UNEP demystifies finance for the circular economy

Circulair economy

Kenya – There is an urgent need to transition to economies that embed circularity and are aligned with global sustainable consumption and production goals. Financial institutions have a critical role to play and can take practical steps to finance the transition. UNEP published a report on financing the circular economy and finds that it could generate 4.5 trillion dollar in economic output by 2030.

The United Nations Environment Programme’s (UNEP) report Financing Circularity: Demystifying Finance for the Circular Economy outlines how the financial sector can scale up financing to accelerate the shift to circular business models. In order to keep resources at their highest value long-term and to reduce waste. The report explores strategies and actions that financial institutions can take to manage related risks and opportunities. Opportunities include rethinking of the design and manufacturing of products and services. And also reducing inputs in agricultural production and digital solutions to transform industries. Coupled with waste management models designed to close material and resource loops.

Structural change

The transition could generate USD 4.5 trillion in annual economic output by 2030 according to Accenture. But financial institutions lack awareness of circularity and still need to develop expertise, products and services to harness opportunities. The report provides insights into approaches to financing circularity. And it explores transitions under way in sectors such as construction, chemistry, electronics, food and agriculture, manufacturing, apparel and fashion, mining and energy, and cross-cutting innovation in areas such as digital technology.

The growth of circular business models will require innovation and structural change of production and consumption systems and corresponding technological change. Substantial financial resources are needed to form a pathway for more resilient economic growth that enhances system-wide economic efficiency and the optimal use of financial capital.

Recommendations

The reporters have several recommendations for banks, insurers and investors to accelerate financing circularity. First is to manage linear and circular risks and opportunities by applying the circularity or 9-R concept in risk policies, product development and client engagement. The 9-R concept consist of Refuse, Reuse, Reduce, Redesign, Repurpose, Remanufacture, Repair, Refurbish and Recycle.

The researchers also advice to integrate circularity into strategies and environmental, social and governance (ESG) criteria. And set targets on resource efficiency. Businesses should also re-orient loans and investments towards more sustainable technologies and business models.

For banks, financing circularity should be an opt out rather than an opt in, in mainstream financial instruments. The reportors also advice to develop sectoral knowledge and competencies to identify best practices for circular economy business models and financing opportunities. And to apply sectoral metrics in decision-making. Also raise awareness of resource efficiency, the circular economy market, material flows and changing consumer demand in your organization and among clients and investees.

Another recommendation is to develop knowledge of how changes of environmental laws and fiscal policies linked to resource consumption and waste may affect companies’ license to operate and competitiveness. They should also monitor and create decent employment opportunities through circular economic growth.

Investors should evaluate how their institution can contribute to financing the transition under key financial industry frameworks such as UNEP Finance Initiative’s Principles for Responsible Banking and Principles for Sustainable Insurance. And also measure and scale up circular economy finance on their balance sheet across lending, investment and insurance. At last but not least the reporters find that standardisation of circular metrics and financial instruments can help banks to finance circularity.

Government

The report also identified the need for governments to provide the financial sector with incentives and an enabling policy and legislative framework in order to accelerate a systematic, concrete and scalable approach to integrating circularity into financial products and services. Recommendations for policymakers, financial industry regulators and supervisors to address barriers and stimulate opportunities include. Integrate measures to catalyze a just transition to a circular economy into climate policies, rules and regulations. Build back better to embed circularity in economic growth and focus on a resilient and inclusive recovery. Implement policies, laws and related instruments to address systemic barriers to circularity and create incentives.

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