Financing an inclusive circular economy

De-risking investments for circular business models and the SDGs

Research paper Updated 28 July 2021 ISBN: 978 1 78413 482 2

Environment protestors outside the Bank of England

Dr Patrick Schröder

Senior Research Fellow, Environment and Society Centre

Jan Raes

Global Sustainability Advisor

The circular economy is a key part of global efforts to meet the goals of the Paris Agreement. Circular economy activities aim to reduce overconsumption, design-out waste and restore and regenerate ecosystems and natural capital. However, new financial instruments and investments are needed to support the growth of these business models and innovations at scale.

With rising public awareness about the impacts of climate change around the world, financial institutions and investors are under mounting pressure to address sustainability concerns in their portfolios. One way to achieve this is through investments in projects that promote the development of the circular economy. In addition, circular economy investment can contribute to achieving several of the Sustainable Development Goals (SDGs), particularly SDG 12 (sustainable consumption and production).

From a government perspective, policy instruments are key to de-risking and incentivizing financial investments in circular models. This paper makes the case for integrating the circular economy more directly into public investment and stimulus packages.

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01 Introduction

The circular economy aims to reduce overconsumption, design-out waste and restore and regenerate ecosystems and natural capital. New financial instruments and investments are needed to finance circular business models and innovations at scale.

Financial institutions and investors are facing mounting pressure from the public, shareholders and new legislation to act on climate change and address pressing sustainability concerns in their portfolios. The circular economy presents an opportunity to improve the sustainability of the finance sector and investments. Increasingly, governments, international organizations, businesses and the finance industry see the circular economy as a key strategy for sustainable development and climate change mitigation. This research paper provides a high-level overview and analysis of the current investment landscape and developments in finance for the circular economy transition.

This introduction presents a broad overview of the circular economy concept and of how the finance sector is gradually adopting circular economy principles and approaches through different private financial mechanisms. These include circular economy themed green bonds and other financial instruments, as well as the use by investment fund managers of the circular economy as an approach to thematic investing. It also provides an estimate of the current value of corporate spending on circular economy initiatives in selected sectors and in value chains with high material intensity. Furthermore, it outlines emerging circular economy business models, and how these relate to developments in financial products and services.

The second chapter examines international development finance, with particular emphasis on overseas development assistance (ODA) spending in the SDG context. The analysis aims to demonstrate how the circular economy is financed and to estimate the current scale and priority areas of spending.

The third chapter provides an overview of how finance and investment for the circular economy can be de-risked through supportive policy tools and dedicated finance mechanisms. A wide range of policy tools to de-risk investment in circular economy solutions is available, including national circular economy roadmaps and strategies, extended producer responsibility (EPR) policies, target-setting for resource efficiency and recycling, product eco-design and fiscal policies. In terms of financial instruments that can de-risk investments, this paper proposes a number of approaches, including blended finance, loan guarantees, political risk insurance (PRI) and public equity co-investments.

Chapter 4 provides an overview of current public spending on circular economy initiatives under ‘green recovery’ packages that have been announced by different governments in response to the COVID-19 pandemic. This paper will make the case for integrating the circular economy more directly into green recovery and just transitions to ensure socially equitable outcomes of investment and public stimulus packages.

The final chapter provides conclusions and recommendations for policymakers, as well as stakeholders in the finance sector and international development finance, to increase the scope and volume of finance and investments for the circular economy.

The appendix offers a brief overview of the research methodology used in the preparation of this paper. The detailed methods used for the quantification of circular spending, and the data sources used for the estimation of the volumes of such spending, are based on a working paper written by Just Economics, which was commissioned by Chatham House to inform this research project and this paper.

What is the circular economy and how can the transition be financed?

The circular economy concept is rooted in various fields, including industrial ecology, systems thinking, ecological economics and biomimicry, all of which have contributed conceptual, technical and policy aspects to the development of this potential new paradigm of sustainability.1 The concept entails a ‘system overhaul’ that aims to reduce overconsumption of resources of traditional ‘linear’ economies, design out waste from production and consumption systems, and restore and regenerate ecosystems and natural capital. This economic, environmental and societal transition from linear to circular is referred to as circularity – a strategy for sustainable business development to keep resources and products at the highest possible value during their lifetime.2

‘Linear’ refers to the conventional way that the economy treats resources (also referred to as a ‘take–make–use–waste’ model). ‘Circular’ refers to an economy where resources and materials are used as long and efficiently as possible within planetary boundaries. In practice, this means that by using already harvested resources for as long as possible resource stocks can be replenished before they are exhausted. It also implies a diminution in the use of abiotic (non-biological) resources (such as fossil fuels) for combustion and other single-use purposes.

