SEE THE SHOW NOTES AND LISTEN AT:  How to Invest in Circular Business with Andrea Brown

Katie Whalen [00:00:00] Getting in the Loop Podcast. Episode 19: How to Invest in Circular Business with Andrea Brown.

[00:00:11] Hi, I'm Katie Whalen and join me each week as I talk with experts around the globe about Circular economy. You'll find out what's being done to make it a reality and if it can really solve the problems it promises. It's time for Getting in the Loop.

[00:00:28] Hi and welcome to Getting in the Loop. I'm Katie. And today, we're talking with Andrea Brown about investing in the circular economy. But first, in September, there will be a train the trainer session for risk and race, which is a serious game I co-developed to simulate circular business operations and the financial side of running a circular business. I invite you to head on over to businessgame.gettinginthelooppodcast.com to learn more about the game and the upcoming two-day train the trainer session. Again, that's businessgame.gettinginthelooppodcast.com to get started helping others learn about circular business models.

[00:01:11] So now onto today's podcast. Andrea is director of Impact for Quadia, a pioneer investment manager that allocates private and institutional wealth into investment strategies that are helping to accelerate the circular and regenerative economy. Andrea has over 10 years of experience working with global Fortune 500 companies on sustainability strategy at the World Business Council for Sustainable Development. While there, she led the development of its Factor 10 Circular economy program that brought together CEOs from over 40 different companies, including Dow, PMG, DSM, Philips, IKEA and Unilever. She also developed the CEO Guide to the Circular Economy and is a regular speaker on circular economy and sustainability at global events. In this episode, you'll learn about impact investing, hear Andrea's thoughts on promising new business models and find out why circular finance has been receiving a lot of attention lately. Resources and links discussed in this episode can be found at gettinginthelooppodcast.com. Let's get to the show.

[00:02:21] Thank you so much, Andrea, for coming on the podcast. I'm excited to get in the loop with you. To start us off, where are you? You're calling from Switzerland, right?

Andrea Brown [00:02:31] I am. I'm calling from Basel. Although my office is in Geneva.

Katie Whalen [00:02:36] Geneva, I grew up in Geneva. But Geneva, New York, not Geneva, Switzerland.

Andrea Brown [00:02:44] It's slightly different.

Katie Whalen [00:02:46] Yeah, slightly different. They kind of look the same. But one has massive mountains behind it. The other one doesn't so.

Andrea Brown [00:02:50] True. Yeah. Nice.

Katie Whalen [00:02:53] So last week, a couple of weeks ago, I was at the World Circular economy Forum 2019 in Helsinki and there was an entire session dedicated to investing for circular business models. So it seems that circular investment is a very hot topic right now, and I'm hoping you could shed some light on this issue. I'm curious why is there this big interest right now?

Andrea Brown [00:03:18] Yeah, I think it's a great question, and I unfortunately, I couldn't join the World Circular economy Forum this year. But I know this is definitely a topic that is on the minds of many people. And I think partly it's because there's still a huge financing gap really to allow circular economy to really scale up and kind of a recognition that public funds are not going to cover that. So there is really a role for private finance, for blended finance to really help scale the circular economy. And I think that a lot of these business models are unproven. So how do you sort of create a business case, an investment case for an unproven business model? And that's a challenge, I think, for large and small investors alike. And I think also connected to that is, you know, this idea of Circular economy circular finance is also new. And so how do you define that? What is behind that? You know, it's certainly connected to the wider challenges we have. What is the lexicon that we're using to categorize, you know, what is a circular economy investment? And so there is some good work happening by some of the larger commercial banks like I N G. ABN Amro kind of connected through the Ellen MacArthur Foundation's Circular Economy Finance Working Group. And they're kind of creating, I think, some great thought leadership on what does that really mean from a definition perspective? How do we kind of quantify qualify what circular finance means and also.

[00:05:06] How do we start to think about what linear risk is as an example for existing portfolios? So if you're a company that, you know, a bank has already invested in. But you're still really operating in a linear economy, what kinds of risks? How do you quantify or qualify those risks? As an investor? And so all of these parts of the puzzle are out there, I would say in different pieces of them are being worked on. But kind of how you fit all of that together is still a big challenge, but also a big opportunity for those of us that are in this space.

Katie Whalen [00:05:44]  I want to dive into what your company Quadia is doing, but before that, could we just go back a little bit? Maybe you could give me an example of what a linear risk might be.

