Growing financial opportunities in the Circular Economy

2020 marked a crucial year for the circular economy. Assets managed through public equity funds with the circular economy as the investment focus have increased sixfold, from USD 0.3 billion to USD 2 billion[1]. The interest of the financial sector in the circular economy is clearly visible from various initiatives being taken by top financial institutions.

The European Investment Bank (EIB) Group is providing financial and technical advisory support to improve the bankability and investment-readiness of circular economy projects[2]. It has a goal of investing at least 10 billion Euros in the circular economy by 2023.

In 2018, ABN AMRO, ING and Rabobank, three major banks in the Netherlands and members of the FinanCE Working Group introduced the ‘Circular Economy Finance Guidelines’[3], with the aim of accelerating finance and investments in circular business models.

The International Platform on Sustainable Finance identifies circular economy as one of its environmental policy goals, as a part of its ‘taxonomies’ (under resource conservation and recycling) where financial flows need to be encouraged[4] and are currently working on technical screening criteria for circular economy based projects.

To encourage innovation in this realm, the European Union (EU) has introduced several funding programmes. The Horizon 2020 EU Research and Innovation programme encompassed circular economy as one of its focus areas, with funding in 2020 amounting to about 400 million Euros[5]. The LIFE programme was another funding instrument and included projects such as the CIRCWASTE-Finland which looked at addressing bottlenecks in achieving EU and national-level waste management targets and planning for resource efficiency and circular economy[6].

These initiatives of the financial sector towards building a circular economy show its increasing trust in investing for a sustainable future. In addition to facilitating the transition from a linear to a circular economy, investments in this direction also contribute towards addressing climate goals[7].

What is driving this change?

Action in this direction is being driven by multiple stakeholders.

Action by companies: Research on enhancing the viability and economic efficiency of circular economy-based business models is still on-going. However, several large and medium-sized organizations across sectors are exploring mechanisms to integrate circular economy principles in their functions and services. In this regard, the clothing industry is undergoing a massive transformation. The market for clothing rental/subscription services is projected to grow from 1 billion USD in 2018, to 2.5 billion USD by 2023[8]. Companies such as Levi’s and Patagonia are enhancing their focus on repair and resale of used clothing (including the development of back-end logistics), thereby fostering the ‘value creation and delivery component of the ‘business model framework[9]. These developments seem to be having a ‘multiplier effect on other companies to explore the business and growth opportunities associated with the circular economy.

Action by Government: In addition to the ‘internal drive’ by the business community, regulatory changes also seem to be playing a major role in laying the foundation of businesses that are sensitive to material efficiency. There has been an accelerated focus on phasing out Single-Use Plastic (SUP) in several countries such as Indonesia, Kenya, India and within Europe. Although the process of phasing out SUP needs to be sensitive to several factors including the livelihoods of workers currently engaged in this sector, these developments seem to be creating the necessary stimulus for the ‘alternatives to plastics’ industry[10].

Action by Innovators: In between established business houses, and state-driven overhauls, are budding start-ups and small-scale innovators. In recent times, this group has also been able to access support in the form of several incubation and accelerator programs. These programs serve as an ideal ‘Petri-dish’ for these innovators and start-ups, assisting them in laying the foundations for this necessary transition.

Financial instruments for Circular Economy

Ellen MacArthur Foundation’s report on ‘Financing the Circular Economy[11]’ provides a detailed insight on several types of investments/financial instruments available in the market. Some of them are listed in the table below:

As the financial support for transitioning to a circular economy is growing, there is a need to strengthen modalities to drive sustained and inclusive delivery mechanisms. Some of the important areas where this support needs to be channelled are:

1. Innovation in data management: revamping the linear economy to circular necessitates a thorough understanding of various sub-systems that work through it. To understand these sub-systems, transparent and verifiable data is key. Trustworthy data sets will support quantifying the rate and efficiency of circular transition. Therefore, there is a need for innovation in data management for a circular economy which will support robust decision making for investments in this sector.