Furthermore, the transition to a circular economy is part of the latest frontier of socio-technological change, linked to digitalization and other Industry 4.0 technology solutions. The financing of socio-technical transitions requires the adoption of a long-term perspective and the building of new and innovative links between technology and finance.3 For example, one such socio-technological trend relates to mobility. Environmental, climate, safety and spatial concerns, especially in cities, have given rise to ‘mobility-as-a-service’ business models such as car sharing, facilitated by digital technologies and changes in mobility behaviour. Finance, leasing and insurance models need to fundamentally adapt and reinvent themselves in light of these socio-economic trends.

The financing of socio-technical transitions requires the adoption of a long-term perspective and the building of new and innovative links between technology and finance.

Circularity provides principles and strategies that can limit or optimize resource usage. It does this by emphasizing the reduction of waste streams in favour of regenerating wastes to useful resources, coupled with restoration as an alternative to the extraction of virgin resources. The concept of the circular economy, as well as the practice of circularity in general, address economic concerns related to the scarcity of resources, distribution and access; the impacts of production, consumption and price volatility;4 environmental issues related to designing out harmful wastes and pollution;5 and societal concerns around preventing the disruption of value chains.6 In practice, circularity aims to redesign the linear take–make–use–waste economy7 into a more circular production and consumption cycle. In the linear economy, circularity is present in the form of the recycling of resources: however, recycling alone is largely insufficient to meet environmental, societal and economic needs.8

Box 1. Circularity and the 9R framework9

The circular economy encompasses a wide range of circular practices and related socio-economic activities, one iteration of which can be referred to as the ‘9R’ framework: Reduce, Refuse, Redesign, Reuse, Repair, Refurbish, Remanufacture, Repurpose and Recycle. The increased adoption of these and other 9R circularity behaviours in economies is the key to the circular transition.

Reduce focuses on reducing the overall use of natural resources for production and consumption. The reduction in the resource-intensity of products is linked to dematerialization and the decrease in absolute quantities of resources needed to support economic functions in society.
Refuse involves the abandonment of the use of a resource or product through elimination, without losing economic function. This can be policy driven, as a consequence of environmental cost or human health risks, as is the case with the disuse of hazardous materials and some chemical compounds. It often results in the substitution of a resource by another resource that is less harmful, or not harmful at all.
Redesign emphasizes a complete rethink of a product to reduce resource consumption or to eliminate certain resource usage through the adoption of ‘product-as-a-service’ or ‘sharing economy’ business models. From a circularity perspective, redesign focuses on needs fulfilment and the availability and use of services, rather than the possession of goods.
Reuse of a product or resource focuses on assuring that a good is of high enough quality to continue to function for its original purpose. For garments and textiles, this is referred to as a ‘second life’ (as opposed to recycling, which often implies shredding into textile fibres).
Repair aims to fix products in disrepair so they can be reused for their original purpose.
Refurbish emphasizes restoration with the aim of increasing the quality of an otherwise obsolete product to a current quality standard.
Remanufacture creates products that are as good as new – or sometimes better, upgraded products – through a recombination of parts.
Repurpose uses a redundant product considered as waste and reprocesses it to give it a different function. In cosmetics, this trend is visible in the recovery of waste streams of food (e.g. orange peels and coffee grounds) into hand soaps.
Recycle focuses on the recovery of materials from waste to be reprocessed as industry-grade inputs for production. The recovery of energy from waste materials is not included.

Figure 1 depicts how the 9R framework of circular economy approaches can achieve the objective of slowing and narrowing resource flows and create material loops.

Figure 1. Circular economy approaches and the 9R framework

— Source: Based on Preston, F., Lehne, J. and Wellesley, L. (2019), An Inclusive Circular Economy: Priorities for Developing Countries, Research Paper, London: Royal Institute of International Affairs, https://www.chathamhouse.org/2019/05/inclusive-circular-economy.

What is still missing in these conceptual diagrams is a designed technical concept related to resource flows in the economy. This requires the creation of markets and business models. The main financial challenge for circular economy finance is precisely this economic problem: how to translate the need for slowing and narrowing resource flows, circular strategies and the 9R framework into viable business models that can be financed at scale.

What is circular economy finance?