Andrea Brown [00:05:57] Sure. So I mean, as an example, a company that is basing their product on a critical raw material as an example. So, you know, that material is going to run out in the future. Yet you haven't actually adjusted your business model to to take that into account. And so that's very much a linear risk. Even a linear risk could be, you know, a single use plastic that's now been on the regulated list within the EU. Now, let's say Canada, many other regions around the world popping up with these kinds of regulations that are starting to create these bans. And therefore, that is also a risk if that's what one of the core businesses or core business lines of your company. And so these are the kinds of things that are being considered know much like many investors are doing around stranded assets and carbon. So I would say it's a similar approach, but looking at linear risk and linear business models.

Katie Whalen [00:07:05] Okay, so having a material that you're heavily dependent on and there's concerns about access to that material in the future. So as you give the example of what the EU calls critical raw materials or concerns about bands of products, substances, processes, how you do business, basically, that could interfere with your company?

Andrea Brown [00:07:30] And perhaps you give a shout out to circle economy at the moment because they have delivered a publication called Linear Risks.

Katie Whalen [00:07:38] Okay. Yeah.

Andrea Brown [00:07:39] We got earlier this year or late last year and they've done that in partnership with some of these banks and sort of laid out a framework for how these commercial banks are starting to kind of think about linear risks. And I think it's a great framework to start from. In terms of thinking about what that means for existing portfolios.

Katie Whalen [00:07:59] Yeah, okay. Awesome. I'll put that. I'll have that linked in the show notes on our on our website so listeners can check that out.

Andrea Brown [00:08:05] Sure.

Katie Whalen [00:08:06] Excellent. So could you explain a little bit about your company Quada and how your company is working to try to address some of these issues?

Andrea Brown [00:08:18] Sure. Yes. So we are a pioneer investment manager and we allocate private and institutional wealth into investment strategies that create positive social and environmental impacts. And we've actually been around for nearly 10 years and we've over that time invested around one hundred and eighty million euros in around 50 companies, projects and funds and much like other impact investors.

[00:08:47] We sort of started out in the energy efficiency space, investing in companies that are, you know, creating more energy efficient solutions, et cetera, and then moved into food, but now have a very much a central focus on the circular and regenerative economy as an impact and also investment thesis. And so by that we mean our firm belief is that we really need a new economic model that moves away from this linear take make disposed model to one that is regenerative by design. And by that, we can, you know, essentially meet human and social needs within the means of one planet. So we're investing in companies that are making this transition through their products and solutions, through these three sectors, through food, through energy and through what we call circular products and materials, which includes many things. It includes fashion and includes packaging. It includes consumer electronics. And you know, what I think is interesting is that you may think, well, you know, investing in a green energy company, that's quite impactful because they're creating access to energy. But we're also saying because of our thesis around the circular and regenerative economy, that that solar producer, as an example, know we don't want them just to to be producing green energy, but also to be thinking about their materials that are going into that product, how they can use secondary raw materials to produce. You know, there are solar panels, how they can be creating more durable products that last longer and how they can think about those products at the end of their life and sort of capture them. And so it's also about how that energy transition is circular, how that sustainable food system is circular. And of course, how circular products in materials create new models that allow consumers to be circular in their everyday habits.

Katie Whalen [00:10:54] Okay. So if I'm hearing you correctly, it's you do impact investing, which is a little bit different than sort of the normal way of investing because you also take into account the system around the company and and sort of what they're doing to prepare for the future. Maybe correct me if I'm wrong, if I'm wrong or if I have partially the idea.

Andrea Brown [00:11:18] Well, yeah. So I think there's different many different classes in sustainable investing and impact investing. At the heart of it is that we don't only look for our return from the financial side, but also an impact creation. And so through our investments in two companies that are helping in this transition to a circular and regenerative economy, we want them to be financially successful, of course, but also to create more momentum essentially around this transition that we anticipate towards a regenerative economy. And as impact investors, I think what often differentiates us as well is that we're actively involved in the companies.

[00:12:00] So we're we're not only engaged on a business model business strategy perspective, but also how can we help those companies create more impact through their strategies, policies, products, et cetera. And we're very much partners in in that development process of the companies we invest in.

Katie Whalen [00:12:21] How do you- Is it do you have a method for quantifying this impact, or are there standards are already out there?

