How has Covid-19 impacted investment in sustainable innovation? Victoria Hattersley put this question to Tazia Smith, managing director of Closed Loop Partners, a New York-based investment firm that specializes in circular economy startups.
Over the past few months, as the Covid-19 crisis has played out, we’ve seen various reports on the possible impact this will have on investment in the circular economy. One example, from CB Insights, ‘How Covid-19 Could Impact Startup Funding’, suggested that startup funding is likely to take a hit, with Private market funding in Q1 2020 is on pace to reach $77B, down more than 16% compared to Q4 2019 and down nearly 12% versus Q1 2019.
Such stories got me thinking about what this situation means for startups in the circular economy – a topic that is naturally of great interest to Packaging Europe. But the field of capital investment is, I freely admit, not my natural professional habitat. That’s why I wanted to put this question to someone who most definitely is at home here. And Tazia Smith is in a position to speak with authority: Closed Loop Partners is firmly grounded in the circular economy with global investments in companies such as AMP Robotics, Algramo, Atlas Organics, HomeBiogas, For Days, Mori (formerly known as Cambridge Crops), TemperPack, and The Renewal Workshop.
“Closed Loop Partners’ team is characterized by a deep bench of operators – entrepreneurs, former CEOs, CFOs – environmental engineers, and former heads of municipal agencies,” says Tazia Smith. “We truly do work with the entrepreneurs and business owners that we invest in, delivering resources, connectivity, and input beyond our investment capital; we’re helping them build sustainable, profitable businesses that proliferate a circular economic system.”
Investment ‘staying on pace’
For circular economy startups, reports such as the one mentioned above paint a gloomy picture. But according to Tazia, this may not be quite the reality.
“Major global events like Covid-19 have threatened the way we currently operate and reinforced the need for a new system that aligns people, the planet and business,” she says. “Covid-19 has not derailed corporate commitments to a more circular economy. Large global corporations are maintaining their zero-waste goals, sustainable product design, and their commitments to using recycled materials in their packaging. The cost efficiencies and resilience benefits for corporations, particularly in the consumer packaged goods industry, have kept pace if not accelerated in recent months. See Nestlé’s commitment of 1.5 billion CHF to buy recycled plastic, or Unilever’s reiteration this June of its commitment to make sustainable living commonplace for 8 billion people, or CVS Health, Target and Walmart’s decision to join forces to reinvent the retail bag.”
She says that, while investment may indeed have slowed in some more conservative, long-established fields, this has not been the case for circular economy innovation.
“COVID-19 has slowed the overall investment selection process for many traditional institutional investors (e.g. pension funds, endowments, fund-of-funds, banks) and there was a notable attention-switch in March to focus either on portfolio protection or distressed debt as an asset class. But large strategic investors, asset managers (ie. VC and PE funds) and opportunistic family offices have stayed on pace with their investments in circular economy innovation.”
‘An opportunity for innovative business models’
This is not, of course, to say there will not be many challenges to face as supply chains are disrupted and global economies slow down. However, says Tazia, “Secular tailwinds behind the systemic transition towards a circular economic model were increased by Covid-19, not decreased. As such, entrepreneurs should be further encouraged to innovate and solve bottle necks in the transition to circularity. This is not to say that the current environment is easy for startups, but on a relative basis, the disruption creates an opportunity for innovative business models that optimize supply chains and increase resource efficiency.”
But this goes beyond economics: lest we forget, the most pressing global priority remains investment in the green economy if we are to avert the climate crisis – or at least mitigate it as far as possible. In the future, Tazia believes ‘circular’ should – and will – increasingly be the norm when investors are looking for new targets. “The focus is for ‘sustainable finance’ to simply be ‘finance’. Pricing environmental and social externalities creates this systemic shift. All market participants, policy makers, and consumers have a role in this systemic change.
“Accenture forecasts a $4.5 trillion capital transition to the circular economic model over the next 10 years. Investing in the circular economic model presents an opportunity to profit in a sustainable system.”