There is no single definition of circular economy finance, rather definitions are currently being elaborated as new service offerings evolve. According to the United Nations Environment Programme (UNEP) Finance Initiative, ‘financing for circularity covers any type of financial service where money is exclusively used to finance, re-finance, invest in or insure in part or in full, new and/or existing companies or projects that advance the circularity of our economies.’10

As pointed out by the OECD, the lack of available finance and persistent funding gaps have been identified as major constraints in the transition towards a circular economy. Many cities and regions in the OECD face restrictions in their ability to transition to a circular economy, whether it be due to insufficient financial resources (73 per cent), financial risks (69 per cent), lack of critical scale for business and investments (59 per cent), and lack of private sector engagement (43 per cent).11

Recent publications have noted the growth and opportunities of circular economy finance, but have also highlighted the need to overcome numerous existing barriers, enhance transparency by mandating disclosure and standardizing, and sharpen definitions and metrics for circular activities.12 Furthermore, it has been noted that the procedures, mechanisms, and tools for social sustainability efforts need to be included in emergent frameworks, analytic conceptions and standards of circular economy finance instruments.13

In view of these concerns, an important categorization and framework for investing in the circular economy is offered by the European Commission in preparation for the EU’s sustainable finance taxonomy.14 The Commission’s categorization system contains four main categories of circular economy activities and 14 subcategories. In addition to these criteria for measuring the contribution to the circular economy transition, the system also includes a set of ‘do no significant harm’ (DNSH) criteria and requirements for meeting minimum safeguards with regard to social and  human rights.15

The first broad category consists of activities related to circular design and production that aim to make resource recovery more effective and efficient. The second category includes the optimal-use systems – such as sharing and product-as-a-service offerings – in which ownership of the asset and the responsibility for maintenance and disposal remain with the service provider. The third category involves material recovery, and the fourth constitutes the circular economy enablers, such as marketplaces for secondary materials, platforms or services that connect the value-chain participants based on circular principles.

The 9R circular economy framework detailed above and this categorization of circular economy activities is increasingly being adopted by public financial institutions such as the European Investment Bank (EIB),16 as well as the Polish, French, Italian, Spanish and German national promotional banks that act as the EIB’s financial intermediaries. Private financial institutions and asset managers – such as ABN AMRO, BlackRock, BNP Paribas, Circularity Capital, ING, Intesa San Paolo, PGGM, Rabobank and RobecoSAM – have issued their own circular economy finance products and services based on guidelines developed by the FinanCE working group, driven by FinanCE members ABN AMRO, ING and Rabobank.17

Financing circular economy business models

Circular business models are often based on new, innovative ideas, and both the research community and policymakers have caught up quite quickly and have engaged in categorizing this new wave of circular economic activity and entrepreneurship. Generally speaking, circular business models and strategies are those supporting the transition to a circular economy, based on the taxonomy of slowing, closing and narrowing resource loops.18 More specific frameworks and categories are being developed: for example, Geissdoerfer et al.19 have identified four circular business model strategies – cycling, extending, intensifying and dematerializing – and combine these with three value logic categories – value proposition, value creation and delivery, and value capture.

Circular business models are often based on new, innovative ideas, and both the research community and policymakers have caught up quite quickly and have engaged in categorizing this new wave of circular economic activity and entrepreneurship.

According to the EU’s categorization of circular economy business models, circular economy finance can flow to at least four categories. With the intended purpose of providing a better and more reliable framework to the finance sector, in early 2020 the EU published a generic, sector-agnostic circular economy categorization system. This work of classification offers technical screening criteria, methodology and guidance that create a regulatory push for financial institutions to align their balance sheets with the environmental objectives and targets of the EU. The regulatory aspect will push the capital allocation process for loans and investments. While it is often seen as part of the cost base of regulatory compliance, the categorization of business models also holds promise as a framework to build a commercial pipeline with companies that have a business model aligned with the environmental objectives of the EU taxonomy. The circular economy categorization defines distinct categories of activities. To qualify, these need to substantially contribute to a circular economy, based on a set of minimum criteria that need to be met by activities under each defined category.20

Furthermore, the EU taxonomy provides practical guidance through the provision of an indicative list of typical investments for circularity.21 Financial institutions will need to adopt this categorization framework for the analysis of their existing portfolios and for future circular economy finance offerings. An important segment of the framework is still under development: the types of standard data, metrics and benchmarks that can support the financing of these categories of the circular economy constitute an area of ongoing work in the finance sector.

Below are some examples for each of the four broad categories of circular economy activities identified in the European Commission’s taxonomy.

