The Impact of Circular Economy on Public Equity in Europe. Understanding De-Risking Effect and Risk-Adjusted Performance

Abstract

Circular Economy (CE) offers effective hedging of linear risks, shields financial actors from the risk of stranded values and promises to ensure persistent performance of businesses and portfolios without compromising financial returns. We tested these hypotheses of de-risking (H1) and superior risk-return combinations (H2) building a sample of 222 European circular shares focused on manufacturing, construction, energy and oil & gas industries for the period 2013-2018. We found that securities that score a higher level of circularity confirm both hypothesis, nonetheless as considered standalone or included in the fully diversified portfolio. This research provides the evidence of the positive relation amongst the degree of circularity with equity de-risking and superior risk-adjusted performance coupled with the development of a materiality based measure that quantifies the degree of circularity of a public stock.

Keywords: circular economy, sustainable finance, de-risking effect, risk-adjusted performance, circular metrics, public equity

JEL Classification: G32, G11, Q56, G39