Spotlight on the importance of a circular economy

“With an increasing population that could reach 9.6 billion by 2050, we will need almost three planets to sustain our ways of living.” – One Planet.

What is the ‘circular economy’?

The concept of ‘circular economy’ embodies a sustainable economic paradigm aimed at enhancing resource efficiency, minimising waste, and decoupling economic growth from resource depletion. Unlike the conventional ‘take-make-waste’ linear model, which has fuelled economic expansion but also unsustainable practices, the circular economy model advocates for a regenerative system of growth. This system seeks to minimise resource input, waste generation, and energy loss through the principles of ‘reduce, reuse, recycle, recover’, the four ‘Rs’.

We believe that the circular economy presents substantial opportunities for risk mitigation and revenue generation, effectively addressing the weaknesses of the traditional linear model. By reducing dependency on finite resources and minimising waste, investors can hedge against resource scarcity and price volatility. Recognising these benefits is crucial to safeguard the long-term value of investments while also contributing to sustainable development goals.

To assist investors navigate these opportunities, we introduce our blog series on the circular economy. The series commences with this introductory blog, focused on exploring the significance of circular economy principles and their relevance to investors, and then delves into three specific areas:

1. Climate, examining critical minerals and circularity concerns in renewables.

2. Nature, addressing the issue of plastics in oceans.

3. Social, exploring social issues within the fast fashion industry.

Through these discussions, we aim to underscore the importance of circularity in each domain, provide investors with insights into risk-mitigation opportunities, and issue a practical call to action in our final wrap-up paper.

Why does the circular economy matter?

The cost of remaining within a linear economy

The statistics presented above underscore a troubling trend in our current approach to production and consumption. This unsustainable pattern, if not addressed, poses substantial risks across various dimensions. As finite resources diminish, the costs of raw materials skyrocket, disrupting economic stability and inflating production expenses. This economic strain perpetuates a cycle that not only impacts financial metrics but also exacerbates broader ESG concerns. Among these, we believe the following to be particularly noteworthy:

Climate impact: The linear economy significantly exacerbates climate change through inefficient resource use and waste generation. Linear production models increase greenhouse gas emissions, contributing to more frequent and severe climate-related disasters. By reusing materials and designing products for longer life cycles, we can reduce the carbon footprint of production and consumption.

We will explore this issue in our upcoming blog focusing on critical minerals and renewables.

Nature impact: Linear production processes often result in significant pollution levels, contaminating air, water, and soil, and harming ecosystems and biodiversity. A 2023 OECD study revealed that plastic pollution in the oceans could triple by 2040 if current trends continue. Adopting a circular economy approach, can help preserve natural habitats and reduce pollution.

We will explore this issue in our upcoming blog focusing on ocean plastics.

Social impact: Linear models of production have been linked to exploitative labour practices, including modern slavery and child labour, particularly within supply chains. Additionally, resource scarcity can undermine human security by reducing access to essential resources such as food, water, and energy, while also driving up costs. Projections indicate that by 2030, global demand for food, oil, and water will rise by 50%, 45%, and 30% respectively, placing further strain on supply chains. Meeting these fundamental needs may become increasingly difficult, potentially leading to social unrest and exacerbating inequality.

We will explore this challenge in our upcoming blog focusing on fast fashion.

The investor case 

“A Circular Economy could help add $4.5 trillion in additional economic output by 2030, and $25 trillion by 2050” – Waste to Wealth

Beyond its potential for substantial real-world impact, investing in circular economy solutions embodies a savvy financial strategy. It can serve to mitigate risks stemming from escalating resource scarcity, while also capitalising on the opportunities presented by the urgent imperative to change our production and consumption practices.

The investment industry has recognised this opportunity, with a growing number of funds and strategies dedicated to this area. In 2023, total capital invested in the UK’s circular economy reached approximately £2 billion. Venture capital accounted for 58% of transactions, followed by mid-market private equity at 21%. We anticipate this trend will continue to expand across other asset classes, driven by increasing public financing support, regulatory incentives, and de-risked capital. In this context, we outline below the key revenue-generating and risk-mitigating opportunities that we believe circular economy practices are likely to present.

Value creating opportunities

Risk mitigation opportunities

How can we achieve a circular economy?

Transitioning to a circular economy requires a collaborative approach involving a diverse array of stakeholders, including regulators, consumers, private investors, and NGOs. The success of this transition hinges on the synergistic efforts of these groups, each contributing unique actions to foster a sustainable economic system.

Among these, investors hold a pivotal role. At Isio, we believe that investors’ influence and strategic decision-making capabilities can drive significant change by promoting investments aligned with circular economy principles. Below are some ways in which they can achieve this: