The rise of the circular economy

Investors are waking up to the need to tackle rampant waste.

Cutting greenhouse gas emissions has dominated the environmental agendas of policymakers and investors in recent years. Yet achieving a truly sustainable global economy will involve more far-reaching changes. With the Earth’s resources depleting rapidly, and consumers increasingly concerned by waste, a growing number of companies are looking for ways to build a circular economy.

Indeed, the massive misuse of resources under the prevailing ‘take, make, waste’ economic model has become impossible to ignore. Plastic packaging, which may be used for only seconds but linger in the environment for centuries, is the best-known culprit. But other sectors, from consumer electronics to agriculture, are also guilty of wasteful practices. By some estimates, around one-third of all food is wasted, at a cost of up to $1 trillion annually – and food waste accounts for as much as 10 percent of total global greenhouse gas emissions.

A circular economy, by contrast, is “restorative by design”, says Jamie Butterworth, founding partner at Circularity Capital, a PE firm that specialises in backing circular businesses. Contrary to what might be assumed, advocates of circularity believe recycling should be used only as a last resort. Instead, the focus is on designing products using materials that are environmentally benign, or on delivering products on a subscription basis so that products are reused multiple times.

Investor interest

Butterworth states that investors increasingly see circularity as a means to deliver a positive environmental or social impact alongside financial returns. “We think that the circular economy is actually a compelling model where it’s very co-linear in the way that it drives the financial value and the way that it creates the impact,” he says.

Products-as-a-service businesses are certainly achieving rapid growth across various sectors. A report published by analytics company ISS ESG in July 2022 noted that seven companies offering resale and rental services for clothing have reached valuations of at least $1 billion since 2019. The report suggested that resale and rental businesses could make up 23 percent of the fashion market by 2030 – up from just 3.5 percent today.

Mirtha Kastrapeli, executive director at ISS ESG, notes that while the growth of circular businesses is ultimately driven by consumer demand, regulatory pressure in some jurisdictions is likely to accelerate the shift to circularity. “There’s definitely regulatory aspects that are encouraging companies to start introducing strategies that have circular-economy principles,” she says. The EU adopted a circular economy action plan in 2020 and the European Commission is working on an extension to its taxonomy to define what activities can be defined as contributing to a circular economy.

Establishing a truly circular economy will clearly be a long-term process. But the rising costs of materials and energy, along with global supply chain disruption in the aftermath of covid, point to the need to reduce waste and make processes more efficient. “Reducing waste [and] keeping materials in use… really can support profitability and margins over the long term,” says Kastrapeli.