GK Point of View: The Circular Economy and its investment potential

With an increasing number of deals being conducted in this space, GK consultant Milo Boyd takes a look at the potential of the circular economy for investors.

The circular economy – a system of trade which aims to increase the efficiency of resource use and reduce environmental impact, while developing the wellbeing of individuals – is increasingly being looked upon as an area that warrants attention from investors, and it seems that the concept is here to stay. A 2021 report published by BDO showed that the concept has been attracting a growing amount of investments – more than £1.5bn of capital has been directed into the circular economy since 2018. Of this funding, 33% of the deals have been conducted in manufacturing and industrial sectors and a further 33% has been directed to the food and drink sector, giving an indication of the breadth of opportunities available for investors. The upward trend in investment would indicate that these opportunities are only going to become more numerous as the UK continues to march towards a more sustainable future, and increasing numbers of organisations place ESG at the front and centre of their business operations.

Fundamental to this shift is the growing understanding of the economic returns that the concept of a circular economy can achieve across a variety of industries, notwithstanding the more obvious environmental benefits. For example, 2021 research from the Ellen MacArthur Foundation and Material Economics found that an adoption of circular economy principles into a system that addresses material use, shifting the focus to retaining and reusing resources and reforming our food system, can help to tackle 45% of Co2 equivalent emissions around the world, and found that profitability of investments can be significantly increased compared with non-circular investments.

Finance has rightly begun to seize on these findings, and this is reflected in the overall trajectory of investment into the concept, as investors strike away from the ‘take-make-dispose’ and instead increasingly seek ‘circularity’ in investment decisions. The optimisation of the UK’s resources can be both economically stimulating and encourage the scale up of markets that support the UK’s net zero ambitions, whilst simultaneously producing high – and crucially less risky – returns for investors.

It is important that the Government provides the right environment to encourage these investments to continue. The installation of a new government brings the prospect of a political and regulatory reset, and with it a new direction of travel for policy. A particular point of focus is what approach new the Prime Minister will take. Liz Truss, a self-confessed fiscal Conservative who is keen to hit the ground running, has vowed to bring about the biggest change to the UK’s economic policy for decades. It remains to be seen how Liz Truss will approach environmental policy, aside from conflicting statements to boost the green economy whilst simultaneously supporting fracking.

The circular economy is an important feature of the Government’s environmental strategy, as has been made clear in the 25 Year Environment Plan published in 2018, and the more recently published Net Zero Strategy. But there has been scant indication of how the new Prime Minister intends to build on these strategies and how she hopes to maximise resource productivity, reduce waste of resources, and to encourage an acceleration in the circular economy’s development. This is where the financial sector needs to proactively respond and not shirk its responsibility – finance can and should be a key lever in maximising the circular economy’s potential. It should be in the sector’s immediate priorities to establish a working relationship with the Government to achieve the environmental and financial benefits that can set the UK on a path towards economic growth and environmental sustainability. This will be of vital importance if the Government and the UK’s finance sector are committed to maintaining the UK’s status as a global leader for finance and climate action.

GK Strategy are experts in helping organisations understand the changing political landscape, and strongly recommend that business leaders quickly meet with government to discuss their priorities. GK is well placed to support finance leaders looking to connect with relevant stakeholders, get in touch with milo@gkstrategy.com for more information.