2. Building resilience: the challenge underlying the need for a circular economy calls for a disruptive approach. However, it is important to balance this ‘progressive disruption’ with stability, by building resilience[14]. Employment remains to be a key factor in this discussion of resilience, and therefore, a considerable proportion of these investments need to facilitate upskilling[15]. This also includes recognising the needs and challenges of small and medium-scale business in the value chain. Metrics, tools, indicators that seek to set standards on circularity need to consider social sustainability, which would entail the involvement of stakeholders from across the spectrum, in addition to investors[16].

For India, transitioning to a circular economy brings forth several investment opportunities. Most recently, the Circulate Capital Ocean Fund has committed to invest USD 19 million in four tech and innovation-based companies that are working on transforming India’s waste management and recycling value chain. The recently announced vehicle scrappage policy is also being viewed as an opportunity for this transition, as it could create a market for the reuse, recycling, and recovery[17] for scrapped/used vehicle components/materials. The year 2020 also marked the participation of six enterprises in one of the mainstream fashion shows in the country, organized under the Circular Changemaker’s Showcase by Intellecap’s Circular Apparel Innovation Factory (CAIF)[18]. This program aimed at addressing market-related and investment barriers among others in the fashion and apparel industry. These developments showcase interesting facets of circular transitions in the country. Amidst all these solutions, is the need to ensure the inclusion of the informal circular economy, given the intrinsic role they play in the waste management and recycling sector[19].

Recent trends in financing the circular economy are promising and fundamental. Reforming as a circular economy can play a promising role for multiple stakeholders, including the finance sector. As we transition towards a more circular way of living, a systems-based approach needs to function as our ‘North Star’, prioritising ‘effective’ solutions over ‘efficient’ ones[20], ‘resilience’ being an integral component of ‘effectiveness’[21].

References: [1] Financing-the-circular-economy.pdf (ellenmacarthurfoundation.org) [2] Circular Economy - Overview 2020 (eib.org) [3] Circular Economy Finance Guidelines | European Circular Economy Stakeholder Platform (europa.eu) [4] international-platform-sustainable-finance-annual-report-2020_en.pdf (europa.eu) [5] Focus areas | Horizon 2020 (europa.eu) [6] Financing the circular economy | European Circular Economy Stakeholder Platform (europa.eu) [7] [7]Financing-the-circular-economy.pdf (ellenmacarthurfoundation.org) [8] A look back at fashion in 2019: Rental, second-hand, gaming and inclusivity (fashionunited.uk) [9] Geissdoefer [10] EU to invest €100M in search for alternatives to plastic | Science|Business [11] Financing the circular economy (ellenmacarthurfoundation.org) (p.41-p.53) [12] BGF Circular Economy | X2 (blackrock.com) (on the date the article was written) [13] Why Blackrock's New Circular Economy Fund is a Big Half-Step in the Right Direction (forbes.com) [14] Three forgotten lessons about the circular economy | The Mint Magazine [15] Circular Jobs: Making the circular economy transition work for people (thecircularcollective.com) [16] Dewick, P., Bengtsson, M., Cohen, M., Sarkis, J., & Schröder, P. (2020). Circular economy finance: Clear winner or risky proposition?. Journal Of Industrial Ecology, 24(6), 1192-1200. doi: 10.1111/jiec.13025 [17] Vehicle Scrappage Policy: Cash, and more, for clunkers - The Financial Express [18] India's First Investor Showcase for Circular Sustainable Fashion Startups by Intellecap's CAIF Took Place at Lakmé Fashion Week - The Week [19] Why an Inclusive Circular Economy is Needed to Prepare for Future Global Crises | Chatham House – International Affairs Think Tank [20] Why Blackrock's New Circular Economy Fund is a Big Half-Step in the Right Direction (forbes.com); [21] Three forgotten lessons about the circular economy | The Mint Magazine

About the Author

Jasprit Kaur has a background in environmental planning and holds an MSc (environmental policy and regulation) from the London School of Economics and Political Science. She was a part of the UN Sustainable Development Solutions Network (SDSN) Local Pathway Fellowship (2020 cohort). Her current work focuses on circular economy and waste management. Views expressed are personal.