Unlike traditional linear models, which follow the ‘take, make, break’ approach, in a circular economy:

Our motivations to participate in the Circular Economy remain unchanged— we see it as both an economic opportunity and a moral imperative. As outlined in our first article on the topic, circular business models should grow in adoption due to three major (and inter-related) factors:

• The planet needs it: The effects of climate change and the associated biodiversity challenges have been in the spotlight for years and are increasingly well understood. Yet, rapid industrialisation of emerging economies and the mass consumption of developed countries provide further momentum to the current wasteful model, driving greenhouse gasses (GHGs) ever higher. Thanks to innovation, renewable energy is more accessible than fossil fuel alternatives in more than two-thirds of the world (How The Circular Economy Tackles Climate Change, Ellen MacArthur Foundation). But this is not sufficient. Even with significantly improved energy efficiency in buildings and transport and a wholesale move to zero-carbon electricity sources, emissions from production of materials alone (e.g. metals) will exceed the climate targets for this decade (according to Ellen MacArthur Foundation, 45% of GHGs are associated with the production of goods and management of land). Therefore, switching to a circular approach, which improves utilisation of materials and decouples growth from the consumption of resources, will play a vital role in meeting our climate commitments.
• Intensifying regulatory response: Government engagement and regulation are catalysing circular economy activity. For example, in 2018, the European Commission adopted initiatives focused on waste, including an EU target of recycling 70% of packaging waste by 2030; the reduction of landfill to a maximum of 10% of municipal waste; and formal requirements for member states to tackle food waste and marine litter.
• The rise of the conscious consumer: Concern about plastics has catalysed consumer expectations and government action regarding sustainability. Extensive media coverage regarding the vast quantities of plastics disposed of in landfill and the world’s oceans has raised consumers’ awareness and scrutiny of companies’ outputs. Social pressure is yielding positive results — an academic paper published in May 2020 established that the positive image of recycled products is the most important driver of consumer acceptance. Given the growing consumer appetite for sustainable offerings, those will attract a considerable portion of spending in the future.

Taken together the above factors yield an attractive financial opportunity.

In financial terms, the current linear economic model is resulting in more than trillion dollars being wasted (Ellen MacArthur Foundation). In London alone, the London Waste and Recycling Board estimates that the transition to a circular economy could release as much as £7bn in net benefits annually by 2036. This suggests circular businesses can benefit from both a new greenfield opportunity (utilising value that is being wasted today) and the ability to capture market share from existing businesses due to the shift in consumer preferences and behaviours.

Accelerating the transition to circular economy

As we’ve discussed previously, we see the circular economy as broader than just recycling — it is a cross-cutting theme that touches virtually all sectors of the economy. Hence, when assessing circular opportunities we are guided by Accenture’s five circular business models: 1) circular supplies, 2) resource recovery, 3) product life extension, 4) sharing platforms, and 5) product-as-a-service.

Over the past year, we were able to further sharpen our approach. Our experience suggests that achieving large-scale impact requires a more wholistic transition to new economic models. If investors were to focus only on businesses with a directly-circular product or service, the transition would be slower and possibly have a reduced impact.

Technology and financial capital are key to unlocking this larger opportunity:

• Digital technologies are enabling new circular economies and accelerating progress towards them. This mirrors previous economic shifts, such as cloud computing and mobile-enabled digital marketplaces and the birth of the sharing economy. Emerging technologies such as AI, the ‘Internet of Things’ (IoT), and decentralised systems are enabling and accelerating the transition to our circular future. For example, ML-powered autonomous systems underpin new sharing economy models; IoT is critical in product-as-a- service offerings and enabling product life extension at scale; decentralised technologies are important in the context of circular supplies and resource recovery models.
• Financial services are also a critical component of this transition. New funding models and methods of value transfer have a profound role to play in incentivising, enabling and tracking the transition to more circular models. For example, green finance and impact investing; new payment models (machine-to-machine, pay-per-use); new marketplace models (C2C and C2B); replacing money as the sole medium of exchange; auditing and accountability.

We look to support all types of participation in the circular economy

Most sectors have complex value chains where migration to a more circular model requires change from multiple participants. Thus, in addition to the companies directly employing a circular model, other businesses support that value chain or provide key components that allow the creation and wider adoption of those models.

We believe this is best summed up in the matrix below (the examples are from MMC’s past and present portfolio). Essentially, we are interested in three broad categories of businesses: 1) those employing circular business models, 2) those participating in the circular value chains (e.g. waste reduction), and 3) those enabling and accelerating adoption (e.g. enabling technologies such as computer vision).

