Is Investment Portfolio Construction Sustainable in the Circular Economy Paradigm—The Case of ESG Investment?

A circular economy is a “closed-loop” economic process, in which raw resources, products, and services keep their value after being processed, incorporated into production, and used by economic agents. Reiterating CE towards investing and portfolio management, one can wonder what could be their relationship. The study looks at investment caveats when facing CE’s aim of a “closed cycle”-based economy. The authors bridge the gap between the POV of investing and its interpretation by circular economists as hazardous, exploitable, and speculative, through the concept of ESG investment. The research team gives examples of existing ESG investments, crafted to CE values, like for example Circular Economy Funds, analyzed and assessed on both investment characteristics and embodiment of CE principles. Custom portfolios are constructed with attention to measuring performance against the market and Blackrock. Also, the team studies specific KPIs of BlackRock and custom portfolios in terms of CE embodiment. The findings are as follows: 1. BlackRock is easily beatable by using simple portfolio construction strategies like Naïve Diversification or P/E Weight Scoring. 2. Weight Scoring fails at delivering additional returns over naïve diversification. 3. Lagrangian optimal weight portfolio underperforms against BlackRock 4. The top 33% of stocks in BlackRock are enough to outperform the whole fund.