Circular design and production business models focus on increasing material efficiency using durability, modularity, upgradability, ease of disassembly and repairability as design principles without compromising functionality. Typical investments in this category include research and development (R&D) programmes and infrastructure, including pilot and demonstration facilities; scaling-up and deployment of new technologies at commercial scale; and design and construction of new buildings and infrastructure incorporating circular products, recycled materials, and new construction processes.
Optimal-use business models emphasize the reuse, repair, refurbishment, retrofitting, repurposing and remanufacturing of end-of-life or redundant products, movable assets and their components, which would otherwise be discarded. The category extends to the refurbishment and repurposing of end-of-life or redundant buildings, infrastructure and facilities. It covers the construction, expansion or retrofitting of manufacturing facilities, ancillary equipment and technology for refurbishing and remanufacturing purposes. Investment can be used for the establishment of small-scale businesses or not-for-profit organizations for the reuse and repair of consumer products such as clothing, furniture, bicycles and household appliances.22
Optimal-use models also include product-as-a-service, reuse and sharing  models based on leasing, pay-per-use, subscription or deposit return schemes. Many product-as-a-service businesses continue to struggle to secure financing at the present time. Financial institutions will focus on the earnings model, the robustness of the cash flow and the ability to track products.23 Product-as-a-service tips the balance from traditional product sales (buying a product) towards a service offering (consumer rents and uses of product). The cash flows of these services or subscriptions become the driver of transactions and the basis for finance. Finance will look at the installed base, the ability to scale activities and the associated marketing cost to grow business, the number of subscriptions, increase and attrition rates, the competitive landscape, digital ability of the company, cross-selling potential and customer loyalty. Product-as-a-service finance is typically expensive, because it involves an extra due diligence effort compared to traditional collateral-based finance for a clearly defined asset. Here, the cash flows form the basis of discussions with the financial service provider.
Value and resources recovery business models highlight the separate and effective collection of different types of waste products. This enables circular value retention and material recovery strategies for biotic materials and biomass, encompassing product categories including food, animal feed, fertilizers and chemical feedstock, and wastewater.
Financial risk analysis has historically been risk-averse towards biomass projects. The risks associated with potential interruptions of the supply chain, quality, amount and price level of the biomass feedstock need to be tackled to smooth the financial due diligence process. Multiple sources of feedstock – for example, a co-fermentation plant that processes biomass in the form of residual brewing waste from multiple breweries, situated within 100 miles of the facility – has a better negotiating position as regards quality, amount and price than a plant processing the residual waste of just one brewery. The recovery of waste heat, based on industrial symbiosis networks, and its reuse for heating for houses, greenhouses or industrial production sites is another proven approach. With the expansion of data centres close to urban areas, there are increasing instances of companies capturing the waste heat generated by servers and using it to heat nearby homes, offices and greenhouses. Stockholm’s Data Parks, for example, aims to cover 10 per cent of the city’s heating needs by 2035 using such methods.24
The reverse logistics of redundant products is a focus on the collection – and the logistics of retrieving – parts and materials to reintroduce in other parts of the value chain, either to close the loop or to slow down virgin resource usage. Until recently, the finance sector has objected to reverse logistics, because such activities would add to the cost of production while rarely adding to the profit made. However, with the sharp increase in e-commerce activity during 2020 as a consequence of the coronavirus pandemic, reverse logistics is now gaining momentum. According to Deloitte, in the late 2010s e-commerce revenues were growing by 15 per cent annually, with a product return rate approaching 30 per cent of sales. By 2022, online retailers can expect about 13 billion units, worth $573 billion, to be returned every year.25 Under current practices, every year millions of returned products and items of unsold stock are simply destroyed, products that are often new and unused.26 Financiers have begun to consider reverse logistics as forming part of four positive trends for companies: cost reduction, waste avoidance, product improvement and customer retention – since the return of goods and materials is an opportunity for customer intimacy (developing detailed customer knowledge).
This category of business model also encompasses the restoration of natural systems and the rehabilitation of degraded agricultural land to return to a fertile and productive state. In particular, the restoration of degraded land that has a positive climate impact is being vetted by the finance sector. The biomass that grows on restored land is a carbon store, and land restoration projects are looked upon with increasing interest within the context of climate finance. Thus, a number of projects that have attracted grant funding have also been able to attract private financing, often with guarantees from the public sector.
Circular support models and enablers of marketplaces aim to facilitate other circular activities and projects, and thus contribute indirectly to increasing resource efficiency. This includes the development and deployment of tools, applications and services to support circular economy strategies – for example, digital tools for predictive maintenance and repair to extend the lifetime of products, and digital applications to facilitate reverse logistics.27 The emphasis is on the dissemination of circularity knowledge, price information, advice (through the use of software applications), and digital or physical marketplaces, and on enabling platforms for all other circular economy business models. Depending on the maturity of their business, many of the companies in this category will be financed in the traditional manner for IT service companies. Early innovations and R&D by start-ups and scale-ups are mostly the terrain of venture capitalists in the financial world. This is early-stage capital, where large returns are expected due to high perceived risks.

