Most greenhouse gas emissions come from material use—a circular economy is vital to mitigating these.
‘“Show me the money'' might seem like a crass way of summarising COP27 climate negotiations. Yet it gets to the heart of what the world must do to tackle climate change and the reason why the United Nations organises these annual climate conferences,’ notes Akshat Rathi and John Ainger of Bloomberg Green.
Today, the large majority of climate initiatives focus on the critical role of renewables and energy-efficiency—yet research shows that energy-use is only responsible for 30% of current greenhouse gas (GHG) emissions. The other 70% stem from material use and production processes. This highlights a huge opportunity to employ circular strategies as a strong economic and environmental tool. At this year’s COP27 in Sharm El-Sheikh, Egypt, finance for climate change mitigation and adaptation remains a hot topic. This year will hopefully provide the long overdue opportunity to position the financial system as a key driver of sustainable development and broaden its scope to include new or alternative approaches—chiefly the circular economy.
This article explores the specific opportunity that the circular economy provides for International Financial Institutions (IFIs), positioning the concept as a systemic approach to sustainable development that addresses multiple environmental objectives in tandem with economic prosperity. It summarises the findings of a paper published by Amsterdam-based impact organisation Circle Economy. The paper, Unlocking the Potential of International Financial Institutions in the Circular Transition: A High-level Roadmap, was commissioned by the Dutch government and was developed based on work sessions with the IFI circularity exchange network. These findings will be presented during the Launch of the Circular Finance Roadmap for International Financial Institutions (IFIs) at COP27 on the 17th of November.
BEYOND TUNNEL VISION ON NET-ZERO AND TOWARDS A CIRCULAR ECONOMY
The current economy takes materials from the Earth and makes materials and products from them that are largely discarded as waste. This process is linear. A circular economy significantly improves the efficiency of how we use materials, and aims to replace virgin materials with secondary materials recovered from waste streams. The formation of the Sustainable Development Goals (SDGs) in 2015, upon the signing of the Paris Agreement, recognised the circular economy as an essential approach to addressing the root causes of multiple cross-cutting sustainability challenges. The agreement states that extraction-led growth has been detrimental to the environment and that fundamental changes in resource use are imperative to keeping global temperature rise within 1.5-degrees.
For the low- and middle- income countries where IFIs typically direct their resources, the circular economy offers a multi-faceted approach to development. Proper cycling of resources has been shown to have a profound mitigating effect on biodiversity loss and pollution, while also relieving material shortages to improve climate resilience. At the same time, the circular economy offers new opportunities for economic diversification, skills development and job creation. For IFIs, this represents a new paradigm for financing sustainable development.
Unfortunately, however, the circular economy is often seen as separate to traditional sustainable development approaches, rather than an improvement of them—or worse still, as a tool only for rich countries. A key issue for IFIs is a historic reliance on extractive-led growth in industrialising economies, where natural material extraction has traditionally been pursued as standard practice for economic development. As such, the circular economy can seem counterintuitive or overly-complex to IFI’s client countries, and this often results in lesser demand for circular projects in these regions.
These aren’t the only barriers: other factors also prevent financiers from making investments in circular projects. A lack of circular investment standards and indicators make assessments difficult, for example, while limited experience and minimal proof of concept increases the perceived risk. For IFIs, working to overcome these obstacles is essential to leveraging the systemic potential of the circular economy in their development efforts. For the low- and middle-income countries set to benefit from financing, the shift would provide an alternative strategy for development that makes them less vulnerable to supply volatility and economic shocks, while mitigating GHG emissions.
FOUR WAYS IFIS CAN SUPPORT THE CIRCULAR TRANSITION
Circle Economy organised the IFI circularity exchange network to identify obstacles to financing circularity in low- and middle-income countries today, and then to consider the changes that need to be made to address them. The result of this work was a high-level roadmap that proposes a number of goals for IFIs to reach by 2030, structured across four overarching objectives:
- Link circularity with existing environmental objectives to ensure that the circular economy becomes both a standalone objective and a critical tool to reach the goals of the Paris Agreement.
- Improve assessment methods for circular economy investments so that high-impact circular projects can be identified and compared effectively and at scale.
- Build internal capacity for the circular transition so that it is embedded in operations to achieve both economic success for countries and partners, and as a systemic approach to meeting environmental objectives.
- Develop mechanisms to de-risk and improve funding for the circular economy that leverage public-private collaboration.
Embracing the circular economy could mean massive impact for IFIs, and could help align their goals with those of the Paris Agreement—while acting as levers for circular funding and catalysing financial contributions from private banks.
The COP for action
According to COP’s presidency vision, the conference must focus on moving from negotiation to implementation: it’s time to formulate a ‘response with an aim to create a resilient planet’. Finance must be a part of this. Circle Economy’s Circular Finance Roadmap provides IFIs with the actionable steps toward creating a more resilient planet for all. You can learn more by checking the recording of the Launch of the Circular Finance Roadmap for International Financial Institutions at COP27.
