Despite the circular economy concept gaining mainstream attention and becoming a recognised megatrend in recent years, global circularity is paradoxically declining. While online mentions of the circular economy have nearly tripled in the past five years, we've consumed over half a trillion tonnes of materials during that same period—nearly matching the entire consumption of the 20th century. The stark reality? The share of secondary materials in our economy, or its “circularity,” has fallen from 9.1% in 2018 to 7.2% in 2023.
While research shows that the circular economy holds the potential to unlock around USD 4.5 trillion in economic opportunities, current investment levels remain stubbornly low. Circular initiatives consistently represent only 3-4% of total investments across various mechanisms—from sustainable bond markets and sustainability-linked bonds to government spending and corporate sector investment (multiple sources). This persistent pattern suggests a systemic underinvestment in the circular economy despite more than 90% of raw material being wasted.
A circular economy is an economic system that aims to eliminate waste and maximize resource efficiency by designing products for reuse, repair, and recycling while keeping materials in continuous circulation rather than following the traditional "take-make-dispose" linear model.
The investment challenge: breaking down market barriers
According to research from 2021 on listed European companies, investing in the circular economy seems justified beyond its environmental benefits. Two metrics highlight this. An 0.1 increase in circularity score could lower the risk of debt default by 8.6%, and the same increase results in higher risk-adjusted stock returns.
Despite these potentially superior risk-adjusted returns, the transition to a circular economy faces significant market barriers that create a complex investment landscape, which may account for the lack of investment. Current market imperfections, such as unpriced externalities (GHG emissions, biodiversity loss, short-terminism in financial markets, etc.), reduce circular activity profitability through decreased returns or increased risks. Research also suggests that organisational and cultural barriers, such as resource constraints and knowledge gaps, further hinder the transition, particularly for micro, small, and medium enterprises (MSMEs), which often struggle with high upfront costs and limited access to credit facilities.
Inadequate regulatory frameworks for the circular economy further complicate the situation, as even well-intentioned policies often lack enforceability and proper oversight. This regulatory uncertainty adds another layer of complexity for investors attempting to evaluate long-term opportunities in the circular economy space.
Investment opportunities: where capital meets circularity
Investment in circular economy-related assets represents a fundamental requirement for driving the transition toward circularity, and it requires a multifaceted approach to financial resource allocation. The circular economy investment category demands specialised financial mechanisms, including circular economy-aligned loans, strategic equity investments, and comprehensive risk mitigation instruments. Given the variety of options investors have to participate in the circular economy, it’s essential to critically analyse their effectiveness in advancing circular economy goals. The question can also be inverted as investors want to know what circular economy practices have the highest potential for delivering a strong return on investment with lower risk. (Fang, et.al. 2024)
Through circular economy-focused investment funds, major corporations like Microsoft, Coca-Cola, and Smurfit Kappa Group are integrating circular principles into their operations, creating opportunities for public market investors. However, based on our research, dedicated circular economy funds remain relatively small; see the table below, which suggests both a lack of interest in allocating capital to the circular economy and its untapped potential.
Circular economy fund name | Type | Type | Inception year | Size (USD m) |
BlackRock CE Fund | Mutual fund | Equity | 2019 | 1,663 |
Candriam Sustainable Equity CE Fund | Mutual fund | Equity | 2020 | 456 |
Decalia CE Fund | Mutual fund | Equity | 2018 | 42 |
Anima Investimento CE 2025 Fund | Mutual fund | Bond | 2020 | 435 |
BNP Paribas Easy ECPI CE Leaders UCITS ETF | ETF | Equity | 2019 | 938 |
VanEck CE ETF | ETF | Equity | 2022 | 6 |
Rize CE Enablers UCITS ETF | ETF | Equity | 2023 | 2 |
Fan et al. 2024
On the other hand, venture capital unlocks innovation earlier in the circular economy, backing companies that blend profitability with sustainability. By Rotation revolutionises fashion through peer-to-peer clothing rentals, promoting reuse and reducing waste. Ricron Panels transforms plastic waste into materials for furniture and construction, addressing pollution at scale. TrusTrace empowers businesses with SaaS solutions for product traceability, ensuring sustainable and transparent supply chains. These companies, each backed by circular economy-focused venture capital funds, exemplify the diverse opportunities for investors seeking impact-driven growth in the circular economy.
Debt instruments, such as concessional loans and thematic bonds (e.g., green, social, and sustainability-linked bonds), can offer possibilities to support circular business models that prioritise resource efficiency and waste minimisation. Concessional loans, in particular, can provide favourable terms like extended maturities and grace periods, addressing the financial constraints of innovative circular projects. Mars, Volvo, Hamburger Hochbahn, and Stena Metal are all examples of debt financing our team has worked on to finance the circular economy. In addition, we have examples of the Government of India’s and TOMRA’s green bonds to finance the circular economy and other activities.
The path forward: bridging the investment gap
Scaling investment in the circular economy requires a targeted and innovative financial strategy. Addressing the investment gap involves developing specialised financial instruments tailored to circular business models, enhancing market mechanisms to internalise environmental costs, and creating risk assessment frameworks that accurately value circular approaches.
The scarcity of circular economy investment is likely rooted in implementation challenges, uncertainty about returns, and limited awareness of its benefits among investors. Overcoming these barriers will require collaboration between policymakers, financial institutions, and industry leaders to align incentives, mitigate risks, and unlock the untapped potential of circular economy business models.
Conclusion
The circular economy presents a paradox: despite growing recognition of its importance, a huge increase in awareness and discussions, global circularity and private investment remain low. This gap between potential and current market reality suggests a few things:
Due to the inherently complex nature of the circular economy, one company cannot implement circularity principles alone. This is a cooperative value chain issue.
Investors see this as too complex, not fitting traditional investment criteria, risk appetite, etc.
Policy frameworks are not adequately addressing or incentivising circular economy investments.
Our global economy has too much inertia to undergo the painful process of changing from the linear system we have designed.
This is not a simple challenge to solve. From our perspective, the circular economy is the future economic model. Why would we want to maintain a linear system full of waste? Companies need to reassess their business models and invest in collaborating up and down their value chains to adapt to the circular economy. Significant opportunities exist for rethinking cost and revenue through the circular economy lens.
The current situation presents both a warning and an opportunity. While the declining circularity rates are concerning, they also highlight the massive potential for investors who can successfully identify and support innovative circular solutions. The question is not whether the transition to a circular economy will happen but how quickly we can mobilise the necessary capital to accelerate this transformation. The future is circular.
Key questions to consider
What factors explain the current 3-4% investment rate in circular economy initiatives despite its recognition as a future economic model?
To what extent is your organisation prepared to invest resources in collaborating with value chain partners, both upstream and downstream?
Which policy frameworks and financial mechanisms would most effectively catalyse large-scale circular economy investments?
At Accrona, we offer actionable insights from our wealth of experience. We drive value creation and sustainability through sustainable finance, including rethinking strategies, financing, capacity building, and intelligence. Our expertise in the circular economy and its financing helps organisations navigate the complexities of sustainable investment while maximising both impact and returns. Additionally, our Founder and CEO, Bjarni Herrera, was the co-founder and CEO of Circular Solutions, acquired by KPMG, and the Founding Managing Partner of the Nordic Circular Hotspot, an umbrella organisation for the circular economy in the Nordics. We turn insights and challenges into success stories. Contact us today to explore how our tailored services can drive tangible and positive change for your organisation and contribute to building a sustainable future.