Andrea Brown [00:12:29] Yeah, I think that's a great question. So there there is a lot of discussion around how to standardize law. You know, the space of quantifying impact. And I think that's a challenge naturally, because so many impact investors have their own impacts thesis that's based on their their own investment strategy. And so some may be focused on ocean, some might be focused on energy. Some like we focus on microfinance. We're focused on the regenerative economy. And so I'd say that's difficult. I think what is behind it is, you know, there is some standardization around what does impact management looks like in terms of a process. And we certainly follow the standards that are out there on that. And we have our own impact measurement approach. And I think what's interesting is that we don't just look at. You know how companies are fostering circular production and consumption. So we look at, you know, how do they measure up against the 5 circular economy business models that Accenture defines and that many, many people use. But we're also looking at how do they improve natural resource use? How do they promote fair value chains? How do they support local communities? And so I think that's an interesting approach because it's not only about the circular economy, but it's how do you move to a regenerative economy?

[00:13:58] How do you create a more fair and equitable shift towards something that is in the means of one planet and that, you know, is circular and regenerative by design. And so these these indicators and these metrics are quite important to be able to understand and, you know, help create that shift that we want to see.

Katie Whalen [00:14:22] Of course. Definitely. So you gave the example of Quadia looking at food, energy and then secular products and materials within your own organization. And also you can feel free to give examples outside the ones that you're supporting. What kinds of business models are you seeing? Are you seeing any interesting and promising ones?

Andrea Brown [00:14:49] Yes, I think what I'm seeing that's unique and promising are companies that don't only produce a product that might be circular, but also ones that are sort of creating this service model that connects the dots across the value chain. And so, you know, an example would be a company that works with brands to take back a product that would otherwise be waste, restoring that product to their original quality and then providing the platform to sell those products on creating value for the brands and themselves, but also helping those brands meet their circular economy goals. And so I think kind of what's interesting in a way are these win win almost turnkey solutions because, you know, creating a circular product is one thing, but creating all those connections across the value chain to make it work is, I think, one thing that will accelerate and create more scale on these big challenges that we have and, you know, that are really providing in a way the unique value proposition over competitors. And yeah, I think that that's one of the unique aspects that I see that seems to be the differentiator for. You know, one product over another in the market yet.

Katie Whalen [00:16:16] Definitely so, not just looking within the company, but also how they're doing it and what they're sort of partnering and how they're creating this value, shared value across the value chain to actually contribute to closing the loop or extending. Exactly times of material in products. Yeah, yeah, exactly. We have some listeners that there are sort of entrepreneurial focused and there are there's also, you know, listeners who are professionals that are working in companies that are trying to create circular business. So do you have any advice for those types of listeners that maybe could- well, I don't know exactly, but could be potentially part of Quadia's prop portfolio and a couple in a couple of years?

Andrea Brown [00:17:03] Yeah, I mean, I think that I like the way that, you know, some have characterized these sort of types of waste in the system. So we're not only looking at sort of actual material ways, but we're also looking at it's a waste of life cycles from products that are tossed away. We're looking at waste of assets. So I think, you know, there's still this enormous amount of waste in the system. And, you know, I think products and services that address those big challenges that we're awakening to are obviously ones where I think there will be a need and an increasing need in the future. And I think going back to my point that I just made, you know, I think companies that are kind of connecting these dots across the value chain. So how do you create the reverse logistics, for example, to take products back? How are you creating the service model to calculate the impact and be able to provide brands, you know, the data that they need to to show their own impact in their sustainability goals, etc. These kinds of connections across the value chain, I think are really critical. And so it's not just the product or solution, but it's really how you kind of create the connections to to close the loop, as you just said. And I think that that is the big challenge.

[00:18:25] But of course, that is where I think there will be lots of room for entrepreneurs to come in and really shift business models and create more exciting opportunities in this space.

Katie Whalen [00:18:40] So this wasn't exactly on my question. She and I might edit it out depending on how you feel about talking about it. But I was just curious. I'm thinking, so when you decide to invest in a company through Quadia and Quadia decides to invest in a company. A lot of the sort of we see a lot of switches towards products, service systems and things like that as part of the business models. But there's also a lot of challenges that come from a financial perspective in terms of pick up larger upfront costs or like return on investment being longer. So I'm just curious, do you take that into account in your in your organization in terms of how that might be different from another sort of an investor? I don't know if there's a good way to ask the question, but-

