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What are the investment opportunities in the circular economy?

By Hazel Davis

Investors are wising up to the benefits of recycling goods and services

What are the investment opportunities in the circular economy?

What is the circular economy?

The term circular economy is one of those things that looks very good on a business plan and on the cover of a shiny entrepreneur magazine. Either that, or it conjures up images of recycled coffee grounds and distressed dining chairs. But the circular economy is the cycle of the production of goods and services that at the same time reduce consumption and wastage of raw materials and energy – the opposite of the old linear version. 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 strength for a number of years. With more than 183m 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 the ranks, followed by a raft of others.

The fashion industry regularly comes under fire for its sustainability issues and it’s been one of the pioneers of the circular economy model. The second-hand market is valued at around $24bn (£18.5bn, €22bn) according to thredUP’s Annual Resale Report. This is expected to double in the next five years. The report says that 56 million women bought second-hand products in 2018, up from 44 million in 2017 and points out that mobile apps and personalisation have made buying used clothes as easy as buying new ones. Convenience and trust have attracted a new generation of second-hand shoppers.

In November, Vinted, a site for consumers to sell and buy second-hand fashion, raised $141m in a round led by Lightspeed Venture Partners, passing a valuation of $1bn for the Lithuanian start-up.

The Business of Fashion report, The State of Fashion, 2019 suggests that resale is growing nine times faster than traditional retail, with research from the Ellen MacArthur Foundation estimating that that an industry-wide move towards circular fashion could add €160bn by 2030.

The thredUP report finds that 59 per cent of consumers expect retailers to create clothes ethically and sustainably and points out that resale satisfies two big demands of the Instagram generation; to be seen in new styles constantly and to be a sustainably conscious consumer. It stands to reason, then that circular economy companies are worth watching.

AirBnB (slated to go public this year) 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 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. Part of these proposals include encouraging the reuse, repair and re-manufacture of products and materials. The proposals include £6.5m in circular economy funding for local authorities and other publicly funded bodies.

The London Waste and Recycling Board (LWARB) and QSA Partners are working with fashion retailers, including Ted Baker, to develop a range of new circular economy models. The retailers – including Ted Baker, Farfetch and FW – are exploring more sustainable ways of operating through the 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 fund, 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, Topshop, GAP, Selfridges and many others in the fast fashion space. “Our mission,” says managing director Patrick Eve, “is to get clothes back on the shelf quickly and keep goods out of landfill.”

Eve says he is seeing huge opportunities around the second-hand apparel market particularly. “There is also a huge push around other business models such as clothing rental (Hirestreet, for example) and then charitable donations for re-use or repurposing – such as Soles4Soles and its campaign with Timberland and North Face or Sheltersuit who are reusing sleeping bags to make suits for refugees and homeless people.” ZigZag, says Eve, “is supporting all of these forms of businesses by helping to get goods back on the shelf quicker and to generate the data that allows businesses to take better decisions around their consumers, products, markets, suppliers and sales channels.”

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.”

FURTHER READING: The war against plastics could be a boon for investors

FURTHER READING: Sky launches $2m zero-waste shopping deliveries

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