Box 2. Financing circular business models: examples from Europe and the US

Circular real estate finance: The first experiments in circular finance in the property sector have been in cases where the façade of a building is financed separately from the rest of the building’s structure. The façade has a separate technical lifespan, and can be replaced after disassembly. When, for example, façade upgrades – such as vertical installation of solar panels, or other energy efficiency improvements – are required, then the replacement of the outer shell of the building is part of a separate financial construction. In the Netherlands, façade-as-a-service or façade-leasing concepts have been tested, where the supplier of the improvement can remain the owner of the outer shell of the building. This product-service-system (PSS) model for integrated building envelopes will require a different design philosophy and alternative financing models compared to traditional buildings.28 As part of the contracting model, it requires the distribution of financial resources to bridge the gap between initial investment cost and long-term service and maintenance fees.

Circular design can also involve the replacement of non-recyclable or non-compostable materials by materials that are recyclable or compostable. In the building and construction sector, an example is provided by mycelium composites – upcycled by-products of fungal biorefineries. These can be used as cheap and sustainable composite materials to replace foams, timber and plastics for many building applications, such as insulation, door cores, panelling, flooring, cabinetry and other furnishings.29 Mostly, financial institutions will look to invest in the providers of these biodegradable materials and companies offering industrial composting services. Depending on the degree of innovation involved, these activities can often be financed by traditional methods, such as loans, bonds or shares. The use of biomaterials does raise additional issues of quality, and of health and safety compliance standards, which can be complicating factors as regards risk approvals of loans and investments.

Financing life cycle asset management: In 2018 the EIB provided funding of €100 million for small and medium-sized enterprises (SMEs) through the Life Cycle Asset Management programme operated by DLL, a Dutch asset finance partner.30 The EIB credit facility enabled some 200 Dutch and Belgian SMEs and companies with a medium-sized market capitalization – ‘mid-caps’ – employing less than 3,000 workers, to transition to the circular economy, providing them with financing at favourable rates of interest. Based on information on the incoming financing requests from SMEs, the total was split in a 2:1 ratio between Dutch companies (which submitted funding requests of €66 million) and their Belgian counterparts (€34 million). The programme defined specific criteria with which a circular transaction must comply, with a focus on the financing of remanufactured second-life assets and on delivering solutions for the complete asset life cycle.

‘Deep tech’ start-up investment for dematerialization: Deep tech includes disruptive innovations in material science, blockchain, quantum computing, biotechnology and other fields. Deep tech finance provides capital to start-ups that use computing firepower to drive innovation in frontier areas of science and technology. It is highly relevant for manufacturing sustainable materials in a circular economy, but also for dematerialization – reducing the overall amount of resources used. One major challenge for such deep tech-enabled disruptive innovations is the rigidity and unresponsiveness of existing linear supply and value chains. Despite the challenges, aggregate annual global private investment in seven deep tech categories identified in a Boston Consulting Group report increased by more than 20 per cent annually between 2015 and 2018, to reach almost $18 billion.31 The US has been leading the field in deep tech investment: in an effort to catch up, the European Innovation Council (EIC) Fund announced investment of €10 billion in the EU’s framework programme for research and innovation, Horizon Europe (2021–27) and a new lending instrument, the EIC Accelerator, to support high-risk, high-potential innovative SMEs that are willing to develop and commercialize new products, services and business models.32

Integrating circularity into sustainable finance

How can the circular economy business models and categorizations listed above be integrated into existing financial instruments? For instance, green bonds have already been used as tools to finance low-carbon solutions. All bonds share common principles and mechanisms, as do all listings requirements and exchange traded funds. Environmental, social and governance (ESG) investing considers the environmental and societal impact of a company or business. These existing instruments can become relevant for financing the circular economy, but will need to be tweaked to deliver the intended impact – reductions in resource use and waste generation.

