A new product geared to the “circular economy” meets the EU’s demanding regime for disclosures under article 9 of the Sustainable Finance Disclosure Regime (SFDR).
The Rize Circular Economy Enablers UCITS ETF (CYCL) identifies companies that can help the world move from linear consumption – which ultimately depletes finite resources – to circular consumption, which re-uses them. Of course, the circular economy is also interlinked with other sustainability objectives such as slowing climate change, and reducing waste, pollution and loss of biodiversity.
The companies selected need to meet one or both of two criteria defined by the EU regulator. They make a substantial contribution to “The Transition to a Circular Economy” objective, one of six under the EU Taxonomy of Sustainable Activities, either directly through their own activities, or indirectly by enabling other companies to do so.
To this end, Rize has selected the Foxberry SMS Circular Economy Enablers Index, which is specifically devoted to this EU taxonomy objective, to track. In turn, Foxberry make use of an expert, Sustainable Market Strategies, based in Montreal, Canada, which provides ESG research for various asset managers. SMS has developed a Thematic Classification to determine which companies should be defined as making a positive contribution to the circular economy, based partly on a 9 ‘R’ list of activities that covers a range of angles and dimensions beyond the obvious ones such as recycling: Refuse, Rethink, Reduce, Reuse, Repair, Refurbish, Remanufacture, Repurpose and Recycle. The methodology is quite nuanced in that the aforementioned list is actually a hierarchy, leading to a quantitative score.
This is quite an extensive process, which reflects the due diligence that must de demonstrated to report under SDFR 9. A number of managers have “downgraded” products from making disclosures under article 9, to making them under article 8, possibly due to fears of perceived or real “greenwashing” or possibly due to the evolving nature of the SFDR and taxonomy regulations.
The CYCL holdings include second hand car dealer, Auto Trader; steel maker Commercial Metals Company, which owns Americas Recycling, and agrifoods re-purposer, Darling International. This shows that an SFDR 9 product does not necessarily need to be invested in radical or new or unproven “blue sky” technology solutions – it can be about making more efficient use of resources within well established industries such as cars, steel and animal based foods.
An MSCI ESG rating is pending for the product.
A total expense ratio of 0.45% seems reasonable for this sort of product, which is initially listed on the LSE and Deutsche Boerse with a SIX Swiss Exchange listing pending.