Andrea Brown [00:19:30] So I think what you're asking is how do we create the investment case for some of these unproven models. Right. Yeah. I mean, I think that's a challenge for everybody. Still, you know, even as impact investors, of course, you know, we're working with with clients that are impact oriented. But I think, you know, we still expect a financial return. And I think one of the key things is we know at the very beginning, we also look at risk return impact. So we look at, you know, things like future legislation. We look at trends around consumer behavior. We look at things like, you know, how are the brands creating sustainability goals around new circular business models? I think, you know, in fashion, there's been quite a lot coming out on on these types of goals from the global fashion agenda or from the new plastics economy, these kinds of goals. Help us also know the signals that are out there in the market and where, you know, the opportunity from an impact perspective can also lay. And so, you know, it's creating as much as we can kind of quantifiable and qualified assessment around those impacts and investment cases. That shows that this is an interesting financial an impact proposal. But it's, of course, you know, I think it's still a challenge for everybody, certainly. But these kinds of things are just some examples of what we might look at to help us think about the future. And I suppose what's also a bit different for us is that we're know we're long term investors. So we're we're investing in company over a five to seven years as an example.

[00:21:21] And so we also have that in mind as we make these investment cases that the world may look quite different in five years from now. And how do we look at these signals today to be able to give us insight for what will be kind of a winning product or solution in in that time frame?

Katie Whalen [00:21:42] And I'm thinking, are you looking for- When we had our pre-call, you were talking about how you look for- You're not really looking for like small startups, you're more looking for a little bit- maybe you can explain kind of what you're looking for.

Andrea Brown [00:21:57] Yeah. So we are investors that don't focus on investing in startups. We're very much focused on companies that already have some traction in the market. So generally, companies that have already been around for a few years that already have a product or service, you know, in the market, and that will reach break even in generally 12 to 24 months. And so, you know, I would say there's many other investors out there that are in the same spot. And I do think that, you know, there's many others focused on startups. And then we're much more focused on this kind of early series A and above investment stage.

Katie Whalen [00:22:45] Okay. So you've given me some great food for thought. And I also think for our listeners for this introduction to this idea of Circular investment and what your company Quadia is doing and what is out there at the moment. I want to ask you the question that I ask all of the guests as like the sort of final question, which is about the In the Loop game, which is the game that I created to have people experience the importance of why we really need to rethink how we use our materials. And in the game, you're manufacturing companies, so you have to navigate through material challenges and changing market conditions, and these come in the form of events.

[00:23:24] And the events are based on real world happenings they can be positive, they can be negative. So they're often the memorable part of the game. So my question to you, Andrea, is if you could create an event for the game, what would your event focus on?

Andrea Brown [00:23:41] I think that's a great question. I mean, I used to work at an organization called the World Business Council for Sustainable Development, the WB, CSC, and several years ago we created this vision 2050.

[00:23:53] That was this 9 pathways heading towards our vision of 9 billion people living well within the limits of the planet. And even at that time, we had looked at sort of how to close the loop in the materials pathway. And in 2050, that ends with not a particle of waste. And so I think that that's something that I've sort of carried with me for many, many years. As a as an opportunity around the Circular economy and as a sort of long term vision, if you will. And so I think for me, the event would be. And I heard this at a conference recently, but basically eliminating landfills. So, you know, tomorrow they're banned everywhere. Yeah. What does that mean for a company, for example, that manufacturers they're going to have to really rethink? How they view waste and what that means for how they innovate around that challenge.

Katie Whalen [00:24:51] Yeah, I love it. That would definitely be a disruption and would make us rethink what we're currently doing and a lot of the current ways that we just consume and also do business. So yeah, that would be a really nice addition to the game. So thank you for that, Andrea. Brilliant. Oh, thank you so much for coming on the podcast. It's been such a pleasure to talk to you.

Andrea Brown [00:25:14] Thanks, Katie. It's been wonderful to be here.

Katie Whalen [00:25:17] And where can listeners go to learn more about you and the topics that we discussed?

Andrea Brown [00:25:22] Well, we have a website. It's Quadia.ch. So Q-U-A-D-I-A dot C-H, but also my LinkedIn or Twitter, of course. So my LinkedIn, Andrea Browns Matlin. I had to tack on Matlin because I'm sure there's thousands of Andrea Browns out there. And then Twitter is @andee_ brown. So A-N-D-E-E underscore Brown. And we obviously share lots of our recent investments, but also the places that we're actively engaged in the discussions around finance and the regenerative economy.

Katie Whalen [00:26:04] Thank you for listening. I hope you enjoyed this episode or show notes and links, go to our website at gettinginthelooppodcast.com. And while you're there, subscribe to our mailing list to have new episodes delivered to your inbox every Monday. See you next week.