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Sector / Consumer

How investors are taking advantage of developments within the circular economy

Momentum builds behind the circular economy as investors seek better growth while tackling global challenges, while innovation in this area is de-risking investments and delivering exciting risk-adjusted returns for investors.

As the circular economy becomes more widely understood as a framework to tackle global challenges – including climate change, biodiversity loss, waste and pollution – while offering new and better opportunities for growth, the financing to support it is rapidly taking off.

Circular economy strategies can be used to de-risk investments and drive superior risk-adjusted returns for investors. (Photo by drown_ in_city on Unsplash)

The circular economy is a systems solution framework based on three principles, all driven by design: eliminate waste and pollution, keep products and materials in use, and regenerate natural systems. And it is a concept that major asset managers and debt issuers are benefiting from.

This June, BlackRock’s circular economy fund hit $2bn in assets under management, a landmark figure that reflects the broader 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 $300m at the beginning of 2020 to $8bn by the end of June 2021.

Elsewhere in capital markets, the total volume of bonds issued to finance circular economy activities has grown significantly, now amounting to $37bn. This covers green bonds with ring-fenced proceeds as well as sustainability-linked bonds (SLBs). The latter instruments can be used for general corporate purposes and have pricing mechanisms linked to achieving predefined environmental and social goals.

Financing activity is growing steeply in sectors where the circular economy is gaining traction, with fashion being a foremost example. In February, fashion retailer H&M Group issued a €500m SLB, which was heavily oversubscribed. Its pricing is linked to a number of the company’s 2025 targets, including increasing the share of recycled materials used in its products to 30%. 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.

In vogue

As well as bonds targeted at fashion products, there is increasing interest and investment in businesses that provide clothing through new circular business models. 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 luxury-fashion marketplace Vestiaire Collective completed a €178m financing round, backed by multinational luxury group Kering and investment firm Tiger Global Management. In the same period, online second-hand clothing marketplace Vinted also raised €250m in a funding round led by Sweden’s EQT, and e-commerce platform Etsy bought peer-to-peer resale app Depop for $1.6bn.

Social marketplace Poshmark and online consignment and thrift store ThredUp both went public in the first half with a strong debut. Morgan Stanley – one of the major investment banks leading these two IPOs – recently joined BlackRock and Intesa Sanpaolo as a partner of the Ellen MacArthur Foundation, indicating its commitment to accelerate the transition to a circular economy.

Sustainability Matters: Ellen MacArthur on Building a Circular Economy

Beyond fashion, the circular economy is transforming a range of sectors, such as food and plastics. Nestlé, for example, is investing SFr1.2bn ($1.3bn) by 2025 to support the use of regenerative farming practices that help improve soil health, enhance biodiversity and mitigate greenhouse gas emissions.

In June, for the first time, more than 100 leading businesses, including Danone, Ferrero, Henkel, Inditex, L’Oréal, Nestlé, PepsiCo, Schwarz Group, The Coca-Cola Company, Unilever and Walmart, have publicly called for the introduction of mandatory, fee-based Extended Producer Responsibility for packaging schemes, recognising that without them packaging collection and recycling is unlikely to be meaningfully scaled.

Proven investor benefits

As the circular economy market develops across industries, questions around the relationship between the circular economy, risk and return are increasingly pertinent, and evidence is emerging of possible benefits. A recent paper by Bocconi University, the Ellen MacArthur Foundation and Intesa Sanpaolo, sets out new evidence on risk and performance, demonstrating how circular economy strategies can be used to de-risk investments and drive superior risk-adjusted returns for investors.

To take advantage of both the de-risking effect and better risk-adjusted performance, Intesa Sanpaolo has already integrated circular economy principles into its strategic plan and is developing its expertise and capabilities on the topic. It has adopted proactive circular economy credit policies and lending strategies, including the launch of a dedicated €6bn credit facility, and is engaging with international institutions, businesses, and academia to support the development of the circular economy market.

Policy backing

These developments in business and private sector financing are reinforced by policy action. The circular economy is one of the six environmental objectives that guide the European Commission’s sustainable finance work, including the taxonomy and sustainability reporting standards, which will impact companies and financial institutions alike.

Across the Atlantic, a regional coalition has been launched by the Inter-American Development Bank, the UN Industrial Development Organization, and other international partners to support Latin America and the Caribbean in transitioning to a circular economy. Led by a steering committee composed of high-level government representatives, the coalition will support access to financing by governments and the private sector, with emphasis on small and medium enterprises.

Momentum behind the circular economy is building, with businesses and governments joining the dots between economic recovery from the Covid-19 pandemic and tackling global challenges. The question now is no longer whether climate change, biodiversity loss, and other ESG issues should be considered, but how they can be addressed urgently through concerted action. The circular economy is a crucial part of the solution, providing a significant opportunity for investors.