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Future Returns: Investment Opportunities in the Circular Economy

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Investors are increasingly dividing investment opportunities into two groups: those that are part of the traditional linear economy in which products are created, used and then disposed of; Or the new sustainable circular economy. And they are increasingly choosing to deploy capital to companies in the latter group.

Since 2019, assets in public equity funds earmarked for the circular economy have increased 28 times from $ 300 million to nearly $ 9.5 billion by the end of November; Bond investments rose 500% over the same period; and the number of private equity funds more than tripled, according to the Alan MacArthur Fund, a UK-based non-profit group.

As its name suggests, the circular economy is a sustainable closed-loop model in which companies are committed to reuse, recycling, reuse of materials, in order not to produce waste.

Instead of a niche in social environmental investment and governance (ESG), the circular economy is a lens through which investment opportunities can be increased, says Ron Kaplan, founder and CEO of Circulate Capital based in Singapore, a private investment firm with several U.S. corporations. $ 106 million in its Circulate Capital Ocean fund, which invests in South and Southeast Asian companies focused on improving waste recycling and management capabilities, and $ 25 million in its climate technology fund Circulate Capital Disrupt.

Sustainability, big and small

Investment opportunities in the circular economy operate within a range of small technology companies that develop new materials, products, or processes to help advance the closed-loop ideal, or large companies committed to moving to a sustainable model.

Closed Loop Partners of New York, a venture capital firm, is investing in startups like Dimpora, which manufactures sustainable membranes for waterproof clothing, and exceeded its $ 50 million capital target in December.

Ricron Panels, a Gujarat based company, India launched in 2005, turns plastic waste into durable materials that can be used to make furniture or as a plywood alternative in building construction. The company is part of the private investment firm Circulate Capital’s Ocean Fund.

At the other end of the spectrum, some big brands are changing working methods to fit a sustainable model. Adidas sells a line of shoes and clothing made from recycled ocean plastic. Brussels-based global chemical company Solvay is turning waste into raw materials in many industries, from healthcare to technology. And automobile maker Boulogne-Billancor, Renault, based in France, has opened the first plant to produce a vehicle dedicated to circular practices, such as remanufacturing components and using recycled plastic.

The motivation of investors to align the capital line with their values ​​has been growing for years as there is a growing sense of urgency to solve global environmental problems. Assets in Environmental, Social and Government Investment (ESG) increased from $ 22.8 trillion in 2018 to more than $ 35 trillion last year, and are on track to reach $ 50 trillion in 2025, according to the Washington-based Global Sustainable Investment Alliance. straight flow

Focusing on ‘E’ in ESG

Investing in the circular economy is increasingly seen as a way to advance the ‘E’ in the ESG.

While much attention is being paid among ESG investors to the transition to renewable energy to reduce greenhouse gases, this change will only address 55% of harmful emissions, according to the Alan MacArthur Foundation.

The remaining 45% are generated from the production of food and products – which may be eliminated with the adoption of a circular economy, according to the fund.

The case of investing in a circular economy deals as much with investor values ​​as with investment performance.

According to a study by the University of Boconi in Milan, the more circular the company, the lower its risk of debt loss and the higher its adjusted risk returns.

Companies in the top quarter due to their “circularity score” – a measure of the strength of their circular practices and products – had a probability of .04% for a default over a period of one year and 0.91% over a period of five years, compared with .50% and 2.35% for companies in the quarter The bottom.

The study also found that for every 1% increase in the circularity score, the chances of a company’s adjusted return increased by 0.2%.

In order to move towards a circular economy, profound changes must be made in the materials used to manufacture products, how they are packaged and marketed, and finally, what happens to them once they are no longer needed. Improvements must be made both in the upper stage – the production and supply chain – and in the downstream stage when products are thrown in the bin.

Hence the ancillary funds of Circulate Capital – one for waste treatment, the other to help drive sustainable solutions in the supply chain, says Kaplan.

“Research finds that most of the plastic in the ocean comes from a handful of countries in Asia and Southeast Asia,” Kaplan says. In its Ocean Fund, it invests in companies that aim to divert plastic from oceans and waterways.

In its second fund, which focuses on upstream improvements, Circulate Capital Disrupt, “we found that most of the exciting opportunities come from developed countries, the United States and Europe,” Kaplan says.

Among them are [is]Arzeda, a technology company from Seattle that focuses on developing new materials that are applicable deep in the supply chain. Among about a dozen products in development is an enzyme based on bio – rather than synthetic – that can be used in detergents with cold water rather than hot water. The energy required for water heating contributes to carbon emissions.

How the underlying companies measure the impact depends on their business, but typically the three biggest metrics are the amount of plastic pollution avoided, tons of greenhouse gases avoided and the number of jobs created, Kaplan says.

His firm predicts that by 2030, Circulate Capital’s impact will include more than 13 million tonnes of plastic being diverted from the oceans, 17 million tonnes of greenhouse gases to be avoided and more than 17,000 new jobs created.

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