UK’s Circular Economy Attracts £1.3bn in Investment in 2022
The United Kingdom’s circular economy has emerged as a compelling investment opportunity, attracting a remarkable influx of £1.3 billion in 2022, as revealed by a recent study conducted by BDO. The research highlights an impressive 18% surge in investments in UK circular economy companies within a single year, underscoring the growing recognition of the sector’s potential for sustainable economic growth.
One notable aspect of this trend is the significant increase in the number of circular economy businesses securing external backing. In 2019, a mere 42 enterprises in this sector received investments, but by 2022, that number skyrocketed to an impressive 142. This sharp rise signifies a substantial surge in investor confidence in the viability and potential of circular business models.
The surge in interest in circular economy investments is largely driven by investors’ focus on environmental, social, and governance (ESG) factors. As sustainability and responsible business practices take center stage in societal concerns, circular business models are increasingly viewed as an attractive proposition for those seeking long-term, environmentally conscious investments. By aligning with ESG principles, circular economy companies offer investors the opportunity to support sustainable practices while pursuing financial returns.
What are the Key Findings from the Report?
Industrial and manufacturing industries have emerged as frontrunners in the UK’s circular economy, attracting the largest share of capital infusion at 36% of all investments. They were closely followed by technology, media, and telecom sectors at 25%, retail, consumer, and leisure at 21%, life sciences at 10%, and food and drink at 8%.
In a remarkable performance, investments in UK circular economy companies saw an 18% surge between 2021 and 2022, outpacing the wider mergers and acquisitions (M&A) market in the country, which experienced a 12% decline in investments.
Venture capital investments played a significant role, accounting for 62% of investments in 2022, with an average spend of £4.9 million. Mid-market private equity and debt accounted for 17% and 8% of deal volumes, respectively.
Noteworthy investors in this space included BGF, Mercia, Maven Capital Partners, Circularity Capital, Development Bank of Wales, Green Angel Syndicate, HSBC, and Santander, indicating the growing interest from a diverse range of financial institutions.
Within the circular economy landscape, investments in circular inputs garnered 26% of all investment, representing products, processes, or services that are produced or delivered using sustainable inputs. This includes cases where traditional linear raw materials have been substituted with circular alternatives. Circular design, which encompasses products, processes, services, or business models designed to directly deliver or facilitate circularity, attracted 21% of investment.
What is Attractive About Circular Business Models?
Circular companies demonstrate a higher level of resilience and are shielded from macroeconomic events, such as the recent disruptions in global trading routes, which were further exacerbated by the Covid-19 pandemic and the rise in oil prices.
Furthermore, the regenerative nature of a circular business model leads to reduced environmental impact throughout its supply chain. This is particularly significant as the majority of a business’s emissions are generated in the supply chain due to the need for raw materials. By adopting circular practices, businesses can minimize their reliance on new resources, resulting in decreased operational costs associated with resource extraction and disposal.
The demand for circularity is steadily increasing, driven not only by customers seeking sustainable solutions but also by regulatory pressures across various industries. Embracing circular principles allows businesses to meet these evolving demands and comply with regulatory frameworks.
LDC, the private equity arm of Lloyds Banking Group, highlights that businesses that integrate circular principles into their operations are more likely to be included in SFDR Article 8 or Article 9 funds. As capital flows increasingly towards these “greener” funds, circular businesses may experience a “greenium” effect, with a premium attached to their value and attractiveness to investors.
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