, so that carbon emissions generated by the mining, smelting and processing of primary resources can be reduced.

Entering the 21st century, the Ellen MacArthur Foundation (EMF) in UK has proposed a new set of principles for circular economy (the EMF Principles), emphasizing that the circular economy should also support the generation of renewable resources, promote soil health, and protect biodiversity.

  1. Design out waste and pollution:Thanks to the original design and material use of the product, consumers don’t have to sweat to much about how to dispose it, and even after it’s disposed as waste, few resources needed to avoid harm to humans and nature. Waste here includes greenhouse gases, toxic substances, non-degradable materials and more.
  2. Keep products and materials in use:While circulating products and materials at their highest value, we keep materials in use, either as a product or, when that can no longer be used, as components or raw materials. This includes introducing more efficient and diverse use of bio-based materials, which can continue to be recycled in the economy and the natural environment.
  3. Regenerate natural system:We restore and improve the natural environment, avoid using non-renewable resources, and protect and enhance renewable resources. This includes enhancing soil regeneration capacity, protecting biodiversity, and replacing petroleum energy with renewable energy sources.

The world’s major economies view the development of circular economy as the fundamental pathway to break the resource constraints, combat climate change, and cultivate new economic growth. The circular economy policies introduced by various countries also reflect the 3R principle or the EMF principles.

In order to promote the implementation of the major strategies of carbon peaking and carbon neutrality, the National Development and Reform Commission issued the “14th Five-Year” Circular Economy Development Plan (2021 No. 969) in July 2021, emphasizing the need to follow the 3R principles, and focusing on product reuse and resource utilization, proposing that by 2025, the output rate of major resources will be about 20% higher than that of 2020, the comprehensive utilization rate of bulk solid waste will reach 60%, and the output of recycled non-ferrous metals will reach 20 million tonnes. The output value of the resource recycling industry reached 5 trillion RMB.

II.Impact characteristics of Ehong’s Circular Economy Portfolio and Impact Framework

In recent years, Ehong has listed “Waste Management and Circular Economy” as a major impact investment theme. We’ve conducted research on related sub-sectors from top down, and followed the principle of putting equal importance on financial, environmental, and social value, in order to source investment deals. Our portfolio mainly covers five types of waste, namely rare earth waste, industrial solid (hazardous) waste, waste lithium battery, agricultural and forestry waste, and waste plastics, etc. As shown in table 1 below:

Table 1: Ehong’s Circular Economy Portfolio Companies

By analyzing the business and operation models, as well as the characteristics of recycling waste and product offerings of the above-mentioned portfolio companies and their impact on the downstream, it appears that Ehong’s circular economy portfolio has two major characteristics in terms of environmental impact. First, they produce a positive low-carbon environmental impact by recycling and utilization of the waste materials; second, their product offerings are mainly used in scenarios and fields with energy saving and carbon reduction effects. As a result, the impact metrics system synthesized based on the characteristics is highly consistent with the 3R principles and EMF principles of the circular economy. See Table 2 below for details:

Table 2: Comparison table for the basic principles of circular economy and related impact metrics list of Ehong’s investment in circular economy

According to the circular economy development plans under the national “13th Five-Year Plan” and “14th Five-Year Plan” , referring to some industry research reports, combined with Ehong’s investment research and practice in circular economy, we’ve summarized Ehong’s environmental impact logic model under the investment theme of “Waste Management and Circular Economy”:

The two core impact metrics in the logic model above are “Greenhouse gas emissions reduced directly by products or indirectly by downstream products (tonnes)” and “Improved resource utilization efficiency (%)”. They reflect basic characteristics of the circular economy and are in line with the current state of China’s circular economy market.

III. The Calculation Methods of The Two Core Impact Metrics of Ehong’s Circular Economy Investments

The calculation methods of the two impact metrics are developed after referring to the general guidelines from the National Development and Reform Commission, the public information of the National Bureau of Statistics and China Energy Administration, as well as the research reports from industry experts. Key data points are selected based on the operational data collected from Ehong’s portfolio companies with considerations of data quality and availability. The computational logic is in line with GIIN IRIS+.

  1. Greenhouse gas emissions reduced directly by products or indirectly by downstream products (tonnes)

Calculation method: Classify each step in the company’s upstream and downstream industrial chain. Then, measure the carbon emissions (or carbon emission reductions) brought by each step. Finally add up all of the carbon emissions (or carbon emission reductions) from each steps to obtain the net carbon emissions or carbon emission reductions of the life-cycle emissions of the company. Key steps include:

1)Calculate upstream carbon emission reduction, including greenhouse gas emissions generated by raw material extraction or raw ore mining, processing, transportation, etc., so as to calculate the upstream carbon emission reductions due to waste recycling.

2)Calculate the energy consumption (including electricity, natural gas, etc.) in the company’s production and operation process to calculate carbon emissions, where the source of energy should be distinguished, including but not limited to:

    • Direct energy supply from government (including the grid);
    • (clean) energy sourced from third-parties;
    • Energy supply from clean energy equipment setup by the company.

3)Collect direct carbon emissions data from the company’s production and operation.

4)Estimate downstream carbon emissions reductions:

    • Calculate the clean energy-related equipment (wind energy motors, electric vehicle motors, etc.) produced by downstream enterprises, so as to estimate the contribution of these devices in the production and use of clean energy (such as the annual clean energy production of wind energy motors, the total amount of clean energy used by electric vehicles per year);
    • Calculate the carbon emissions reductions (tonnes) by waste avoidance after using materials and products produced by the company.

5)Finally, add the carbon emissions generated by the company due to energy consumption and direct carbon emissions during production, and then the upstream and downstream carbon emission reductions are subtracted to calculate the net carbon emissions (or emission reductions) of the company’s life cycle.

For example:

  1. Improved resource utilization efficiency (%)

Calculation method: Improvement of resource utilization efficiency = (resource output rate after recycling – resource output rate before recycling) / resource output rate before recycling. Where the resource output rate = total product value (RMB) / actual consumption of main resources (ton).

This calculation method refers to the definition of the National Development and Reform Commission’s “Evaluation Index System for Circular Economy Development (2017 Edition)”, the National Bureau of Statistics, and the China Geological Survey’s “Research on Mineral Development and Utilization Efficiency Indicators”. We compare the resource output rate before and after recycling according to the amount of waste recycled, amount of material sold and average sales unit price of the invested enterprises in 2021 to obtain the improvement value of resource utilization efficiency.

For example:

Author: Ehong Capital