The circular economy not only allows us to live within planetary boundaries, it can deliver superior returns, new growth opportunities and access to preferential credit lines. The finance sector is increasingly getting behind this framework and is supporting businesses in their transition with significant growth in funds.
01 June 2021 • 4 min read
The Covid-19 pandemic has drawn our extractive global economy into an existential crisis. Environmental, social and governance (ESG) issues, once fringe considerations in corporate boardrooms, have accelerated up the agenda in the last two years to become an increasingly strategic imperative. Mounting public awareness combined with greater legislation means businesses’ licences to operate hinge more and more on the positive contribution they make to the environment and communities.
The circular economy provides a framework for achieving these non-financial goals while providing opportunities for new revenues and better growth. For instance, adopting circular economy principles in Europe, in the mobility, built environment and food sectors alone could offer annual benefits of €1.8 trillion in 2030. Based on three principles, all driven by design, the circular economy eliminates waste and pollution, keeps products and materials in use, and regenerates natural systems. Its relevance has become even more apparent in recent discussions about post-pandemic economic renewal, as policymakers and businesses look to address other urgent global challenges, such as climate change, biodiversity loss, and plastic pollution.
Based on three principles, all driven by design, the circular economy eliminates waste and pollution, keeps products and materials in use, and regenerates natural systems. Its relevance has become even more apparent […] as policymakers and businesses look to address other urgent global challenges.
Apart from responding to shifting customers’ mindsets and stricter legislation, growing evidence shows that implementing circular practices is good for businesses, and their investors. A recent study by the Ellen MacArthur Foundation, Bocconi University and Intesa Sanpaolo set out new evidence that circular economy strategies can de-risk investments and offer better risk-adjusted returns.
The world’s largest corporations and emerging innovators alike are already adopting circular principles to generate new sources of revenue, reduce costs, spur innovation and mitigate risks. For example, Renault offers remanufactured components and spare parts with as-good-as-new warranties to customers for prices that are 30–50% lower than for new replacement parts. Similarly, Danone has enhanced its supply resilience by investing in regenerative agriculture while also appealing to consumers interested in where and how their food is grown.
Applying circular economy principles to existing business models and products is progressively recognised as an investment in resilience and future growth; however, the shift can appear challenging. A reimagined relationship with materials and products can mean practical changes: innovative approaches towards supply chain collaboration, such as reverse logistics for reusable containers; disruptive technologies, such as digital resale platforms; and alternative business models, such as pay-per-lux lighting models; which all can be complex in the short term.
Encouragingly, as the opportunities are recognised by financial institutions, support for these transformations is becoming increasingly available for both mature and startup companies. In its latest investment round, for example, food system innovator Apeel, which has created a plant-based protective layer that keeps fruit and vegetables fresh longer without packaging, attracted $250 million. This doubled the company’s value to $2 billion and brought its total funding to more than $635 million.
Targeted financing activity for circular activities is taking off rapidly around the world. This June, BlackRock’s circular economy fund hit $2 billion in assets under management, reflecting steep growth in the area. Total assets managed through public equity funds dedicated solely or partly to the circular economy have grown more than 25-fold in just a year and a half, from $300 million at the beginning of 2020 to $8 billion by the end of June 2021.
Total assets managed through public equity funds dedicated solely or partly to the circular economy have grown more than 25-fold in just a year and a half.
Elsewhere in the finance system, dedicated banking products aimed specifically at stimulating the development of the circular economy are emerging in the market. Intesa Sanpaolo has a €6 billion credit facility to support circular activities and ABN Amro concluded nearly €850 million of circular economy deals from the beginning of 2019 to the end of 2020. Several companies started to link debt financing to circular economy KPIs, such as AB InBev’s $10 billion revolving credit facility with terms linked to the use of recycled material in its primary packaging.
Larger organisations are also testing creative ways to finance circular strategies in debt capital markets. For example, in February, fashion retailer H&M Group issued a €500 million sustainability-linked bond, which links pricing to a number of the company’s 2025 targets, including increasing the share of recycled materials used in its products to 30%. It was heavily oversubscribed. As less than 1% of materials used to produce clothing globally is currently recycled into new clothing, this commitment could be an unprecedented step towards a circular economy for fashion if it is achieved.
As well as bonds targeted at fashion products, there is increasing interest and investment in new innovative businesses. Clothing resale, for example, is projected to grow to more than twice the size of fast fashion by 2030, with market developments already supporting this projection. In the first half of 2021, online fashion marketplaces had successful funding rounds, including Vestiaire Collective and Vinted, and IPOs, such as by Poshmark and ThredUp. Smol, a subscription-based company selling concentrated surface cleaners in refillable bottles and other cleaning products, recently raised £24 million in funding, bringing its total investment to £32 million since its inception in 2018.
The question now is no longer whether climate change, biodiversity loss, and other ESG issues should be considered, but how they can be best integrated into business strategy.
Momentum is building behind the circular economy as companies and policymakers are increasingly joining the dots between economic recovery and tackling global issues. The question now is no longer whether climate change, biodiversity loss and other ESG issues should be considered, but how they can be best integrated into business strategy, strengthening financial objectives. The circular economy is a crucial part of the answer to that question, one that businesses and investors alike can no longer afford to ignore.
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01 September 2021 • 4min read