Financing the Circular Economy
Money makes the world go round
Everyone who works within the circular economy recognises that system change will not happen easily or quickly. The required tasks of innovation, change management, the opening of new markets and future proofing business models all have one thing in common – they require lots and lots of money.
The rate of new circular products and technologies coming to market seems to be gaining momentum continually. However, despite being a global financial centre, the UK’s finance system has not produced innovations to finance the circular economy at the same pace.
Concept or concrete
Whilst the concepts of green and socially responsible finance have started to attract substantial allocations of capital, the UK lacks significant dedicated capital to support the circular economy. There are some understandable reasons for this. One issue is that the circular economy is a broad-ranging concept rather than an easily identifiable and quantifiable sector – Banks like to lend against assets and contracted revenue, not nebulous concepts that can be interpreted in different ways! Perhaps there is an issue with the language used to describe the circular economy – we rarely hear about the value creation opportunity, which is ultimately what investors are looking for. That value opportunity is out there – the recent “Achieving Growth Within” report released by our friends at Systemiq identified a €320bn investment opportunity, but more work needs to be undertaken to translate that macro picture into easily identifiable opportunities.
Equally, it would be helpful if more companies started to report on their income and profits generated by circular products – it is very difficult for investors to assess an opportunity if there is no performance or comparable data available.
Volume and scale
I would also argue that whilst the long-term investment fundamentals are strong in the circular economy, at a local level we still lack a high volume of scalable, investment opportunities. Many of the new circular economy business models and enabling technologies are relatively new and unproven, which makes it difficult for investors to effectively understand and price risk and deploy capital at scale. System change is also going to take time, something which is not really compatible with our current finance system. Most Venture Capital and Private Equity Funds have a 3-7 year investment horizon, yet many of the returns available within the circular economy are going to be harvested over a much longer time frame.
However, the UK finance industry has a long history of innovating to create solutions, so I have great confidence that once we can demonstrate good quality deal flow, the market will respond. In the meantime, there will be a need for public sector support to help finance the market and to create investment opportunities. LWARB is building a circular economy ecosystem in London, offering investment readiness and capacity building services to SMEs through our Advance London team, creating an accelerator that can help to commercialise the best new ideas and seeding new Venture Capital and Private Equity funds with a specialist circular economy investment lens.
Author: Stuart Ferguson