Some businesses provide multiple parts of the chains. For example, our portfolio company, Qflow, (1) directly increases the proportion of material waste that gets recycled in a construction site; (2) helps large construction companies to understand the flow of materials across their sites; and (3) enables a wider industry shift by creating auditability and enabling new contractual arrangements.

Sector agnostic approach to investment but seeking to invest behind catalysts that can accelerate the transition to circular models

As emphasised above, we consider the Circular Economy to be a cross-sector theme. However, the adoption of circular business models is not homogeneous across industries. The most common factor hindering progress is the lack of sufficient economic incentive to transform. Consequently, enterprise and institutional investment in circular initiatives have not developed as rapidly as hoped.

Policy action, consumer behaviour and other externalities (e.g. Covid-19) can all serve as catalysts for change. We are focused on determining those catalysts and backing companies that benefit from the acceleration in adoption of more sustainable models. Our recent investments in the fashion and food supply chains, construction tech, and recycling tech illustrate this approach well:

• The fashion supply chains need transforming — the fashion industry contributes 2.0% to 2.5% to global GDP but has a disproportionately large environmental and social footprint — share of global emissions (5% to 10%), global freshwater extraction (about 5% to 7%), industrial water pollution (nearly 20%), and global waste produced (about 4%) (Fashion for Good, BCG). We see Covid-19 as a clear catalyst for companies to reconsider the structure of their global supply chains and build resilience against future shocks. Fashion brands will need to operate with greater flexibility across the value chain, cutting down go-to-market times and adapting swiftly to consumer trends and needs. In 2019, we invested in Unmade — a pioneering fashion-tech company that’s reducing waste in the fashion supply chain by enabling ‘demand-driven’ creation.
• Food waste requires more decisive action — WRAP (Waste and Resources Action Programme) estimates that c.22% of the food that is purchased in the UK ends up as waste. This is responsible for 25m tonnes of GHGs (6% of the 2019 emissions). 70% of that waste is avoidable. In 2018, the UK government pledged £15m of funding to tackle food waste and the Mayor of London has adopted the UN’s Sustainable Development Goals to help cut food and associated packaging waste by 50% by 2030. Further policy action, as well as shifts in consumer preferences, will catalyse acceleration in these trends. Opportunities to reduce food waste exist at every point of the lifecycle — designing of menus, sourcing ingredients, preparing and servicing meals and managing food waste. We recently backed an online fish marketplace connecting ports in the UK to any restaurant, supermarket or wholesaler. This results in a less wasteful economy where local produce can be sold domestically reducing the needs to import fish. It also enables real-time visibility of fish supply in UK waters, enabling better management and protection of this naturally-circular resource. Our portfolio company, Gousto, also actively contributes to reducing food waste.
• Construction is moving towards more sustainable models — Eurostat estimates that the construction sector is responsible for over 35% of the EU’s total waste generation and 5–12% of the GHGs. Accordingly, the European Commission is preparing to respond by outlining a Strategy for a Sustainable Built Environment. Increasing regulation and risk of reputation damage will catalyse action to reduce the environmental impact management in construction. Corporates are increasingly implementing “self-controls” requiring projects to meet internal targets. For example, Skanska have set up ‘Deep Green’ with the aim to have near-zero environmental impact and to reduce long-term operating costs. Our recent investment, Qflow, is working to accelerate these secular trends. Qflow, is deployed on construction sites to monitor flows of materials in and waste out. Its platform allows sites reduce waste, maximise the proportion of waste sent to be recycled, and enables better data and contractual requirements in this market.
• Local recycling comes to the fore — Recent changes in manufacturing policies at some emerging markets are prompting developed countries to rethink their approach to waste export. China’s “National Sword” policy, enacted in January 2018, banned the import of most plastics and other materials. By that time, the nation’s recycling processors had handled nearly half of the world’s recyclable waste for the past quarter century. Following this policy, the UK had started sending its recyclable waste to Malaysia instead. This has not worked out as well as hoped with the country rejecting 1,000’s of containers of waste, often because the underlying quality of the waste is not good enough to recycle. Therefore, the waste management industry faces urgent need to improve the quality of its recyclable output and find more home-grown solutions to process and use the waste. One of our recent (but not yet public) investments at MMC aims to alleviate these challenges by developing ultra-low-cost, rapidly deployable, decentralised, scalable, digital & fully-automated robotic sorting solution. It can be deployed at local mini material recovery facilities such as those at airports, for example.

Beyond investment, we are also contributors to this important movement. As a fund, we seek to catalyse support for, and participation in, the move to a circular future. We are also constantly looking for opportunities to strengthen our own ESG commitments.

If you’re an early stage company helping us move to a circular future, get in touch to see how we can accelerate your journey.