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Impact Investment For The Circular Economy

by Rob Kaplan
January 31, 2019

Rob Kaplan is Founder and CEO of Circulate Capital, an impact-focused investment management firm dedicated to financing innovation, companies, and infrastructure that prevent the flow of plastic waste into the world's ocean while advancing the circular economy. 

How do you define a circular economy? 

I think a circular economy is one where commodities and resources are managed in perpetuity. So that there is no waste, but instead it's a resource for future innovation and product manufacturing.

In transitioning from a linear system to a circular one – who becomes responsible for the end of life? Especially in a time where goods are globally dispersed.

Well, I think the answer is that everybody's responsible. There's no single entity that is responsible for how it's managed at the end of its life, in my opinion. That's why this is a systems challenge that requires a systems solution.

Part of the challenge you're noting is the aspiration of a circular economy with the reality of where waste exists today. Because, circular economy in many ways is an aspirational concept. Especially within consumable products. It doesn't really exist. As we look to invest in companies that can prevent plastic pollution and instead drive towards more circular opportunities, it is a matter of degree. It's not, we'll get there tomorrow in that perfect ideal. It's more about, we've got a lot of waste that's not being managed appropriately. How do we improve that in a way that can create value for those communities? And also prevent the pollution at the same time.

What do some of those solutions look like in practice for you and the companies you work with?

We've been looking at how to invest in South and Southeast Asia for the last couple years. I'd say most of the opportunity that’s "shovel ready" today is in the waste and recycling sector. They are usually startup recycling companies that are generally the first line of formality. Where they're buying materials from waste pickers as well as municipalities in some cases. And then adding some kind of value to it. We also see a number of recycling facilities. They're a little bit further downstream from the collection aggregation. We have started to see a little bit of reusable and returnable systems, but they're in a very early stage at this time.

When you work with a large multi-national company, such as PepsiCo or Coca-Cola, what does their commitment to this process look like?

They have two different levels of commitment. The first is they are committing to improve their own operations and supply chains. Almost all of our investors have direct commitments about what they're doing to increase the amount of recycled materials they use in packaging and design for recyclability. Then, they are also committing capital to our strategy to allow us to invest in companies that can increase the amount of recycled material available for their use and the use of others.

They are also providing expertise and resources, and network. They are providing essential off-take and the ability to buy the material after it's collected and sorted. That's a big part of the challenge. The market that's available to buy this material. Needing that kind of surety of off-take.

We’ve discussed circular economies from a variety of perspectives and backgrounds. Science, academia, advocacy. You approach it as a business. Why is your work a necessary part of the puzzle?

The particular slice of the problem we are looking at is plastic pollution in Southeast Asia. We quickly realized it was going to take many billions of dollars of capital to build the infrastructure required to really stop the flow of plastic leaking into the environment and the ocean. We started to look at where would that capital come from? And we realized that it's not going to come from necessarily consumers or companies, but really, institutional investors that are financing the future of infrastructure in Asia. The only way to get those folks involved in this space is to show them that it's an investable marketplace. That there is a track record. That there is a pipeline of opportunity. And that you can make money doing this. We want to demonstrate that investing in waste recycling is as boring as investing in roads and bridges, for which there is a lot of capital allocated.

Our approach to this was “How do you turn this from a waste stream and a cost center into a profit center as a way to unlock that capital?”

And a circular economy has that promise associated with it, which is that there's a resource in that waste.

When you say infrastructure, are you talking landfills, incinerators? What is that infrastructure?

Our focus is certainly on the recycling and reuse side. I think there is a reality that they need to have improved landfills in Southeast Asia too. But we're not particularly able or interested in financing landfills and incinerators are out of our scope.

Has the China recycling ban affected your day to day?

Oh yeah. I mean National Sword basically turned the entire recycling industry upside down globally. In the markets that we're particularly focused on, they were exporting waste to China too. They hadn't invested in their own domestic processing. That has caused big problems for them and has created great opportunities for investors, who are trying to build those companies within those countries, under those infrastructure projects.

I think most of the countries we're working in in Southeast Asia have also started to follow China's lead and stop accepting imported waste. The US and Europe are not contributing as much to ocean plastic these days as we used to. Because the exporting markets have dried up.

I think there's probably a shifting in the future where more of that will go to Africa, right? Because they haven't started those bans. But most of Southeast Asia has already either halted imports or is talking about halting imports.

Does all of this help move the agenda of circular economies further?

Absolutely. It was so cheap. No one had any incentive to invest in domestic circular economy opportunities because if you were in Los Angeles it was cheaper to ship a container of waste to China than it was to Chicago.

That's crazy.

One important point that I've been trying to communicate lately is that there is no silver bullet for these solutions. It's incredibly complex. People really look for elegant, simplified solutions. But a circular economy is complex. We're not going to be able to reduce our way out of this problem just like we're not going to be able to recycle our way out of this problem. You need both and many more solutions. I worry about absolutists that are trying to push agendas rather than really trying to drive environmental progress.

Our approach is very much, how do we deploy capital as much and as quickly as possible to stop this pollution and make triple bottom line in the process of doing it? Rather than, you know, any political perspective or point of view, it's really just the view of the investor that we're looking to bring to the conversation.

All or nothing doesn’t work here.

Yeah. It's really complex. How can anyone say that there's a single solution to something? If it were that easy, we would have figured it out already. And I think we're also starting to see, because of the topic getting so hot and everyone wanting a piece of it, they're all saying, “Well, what's my contribution?"

Right.

My contribution is activism. My contribution is lobbying or my contribution is X, Y, and Z. And so they're all sort of piling on without a really clear theory of change about where they think they're trying to drive the progress.

Has the re-upping of investment from petrochemical companies into the production of plastic affected your work?

Yeah. One of the interesting things about plastics and circular economies is you actually want that feed stock, right? If you start removing feed stock opportunities, like PET plastic, which is what most beverage bottles are made of, for example, that's really problematic from a circular economy and recycling perspective because PET is the most recyclable plastic that we have today. You'd want to see more of that recyclable material out there. Right now it's cheaper to make plastic out of petroleum or natural gas in the US. It could be cheap to make it out of old plastics. That's where I think the big unlock towards the circular economy comes in. How do you tap into those market forces of building massive chemical facilities and use that as your off take for recyclables? That's the opportunity to change the game and that's your supply and your demand.

Are you optimistic that that will start happening?

I think the petrochemical industry is starting to show that they're really interested in that idea. I think it's really complex and hard to do. There's a lot of barriers. But it's not a technology barrier necessarily.

Is it a political barrier?

It's not so much a political barrier, I think but... Why do you think it's a political barrier?

Because of the political and financial incentive to produce and frack natural gas. How do you switch where incentive lies?

Yeah. I think you're right there. Policy is a huge part of that. Especially in the US where natural gas is so cheap thanks to policy incentives and new technology. It's not so much the same thing in some of these emerging markets we're working in, which is where energy is very expensive and most of that additional capacity is coming online.

One of the opportunities we have in front of us to decouple plastics from extraction – that is the promise of a circular economy.