Financiers can and must make the shift to circularity, ensuring the consumption and production patterns of the businesses they invest in make more efficient use of resources and minimize waste, pollution and carbon emissions, according to a new report by the UN Environment Programme’s Finance Initiative (UNEP FI). Launched this week at UNEP FI’s Global Roundtable 2020, Financing Circularity: Demystifying Finance for the Circular Economy outlines how financial institutions can help redesign global economies by changing the way we consume and produce.
The move to circular economies could generate USD 4.5 trillion in annual economic output by 2030 while helping to achieve the Sustainable Development Goals, protect the health of our ecosystems and enable sustainable recovery in the wake of the COVID-19 pandemic. Banks, insurers and investors can play a critical role by providing businesses with financial products that contribute to the circular economy, conserve natural resources and avoid or reduce waste. Financial institutions currently lack awareness of circularity as well as the expertise, products and services to harness business opportunities.
“The economic recovery from the COVID-19 pandemic is an opportunity to stimulate the urgent transition to more sustainable consumption and production. We need both the private and public sectors to transform our economies to address climate change, reduce pollution and improve resource efficiency. Collective action is critical to delivering on the Agenda 2030 for Sustainable Development,” said Inger Andersen, Executive Director of UNEP. “The financial sector and policymakers in particular have a central role to play in the shift from linear, wasteful growth to embedding circularity in finance and our economies.”
The growth of circular business models will require structural and technological change, including innovation in the design and manufacturing of products and services; reducing inputs to agriculture; cutting food waste and using digital technologies to increase transparency and sustainability in supply chains. The financial institutions surveyed for the report recognized that there are opportunities to boost circularity in the buildings and construction, food and agriculture, chemicals and electronics sectors in particular. The report explores transitions already underway in these sectors, as well as in manufacturing, apparel and fashion, mining and energy and cross-cutting innovation in areas such as digital technology.
It outlines a number of recommendations for financial institutions to boost circularity:
- Integrating circularity into their core business strategies and increasing their assessment of environmental, social and governance (ESG) criteria
- Setting targets on resource efficiency
- Re-orienting loans and investments towards more sustainable technologies and financing innovative business models,
- Making financing circularity an opt out rather than an opt in in mainstream financial instruments,
- Evaluating how financing for circularity can contribute to the implementation of key financial industry frameworks such as UNEP Finance Initiative’s Principles for Responsible Banking and Principles for Sustainable Insurance.
The report highlights examples of innovation in financing circularity, including a sustainability bond issued by Italian bank Intesa Sanpaolo, in collaboration with the Ellen MacArthur Foundation, to fund projects and businesses under a €5 billion credit facility. It will support circular economy opportunities such as offering solutions for the lifetime extension of goods and materials, regeneration of natural capital (e.g. restoration of degraded soils), circular design focused on waste and pollution reduction, production processes producing or dependent on recycled resources, resource efficiency in the supply chain, reverse logistics, collection, separation and recycling of used materials and innovative technologies to enable circular business models.
Swedish Insurance Fintech Omocon has developed a microinsurance product for the sharing economy, involving shareable goods rented out on a platform. The product protects the owner of a shareable good or asset that needs protection against damage. Omocom collects data on the sharing platform to look into the usage statistics of sharing transactions to calculate risk and price insurance. This has changed the underwriting process and claims processes.
The report also identifies the need for governments to provide the financial sector with incentives and an enabling policy and legislative framework to accelerate the integration of circularity into financial products and services. Recommendations for policymakers, financial industry regulators and supervisors to address barriers and stimulate opportunities include: integrating measures to catalyze a just transition to a circular economy into climate policies, rules and regulations, implementing COVID-19 recovery strategies that embed circularity in economic growth and focus on a resilient and inclusive recovery, and implementing policies, laws and related instruments to address systemic barriers to circularity and create incentives.