Banks and other financiers award only 2 percent of funding to the circular economy. As a result, innovations with the biggest potential to transform the global economy, reduce risks and slash emissions are left on the table, according to the first Circularity Gap Report Finance, released June 30.
Moreover, only 4.7 percent of circular funding flows to “high-impact” innovations, such as in materials, modular design and regenerative production, the authors found. In addition, they note, innovators struggle to scale, getting support early on but later suffering the “commercialization valley of death.”
In all, circular investments totaled $164 billion between 2018 and 2023. And while annual investments peaked in 2021, recent figures suggest new momentum: Funding totals were 87 percent higher in the period between 2021 and 2023 than between 2018 and 2020.
“The transition towards a circular economy is crucial for value preservation and value creation in the economy at large and for individual businesses,” said Suzanne Kuipers, director of circular economy and product decarbonization and KPMG, in a statement. The firm worked on the report with Circle Economy and the International Finance Corporation.
A $2.1 trillion opportunity stands to be realized by 2030 if the transportation, buildings and food sectors embed circular economy practices, the report noted. But there’s a long path ahead. Circle Economy, an Amsterdam think tank, found in May that the world’s economies are only 6.9 percent circular, a dip from 9.1 percent six years earlier.
What’s in the 2 percent?
The 2 percent slice of circular finance includes support for companies with fully circular business models as well as the transitional efforts of existing, linear companies. Yet most of the funding, 35.7 percent, went to the latter in the form of green and sustainability-linked loans.
The next biggest segment, 27.5 percent, supported material recovery efforts, including recycling, composting and biomass, followed by 23.5 percent for use models such as repair, resale, reuse, rental and product-as-a-service. An additional 8.6 percent of funding was unclassified.
“Tracking capital flows in the circular economy is essential to unlocking its potential as a driver for competitiveness and innovation,” stated Massimiano Tellino, head of circular economy for the innovation center of Intesa Sanpaolo Group. The private bank in Turin, Italy, has allocated more than $23 billion to circular projects since 2018.
“Circular business models remain underfinanced despite their capacity to reduce risk and generate long-term value,” he said. “Aligning capital with circular principles is key to building a more regenerative and future-proof economy.”
Investments often went to conventional business models, such as car repair or online resale marketplaces, the report found. Waste prevention, packaging innovations and recycling efforts also attracted funding.
However, sectors that use the most resources and spew the greatest amount of climate emissions — including construction, farming and manufacturing — were underfunded, according to the report. So were disruptive circular business models, such as product-as-a-service offerings. The researchers suggested that lenders and investors need to better value material innovation, cradle-to-cradle design and zero-waste manufacturing.
Who is funding?
Big banks and other creditors provided 39 percent of total circularity investment over the six-year period studied in the report. Their average annual flows of $10.6 billion eclipsed the $3.2 billion from private equity, $2.3 billion from asset managers and institutional investors and $1.9 billion from investment banks. Venture capital firms provided the least, $1.5 billion.
Public funding, on the other hand, grew at an average annual rate of 46 percent between 2018 and 2023. That share from government and development institutions made up 22 percent of overall circular finance.
Equity investment, which accounted for 23 percent of total funding, soared by 154 percent between 2018 and 2023. But despite high expectations and large deal sizes ($573 million on average), there were only 59 transactions.
Venture capitalists, meanwhile, were busy cementing 1,000 deals related to circularity, half of their overall disclosed total in that time period. Yet they only provided about 7 percent of circular finance.
Why the gap?
The misalignment between funding and the potential impact of the solutions receiving support stems partly from a lack of understanding of circular business models, according to the report. It suggested that circular services and reuse-focused business models may not map to traditional private equity or venture capital expectations for rapid growth and exits.
Circular ventures often involve physical assets, reverse logistics or long payback periods. In turn, they externalize benefits or help companies avoid costs, rather than providing strong revenue growth, according to the report. The non-linear models of reuse and repair also depend heavily on consumer change, which is hard to control.
That said, regulations can drive change: The researchers noted, for example, that after the European Union enacted its Circular Economy Action Plan in 2020, investment in circularity rose by 62 percent there — even as it was flailing in North America.
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