Goldman says these overlooked companies will play a key role in a more sustainable economy

Published Tue, Feb 7 20232:27 PM EST

It's going to take more than recycling to reduce the world's carbon footprint, Goldman Sachs analysts say. The firm views "inner loop" solutions — which include service-oriented companies that repair, use spare parts, share and refurbish items — as a "critical and deeply underappreciated opportunity" in the transition to developing a circular economy. As more companies look to develop sustainable business practices, the idea of a circular economy has gained traction in recent years , making room for investors to get in the space as well. A circular system incentivizes reusing and recycling materials in ways that minimize waste, and "inner loop" solutions reduce the demand for virgin resource extraction before recycling is needed, the firm said. In doing so, the lifespan of existing materials is increased. Limiting biodiversity loss "Transitioning towards a circular economy will be pivotal to decouple economic growth from resource consumption and is needed to solve for both net zero emissions and limiting biodiversity loss — a dual benefit that is often overlooked, in our view," Goldman analysts wrote in a recent research report on the topic. Goldman expects the shift to inner-loop business models to accelerate in the near future, driven by its sustainability and economic-related benefits. In terms of economic value, Goldman expects that higher costs of raw materials will push companies towards the "product as a service" model to alleviate their dependence on scarce resources, generate new revenue and higher margins, and allow customers to operate more efficiently. On the sustainability side, analysts see the rise of net zero movements in the past few years as a potential catalyst for companies and consumers to look towards service-oriented business models. Because a large percentage of global emissions are created from the use, processing and end-of-life treatment of products such as landfilling, incineration and recycling, transitioning to these models will help further reduce emissions, the analysts said. Reducing emissions Circular economy solutions could help reduce 39% of global greenhouse gas emissions, the report said, contributing to the decarbonization efforts needed to reduce worldwide carbon emissions to zero. They could also add $4.5 trillion in economic output by 2030 and $25 trillion by 2050. Goldman analysts highlighted several service-oriented companies that they view as drivers of the inner loop of the circular economy transition. The firm organized these companies into those that rent and share materials; maintain and prolong the useful life of materials; reuse and redistribute materials; and refurbish and remanufacture materials. 'Inner loop' companies Here are the companies Goldman identified, and what Wall Street thinks about them. Rent & Share: Goldman identified companies Rent the Runway , Herc Holdings , United Rentals and McGrath RentCorp as businesses employing the "rent and share" model, by renting out their inventories to customers. Although this model increases the use of products, it requires these companies to buy new items to keep their inventory running. After seeing a double-digit stock price fall last year, shares of apparel rental service Rent the Runway have gained more than 38% so far this year. The company is rated overweight with a target price of $5.85, according to FactSet. If the stock hits that target, it will have gained more than 29% from its close on Monday. United Rentals and Herc Holdings are seeing a similar boom so far this year, up more than 27% and 19%, respectively. Maintain & Prolong: The firm also named lighting manufacturer Signify and tire manufacturer Goodyear Tire & Rubber as companies with a "maintain and prolong" model that help predict failures in customers' items, optimize the need for maintenance and spare parts, and extend the life cycle of equipment. Both have ambitious sustainability goals. Signify aims to develop lighting solutions that double its circular revenues to 32% by 2025, while Goodyear has made significant progress toward its goal of creating a tire made entirely of sustainable materials by 2030. Goodyear's stock has gained 9.8% so far this year, a turnaround after shares fell more than 50% last year. The manufacturing company was under pressure from higher input costs. Its stock is rated overweight with a target price of $13.57, according to FactSet, or a 21.1% increase over its latest closing price. Analysts also called out Impinj and Honeywell as companies that help increase the efficiency and extend materials usage, while reducing waste. Impinj makes radio-tracking tags. Thes devices may be used to track inventory, which can minimize unsold items and ensure products like medication or food is used before it expires. The tags also help improve delivery routes to lessen fuel consumption and reduce emissions. Shares of Impinj have fared well over the past year, having gained nearly 36% in the past six months and 15.4% so far this year. Analysts rate the company a buy, according to FactSet. Impinj has an average target price of $128.86, which means the company stands to gain 4.2% from its close on Monday. Reuse & Redistribute: Goldman analysts named ThredUp as a viable "inner loop" solution with its fashion resale model, a business that plays into the increasing popularity of thrifting among younger shoppers who are trying to stay away from fast fashion. The so-called recommerce market grew twice as fast as the broader retail market in 2021 and is expected to reach $289 billion by 2027, according to a 2022 recommerce report by OfferUp . Shares of ThredUp have skyrocketed more than 57% so far this year, but are still down more than 73% in the past year. Analysts have rated the company as overweight with a target price of $3.40 per share, a 65% jump from its latest closing price at $2.06. Wells Fargo Securities and Wedbush Securities recently rated the company as a buy, according to FactSet. Kate Spade New York announced a resale program partnership with ThredUp on Monday, adding to the company's existing partnerships with major retailers J. Crew, Francesca's, and Reformation. The online resale company has added more than $88 billion to its market cap since the beginning of this year. TDUP 6M mountain Shares of ThredUp have gained more than 19% this month. Companies that either use reusable packing within their own business, or sell it, also play a vital role in encouraging sustainability, according to the report. Retailers like L'Occitane and Aesop sell refill materials to customers in lighter packaging, Tupperware sells reusable packaging and goods, and companies like Loop Industries and RePack provide reusable packaging to other businesses. On average, analysts have rated Tupperware overweight, according to FactSet, with a target price of $6.17, which would be nearly 48% higher than its $4.17 closing price on Monday. Tupperware 's stock price is up 1.8% so far this year, sliding into the green after its shares declined by 73% over the past year. Refurbish & Resell: Analysts included Caterpillar 's CAT Reman and Rebuilt program as a driver of the "refurbish and resell" model, as it cleans and remanufactures returned parts. In 2021, Caterpillar recycled 127 million pounds of material taken back for remanufacturing through its Reman program. The company aims to increase sales and revenue earned from this unit by 25% from 2018 to 2030. It has seen a 3% decrease in these sales since 2018, however, according to its 2021 sustainability report . Caterpillar 's stock price has edged up 5% this year, and gained over 25% in the past year. The company's stock has an average rating of overweight with a price target of $255.96, according to FactSet. That's only 1.8% above its close Monday.