What are the investment opportunities in the circular economy?
Investors are wising up to the benefits of recycling goods and services
What is the circular economy?
The term circular economy is one of those phrases that looks good on a business plan or on the cover of a shiny magazine aimed at entrepreneurs. Either that, or it conjures up images of recycled coffee grounds and distressed dining chairs. But, in reality, the circular economy refers the production of goods and services that reduce the consumption and waste of raw materials and energy – it's the opposite of traditional linear production models. Investors are starting to realise why the circular economy is important and how to make money from it.
This circular economy has been quietly building up for a number of years. With more than 159 million active buyers globally, eBay is one of the world’s largest online marketplaces and, although it’s changed direction since its foundation in 1995, it pioneered an interest in large-scale recycling. Etsy joined its ranks in 2005, followed by a raft of others.
The fashion industry regularly comes under fire over sustainability issues but it’s been one of the pioneers of the circular economy model. The second-hand fashion market in 2021 is valued at around $36bn, according to thredUP’s Annual Resale Report. This is expected to grow to $77bn by 2025. The report says that 33 million consumers bought second-hand products for the first time in 2020. There were also 32.6m first-time sellers, thanks to user-friendly mobile apps. Convenience and trust have attracted a new generation of second-hand traders.
In November 2019, Vinted, a site for consumers to sell and buy second-hand fashion, raised $141m in a funding round led by Lightspeed Venture Partners. The Lithuanian start-up attained a valuation of $1bn and now has four other firms onboard.
McKinsey’s Business of Fashion report, The State of Fashion 2021, said peer-to-peer social shopping resale app Depop saw a 300% year on year increase in items sold during the pandemic. Research from the Ellen MacArthur Foundation estimated that that an industry-wide move towards circular fashion could add €160bn by 2030.
The thredUP report found that one-in-three consumers care more about wearing sustainable clothes than they did before the pandemic and 43% prefer resellable over disposable garments.
AirBnB is currently building homes that are designed to be shared, not owned. IKEA has announced plans to offer furniture rentals in a bid to become a circular business by 2030 and clothing brands are now being created exclusively for RentTheRunway, an online service that provides designer dress and accessory rentals.
Policymakers are also wising up to the benefits of the circular economy. The Welsh government is consulting on proposals that aim to see the country move towards zero waste by 2050, including the reuse, repair and re-manufacture of products and materials. The London Waste and Recycling Board (LWARB) rebranded as ReLondon and is working with QSA Partners and fashion retailers, including Ted Baker, to develop a range of new circular economy models. The retailers – also including Farfetch and FW – are exploring more sustainable ways of operating through the 2018-launched Circular Fashion Fast Forward project.
Nick Oettinger is founder and managing director of The Furniture Recycling Group (TFR Group). He says that he believes automation will be a key focus in the future of the circular economy. “The mattress recycling industry is one sector that will hugely benefit from automation, as the traditionally time-consuming process of breaking down mattresses by hand overwhelms many recycling companies,” he says. “This often leads to mountains of mattresses being dumped in landfill or left in warehouses across the UK.” TFR is investing its own time and resources into systems to automate the mattress process but believes this is one area that could benefit from better investment.
Examples in the listed equities market include Decalia's circular economy fund, launched June 2018, BlackRock's Circular Economy funds, which launched October 2019 and most recently RobecoSAM’s, launched in January 2020.
Edinburgh-based private equity firm Circularity Capital is a specialist firm focusing exclusively on this area. Its inaugural fund, focusing on growth stage European circular economy “enablers”, was oversubscribed for its £60m final close in 2018, with commitments coming from a range of leading institutional and family office investors.
Circularity Capital has identified some key main circular economy areas:
- Product-to-product: that is businesses extending asset life or enabling multiple use cycles through maintenance, repair refurbishment and/or re-manufacture;
- Product as a service: business using “PaaS” or innovative lease/hire models to enhance asset productivity and deliver superior customer solutions;
- Waste to product – business up-cycling waste material flows into higher-value products and materials;
- Circular design: those businesses that unlock value through optimising the design of products or materials to enable recycling, refurbishment, maintenance, reuse or biological restoration;
- Enabling data solutions: business leveraging data to drive resource productivity including through extending asset life, enhancing utilisation, enabling multiple use cycles and reducing waste.
ZigZag, backed by Circularity, specialises in handling ecommerce returns for retailers such as Superdry, Boohoo, GAP, Selfridges and many others in the fast fashion space. ZigZag’s mission: to get clothes back on the shelf quickly and keep goods out of landfill.
What next? Mass-acceptance of clothing for rent and charitable donations for re-use or repurposing. One example of the latter is Soles4Soles and its campaign with Timberland and North Face or Sheltersuit’s transformation of sleeping bags into suits for refugees and homeless people. Circularity Capital partner Jamie Butterworth says, “the right circular economy business models outcompete their linear counterparts and create more value (and decouple growth from resource constraints).” He adds, “Investors are starting to wake up to this and provide products to focus on these strategies.”