Unravelling how to invest in the circular economy
Over the last few years there has been a wealth of research into the economic windfall a "circular economy" could bestow on those that adopt a zero waste model.
One landmark 2015 study from the Ellen MacArthur Foundation suggested if Europe were to adopt a more circular economy it could expect to receive $2 trillon in net benefits. Separate research indicates a circular economy could boost U.K. GDP by $32.2 billion and create 205,000 new British jobs, not to mention potential further commercial benefits for specific industrial sectors.
But how do we translate these impressive figures into an on-the-ground revolution in manufacturing, consumption and recycling? Jamie Butterworth, former chief executive of the Ellen MacArthur Foundation and now a founding partner at Circularity Capital, believes the answer lies in investors stepping up to enable small and medium-sized businesses (SMEs) to enter the nascent marketplace.
Speaking to an audience of financiers at an ING Capital event in London last week, Butterworth said while working at the Ellen MacArthur Foundation he became convinced finance was crucial to unlocking the economic potential of the circular economy. "I became more and more convinced that outside of education and policy ... finance was key," he said.
He explained finance markets are traditionally very good at looking backwards and projecting future returns based on past performance, but there was a real need for specialist circular economy investors to demonstrate the kind of returns circular business models could offer in the future.
"I became utterly convinced there was an opportunity to create a fund, to firstly support the European SME ecosystem by actually raising money ... but secondly to act as a catalyst to other investors to demonstrate exactly how much value the circular economy is creating in the market," he said.
While big corporates may have the backing of a hefty balance sheet to finance investment in circular projects, smaller firms tend to need more investor support to deliver a step change in how they operate. And alongside broad SME needs such as access to capital and industry knowledge, circular economy SMEs also tend to need specialist investment advice, according to Butterworth.
For example, if its model is based on extending the life cycle of a product, an investor needs to be experienced in valuing goods for re-use and refurbishment — not something usually taken into account by the traditional investor.
Investors and SMEs in this space also need to be familiar with a broad scope of emerging regulatory, legal and financial implications.
For example, if a company is moving from turning a product into a service — such as Philips, which is moving from selling LEDs to providing lighting as a service at Amsterdam's Schipol Airport — it needs to consider the legal and financial implications this would have on the business model. "These businesses go from selling a product and getting the cash for that product immediately, to having to finance very significant asset value on their balance sheet," Butterworth said.
But for investors that are tempted by the potential of the circular economy, Butterworth highlighted some key ways circular business models can drive value — and ultimately investor returns.
One core value opportunity lies in increasing the use of an asset — how much of the time it is deployed in value creation. For example, the average car spends 97 percent of its life parked on the street or in a parking spot. But apps such as Uber and Zipcar allow multiple people to access a single asset (a car) when and where they need it, meaning that it remains in use and delivering value for longer than a vehicle with just a single owner.
"We've seen an explosion in these business models recently," Butterworth said. "It's about unlocking more of that value, and simply smartphones and knowing the real time location and demand patterns of products is increasing that very significantly across the economy, not just in the business-to-consumer sector, but also in the business-to-business sector."
Secondly, firms are starting to be able to take an asset — a material, component or product — and give it a second lease of life. Butterworth highlighted the case of Renault, which now remanufactures its vehicles' drive trains, engines and gearboxes into the same condition as a new product. "When they do that they use 80 percent less energy, 70 percent of the original materials, and it's the most profitable part of Renault," Butterworth said.
Finally, Butterworth said there is also a clear opportunity to harness nature to develop effective circular economy models. "[Living systems can] take inputs, create those into a biological product, and then use that to create value in the economy either as feedstock, anaerobic digestion or cascaded over a series of uses."
Using these opportunities, Butterworth suggested companies can improve customer relationships, provide solid, stable earnings projections, reduce supply chain risk and boost a firm's overall valuation. "For investors, it's creating a real investable opportunity," he concluded.
If the circular economy is to move out of the confines of enthusiastic think tanks and a few pioneering businesses, it needs the backing of the investor community to make it happen. For a brave investor willing to take a leap of faith, it seems lucrative opportunities await.