Green bonds and transition bonds

Green bonds were created to fund projects and assets that have a positive environmental and climate impact. The majority of existing green bonds do not integrate circularity principles. Still, the requirement that green bonds have a clearly defined ‘use of proceeds’ is valuable to circular economy finance, precisely because green bonds have entered the mainstream in the finance sector and because they can integrate circularity in the set-up. The inception of the green bond market was in 2007, when the first sovereign green bonds were issued by the EIB and the World Bank. In 2013, private companies followed suit, and started to raise capital by issuing corporate green bonds. In 2015/16, China endorsed green finance and green bond development during its presidency of the G20. Following these developments, in 2019 the Italian bank Intesa Sanpaolo became the first private bank to issue a sustainability bond in line with the green bond mechanism, focused on the circular economy and specifically aimed at projects with circularity at their core.33 Although volumes were down due to the COVID-19 pandemic, issuance nevertheless reached more than €81 billion of green bonds equal to or larger than €100 million globally across all currencies in the first quarter of 2021.34 With new issuances by Germany being announced in the second half of 2020, some observers projected that the overall green bond market size could grow to $1 trillion by the end of 2021.35

In the context of green bonds, waste management and resource efficiency are obviously closely connected with the circular economy and constitute the fourth largest category for green bond ‘use of proceeds’ globally. Some green bond guidelines for use of proceeds explicitly include categories linked to the circular economy, such as eco-efficient and/or circular economy-adapted products, production technologies and processes, or pollution prevention and control, including reduction of air emissions, waste prevention, reduction and recycling.36

Waste management companies in five countries (China, France, Sweden, Switzerland and the UK) raised $2.3 billion from bond issuances between 2015 and 2018.37 However, the inclusion of incineration and waste-to-energy plants as circular economy activity in the context of circular economy finance is controversial. The EU’s CE Finance Expert Group has advised that ‘the resource efficiency gains from waste-to-energy and waste-to-fuel strategies are fairly modest in comparison with the other 9Rs, particularly when considering the loss in economic value of potentially recyclable materials through incineration. Hence, the activities primarily aimed at the energetic use of wastes and residues are excluded from the circular economy categorisation system’.38 The exclusion of waste incineration from eligible activities would raise the quality and recognition of green bonds by the market and investors as a financial instrument contributing to the circular economy transition.

The exclusion of waste incineration from eligible activities would raise the quality and recognition of green bonds by the market and investors as a financial instrument contributing to the circular economy transition.

Many projects that are financed through green bonds are in fact transition outcomes. There is a heavy overlap – and a sometimes artificial distinction – between green bonds and so-called transition bonds. This distinction is driven by the wider Paris Agreement alignment process, aiming for financial flows to become consistent with a pathway towards climate-resilient development.39 Since concerns have been raised around ‘greenwashing’ and the additionality of green bonds for climate mitigation, transition bonds have come into play. Transition bonds touch upon what is referred to as a greenhouse gas emissions-intensive taxonomy of economic activities – activities that have a significant negative impact on the environment and climate. Like most green bonds, transition bonds aim at reducing the negative impact of greenhouse gas emissions-intensive technologies and businesses, and enable a low-carbon transition.40 Projects financing upstream emissions reductions and the decommissioning of fossil-fuel assets are eligible for climate finance, and are sometimes packaged as green bonds. In the circular economy context, transition bonds are used for investments to increase energy and resource efficiency in cement, metals or glass – for example, by reducing the clinker-to-cement ratio or the use of smelting, using recycled raw materials, and achieving improved recycling rates.41

Greenhouse gas emissions-intensive industries are dependent on fossil fuels, and their production and consumption have negative side-effects on the environment, public health and economics – examples might include single-use plastics, unprocessed food wastes or fast-fashion items. When progress is measured and periodically monitored by metrics according to SMART (specific, measurable, achievable, realistic and time-bound) objectives, these transition bonds could mobilize capital to accelerate the circular economy transition of incumbent industries. Furthermore, the concept of just transition sovereign bonds42 could be used to finance a blend of green and social projects that include education and vocational training, access to skills development and new job opportunities, if these are aligned with climate objectives and the wider circular economy transition.

Sustainability-linked loans and bonds

These loans and bonds originated in the intention of companies to improve their environmental and social performance. In contrast to green and transition bonds, where the proceeds are identifiably linked to projects and assets, sustainability-linked loans (SLLs) and bonds (SLBs) give flexibility to the borrower or bond issuer to spend the capital for organizational purposes. SLLs and SLBs cover a whole range of key performance indicators (KPIs) that refer to the policy and risk appetite of the issuer. Transparency pressures among responsible investors push for clear KPIs. In setting up the financial instrument, these KPIs can be aligned with circular economy principles (e.g. number of tonnes of material recovered, percentage usage of secondary materials). Since September 2020, SLBs have been issued across a variety of sectors including energy and utilities, fashion and textiles, pulp and paper products, and pharmaceuticals.43 There is a voluntary mechanism for reporting progress to stakeholders and investors, mostly via the regulatory, integrated or sustainability reporting cycle and not specifically attached to the financial instrument (as is the case with green bonds). Some regulators and policymakers (together with stock exchanges) have imposed mandatory environmental and sustainability reporting obligations for listed companies that raise capital via their stock exchange. In this way, growth in the quantity and quality of sustainability reporting supports the growth of SLLs and SLBs.

