The circular economy will not be built without the people who are building it.

Circular economy investment is growing, but headline figures obscure where the money actually goes. Recent data from the World Bank's Circular Economy Investment Tracker shows that investment activity peaked in 2021 and has not recovered to that level since. It is also heavily concentrated. Some 62 per cent of disclosed circular economy investment goes to waste management and recycling, at average transaction sizes of nearly $67 million, while circular design and production lags behind at an average of $42 million. Analysis from the Circularity Gap Report Finance, produced by Circle Economy with KPMG and the International Finance Corporation (IFC), finds that only 2 per cent of tracked investment supports circular business models. Of that already small share, only 4.7 per cent reaches innovators working with material design, regenerative production and new manufacturing models.

Capital flows to established revenue streams with regulatory backing and long-term contracts, and the companies changing what things are made of are overlooked.

The recycling trap

There is a version of the circular economy where waste is collected, sorted and processed at impressive scale, while the materials entering the system at the other end remain unchanged. Recycled polyester is perhaps the clearest example. Praised as sustainable, it is mostly made from plastic bottles rather than recovered textiles, sheds microplastics, and still originates from fossil fuels.

This is not an argument against recycling. It is an argument for recognising that recycling alone cannot close the loop. Circular production systems need new inputs: materials that are regenerative, biodegradable and designed to use less harmful chemicals, save water, energy and other resources. As oil price volatility drives up the cost of synthetic fibres and conventional cotton prices continue to rise, alternatives such as hemp and lyocell offer manufacturers a more resilient and cost-stable supply chain.

Preventing waste at the source is cheaper than managing it later, but our investment systems do not reflect this. In failing to do so, we risk leaving the $4.5 trillion circular economy opportunity largely unrealised, along with the resource savings, supply chain resilience and business growth that consumers increasingly want to support. Material innovation is harder to underwrite: the returns are less predictable, the timelines longer, and the risk profile unfamiliar. But the opportunity is proportionate to the challenge.

The financing gap

The companies best positioned to introduce new materials and production models into consumer supply chains are not large corporations. Large entities move slowly, constrained by existing infrastructure and shareholder pressures that make radical material substitution commercially unattractive, especially without strict regulatory or market incentives.

The companies actually driving material innovation are founders and entrepreneurs rebuilding supply chains, working with regenerative farmers, developing manufacturing infrastructure that did not previously exist and navigating regulatory environments that were not designed with them in mind.

SMEs generate around half of global GDP and the majority of jobs worldwide. The IFC's own Harmonized Circular Economy Finance Guidelines acknowledge that micro, small and medium-sized enterprises will be central to delivering the circular economy transition. Research consistently shows that purpose-driven companies outperform competitors on both growth and profitability. Yet financing frameworks treat them as a residual category, and the investment landscape is not organised to reach them.

The minimum transaction sizes of institutional climate finance exclude SMEs by design, through transaction thresholds, reporting demands and compliance costs that early-stage companies running lean operations do not have.

Venture capital, which might theoretically fill this gap, has largely redirected towards AI and deep tech - a shift so dominant it influences investment trends globally, resembling financial astrology with enormous conviction and returns that remain largely a matter of faith.

This group of investors also tends to have growth expectations that are rarely compatible with the more patient development models that circular material innovation requires. The consequences of forcing that mismatch are visible. Everlane, weighed down by debt as venture funding dried up, was sold to Shein at a steep discount, while Allbirds struggled with overexpansion. At the same time, Jeff Bezos's $34 million bet on bio-based textile innovation aimed at replacing cotton and polyester suggests that larger players are beginning to notice the circular design opportunity.

What remains for circular SMEs is a narrow pool of angel investors willing to take on the highest risk, and non-recurring, highly competitive philanthropic grants. Neither offers a viable financing ecosystem.

Sophisticated climate finance instruments already exist - green and social bonds, concessional loans, debt-for-nature swaps, blended finance - but they are not yet fine-tuned to reach circular consumer goods companies. These businesses deliver climate solutions by changing what sits in people's homes, workplaces and supply chains, yet they typically fall between two stools: above the threshold of microfinance, below the minimum deal size of institutional climate funds. That gap needs a framework to match.

Three things would move this significantly.

First, financing frameworks, including the IFC's own Harmonized Circular Economy Finance Guidelines, need formal sub-categories for circular consumer goods and material innovation, with eligibility criteria and reporting requirements scaled to SME realities. The framework exists; the accessibility does not.

Second, blended finance instruments should be deployed to reduce risk for early-stage circular material innovation and to establish access to market, using public capital to absorb the first-loss position and bring private investment in at a scale where it can participate. This has worked in clean energy and sustainable agriculture, but it has not yet been applied systematically to circular material innovation.

Third, capital and market access need to be addressed together. Larger buyers, particularly wholesale and B2B buyers who will eventually source from circular SMEs, need to enter the investment conversation earlier, through procurement commitments, pilot partnerships and supply chain finance arrangements that give smaller companies the market visibility they need to attract capital.

The filter, not the framework

The circular economy will not be built by waste management companies alone. It will be built by the founders and entrepreneurs proving that things can be made differently. They are not asking for charity. They are asking for financial infrastructure that matches their ambition to reduce emissions through more efficient and creative resource use.

The tools to deliver it exist. None of the sustainability-linked financial instruments need to be reinvented. What needs to change is who they are designed for. Right now, the transaction floors, the compliance requirements and the reporting standards of green finance frameworks function as an invisible filter that lets infrastructure deals through and stops smaller companies at the door.

Adjusting this filter is a much-needed intervention. It is a question of whose interests are prioritised when the frameworks are written, and who gets a seat at the table when eligibility criteria are set. Circular SMEs are rarely in that room, and that will not change without a deliberate policy choice.

Brianna Kilcullen is founder and CEO of Anact, which makes hemp and organic cotton textiles.