Environmental, social and governance investing with added circular economy metrics

ESG investing is both an evolution and a stricter implementation of the International Finance Corporation’s social and environmental performance standards: for many asset managers, it was the next step after exploring investment strategies known as socially responsible investing (SRI). The key difference with ESG investing in its current form is that these earlier SRI investment models relied on the judgment of individual investors or investment committees. ESG investing and analysis is backed, more numerically, by concrete non-financial metrics in the field of environmental, social and governance performance. Still, the scoring of the ESG criteria remains subjective, and can differ substantially among ESG ratings agencies. The Global Reporting Initiative’s (GRI) standards are the most widely used for reporting on ESG impacts.44 GRI provides disclosure standards for companies and investors to report on critical sustainability issues including climate change, human rights, governance and social well-being. The GRI 306: Waste 2020 standard, published in May 2020, is among the first of its kind, highlighting the relationship between materials and waste. It assists companies in identifying and managing their waste-related practices and impacts throughout their value chain of products and services.45

The addition of ESG metrics that relate to resource efficiency and material use within the context of the 9R behaviours is a field that is still being developed by several investors that have introduced circular economy-related investment funds and mandates: these include BlackRock and RobecoSAM. Furthermore, the work being carried out around circularity metrics by the UNEP Finance Initiative, the World Business Council for Sustainable Development and the Ellen MacArthur Foundation will influence the ESG scoring process in time to better integrate metrics of circular economy approaches into ESG frameworks.

Figure 2. Overview of sustainable finance instruments to support circularity

Circular economy investment funds

Since 2017, many new investment funds have been created specifically to invest in circular economy projects and businesses. The most prominent example is the Circular Economy Investment Fund issued and managed by BlackRock, which reached a fund value of more than $1 billion within less than a year of its launch, in October 2019, with capital of $20 million.46 Although this value is very low compared to the multi-trillion dollars’ worth of assets under the management of this global investment institution, the rapid value growth of the Circular Economy Investment Fund indicates that there is an appetite among institutional investors to diversify their investments in packaging, chemicals, electronics, fast-moving consumer goods, textiles and garments, and forestry services and products, towards activities that accelerate the transition from a linear to a circular economy.

Based on the analysis conducted by Just Economics for this paper,47 it is estimated that the funds that are investing in the circular economy have a total value of around $21 billion. Many of the funds form part of larger green/environmental/sustainability funds, and value adjustments have been made to take account of these – i.e. the authors have estimated the proportions of those funds’ portfolios that are circular economy-related. About 4 per cent of generic green bonds are estimated to be invested in the circular economy, which implies that around $24.5 billion is invested in the circular economy via these instruments. This would suggest that the total value of private circular investment funding is in the order of $45.5 billion. Table 1 provides an overview of the major circular economy investment funds established to date.

Table 1. Selected circular economy investment funds by instrument category, sector and value (February 2021)

Investor	Sector	Instrument	Adjusted value (€ million)
Intesa Sanpaolo	Circular business models	Debt; guarantees	6,000.00
BlackRock	Mixed	Public equities	1,700.00
Archipelago Eco Investors	Plastics/packaging	Private equity	1,500.00
Lloyds Bank	Mixed	Investor commitments	1,484.74
Credit Suisse Rockefeller	Circular oceans	Public equities	1,276.91
ABN AMRO	Mixed	Debt; guarantees	1,000.00
Ambienta	Resource efficiency	Private equity	668.84
Spring Lane Capital	Waste/recycling	Project finance	578.82
Danish Green Investment Fund	Mixed	Debt	442.59
Goldman Sachs	Waste/recycling	Green bonds	427.10
Circulate Capital	Plastics	Venture capital	306.95
NN Investment Partners	Mixed	Public equities	186.33
Allianz Clean Planet Fund	Mixed	Public equities	179.66
Ultra Capital	Waste/recycling	Equities; debt	175.40
Goldman Sachs	Plastics/packaging	Green bonds	162.25
Decalia	Mixed	Public equities	146.34
BNP Paribas	Circular business models	Public equities	139.11
Anima Investimento	Mixed	Mutual fund	123.00
Candriam	Circular business models	Public equities	101.60
Circularity Capital	Circular business models	Private equity	100.00
H&M CO: LAB	Sustainable fashion	Equity (Venture capital)	100.00
Closed Loop Partners	Mixed	Mixed debt/equity	87.70
RobecoSAM	Mixed	Public equities	84.64
Tin Shed Ventures	Innovative, circular economy start ups	Equity (Venture capital)	75.00
Breakthrough Energy Ventures	Circular business models	Venture capital	69.28
Tesi	Circular business models	Private equity	68.41
Taaleri	Mixed	Private equity	65.00
Prelude Ventures	Circular business models	Venture capital	55.00
Goldman Sachs	Mixed	Public equities	50.78
The Westly Group	Tech and artificial intelligence; some circular economy	Equity (Venture capital)	50.00
Generate Capital	Circular infrastructure	Project finance	46.48
Althelia Sustainable Ocean Fund	Plastics	Equity	44.00
Tesi	Plastics/packaging	Private equity	40.00
Pangaea Ventures	Advanced materials	Equity (Venture capital)	35.00
Circular Capital	Waste/recycling	Debt; guarantees	30.70
Sky Ocean Ventures	Plastics	Venture capital	30.00
Prelude Ventures	Env/circular business	Equity (Venture capital)	20.00
Alante Capital	Circular economy textiles	Equity (Venture capital)	15.00

Source: Lawlor and Spratt (2021), Circular investment.

It is important to note that the information presented in Table 1 provides insufficient detail on the resulting investments as regards indicators and selection criteria, which in most cases remain relatively vague. Therefore, classifying these investments by category is challenging. A general categorization, based on best available data, is presented in Figure 3.

Figure 3. Circular economy investments: value share by sector

— Source: Lawlor and Spratt (2021), Circular investment.

As Figure 3 shows, circular business models account for the largest share of investments in terms of value. Generally, these refer to either investments in companies that want to transition to more circular activities, or, more commonly, that want to create new circular technologies or products. Plastics and packaging, which are very dominant in corporate and government investments, only make up a small proportion of investment from the finance sector. One likely reason is that much of this investment needs to be made by large, incumbent firms with respect to their own packaging and value chain operation – hence the high level of corporate investment. It may also be that there is little scope to break into this type of activity profitably, given the presence of large incumbent firms. Finally, it may be that circular business models are being applied within this and the other identified sectors.

How large is the corporate circular economy in financial terms?

While circular economy finance is expanding and the market has strong potential, there is still not enough available investment in most sectors. In addition, opportunities for SMEs to access venture capital and loans can be very constrained during the start-up and initial growth stages; in contrast to the opportunities available to established companies requiring financing for larger projects, to change their existing practices and supply chains. In addition to investment funds, corporate spending on the circular economy has also increased. The working paper prepared by Just Economics48 provides estimates for corporate investment in circular economy approaches across a number of sectors, including consumables (fashion and textiles, electronics), construction, automotive, food and beverages, agriculture and non-specific wastes. These sectors account for the highest levels of both emissions resource usage – housing, mobility and food alone produce 70 per cent of life cycle emissions.49 Although the share of circular spending has been growing fast, it continues to be outstripped by linear spending.

For example, the fashion industry is a global business with an estimated value of $1.5 trillion,50 which has been growing faster than the aggregate global economy over the past decade and is projected to continue doing so. While there is evidence of new circular business models around the resale and rental of clothing – which are attracting investment, giving rise to expectations of strong growth in these markets – such models currently account for only about 0.05 per cent of the global industry ($7 billion51 and $1.26 billion,52 respectively, in 2019). The largest share of circular spending in textiles is destined for the eco-fibres subsector, which is estimated to be worth $40 billion.

Another example can be found in the sector of electronics and e-waste. For some electronics manufacturers, circularity appears to be increasingly integral to their core business. Schneider Electric, for example, reports that circular activities now account for 12 per cent of its revenues (equivalent to €3.2 billion in 2019),53 while Philips has pledged to generate 25 per cent of its income from circular activities by 2025.54 Currently, as little as 17 per cent of global e-waste is recycled in formal recycling centres with adequate worker protection.55 E-waste is also the world’s fastest growing waste stream, and investment in recycling facilities lags behind the growth in new electronic products. Evidence suggests that this has been exacerbated by homeworking trends during the COVID-19 pandemic.56 There is clear scope to improve e-waste recycling and reduce the potential harmful impacts to workers through exposure to toxins. However, corporate investments are more focused on e-waste recycling than designing electronic products that last longer and are repairable.

Overall, the Just Economics research has estimated that global spending on corporate circular models is in the order of $800 billion, across eight selected sectors. While corporate circular economy initiatives and spending have exhibited very rapid growth in the last two years, Table 2 shows that this equates to just 3 per cent of the $35.4 trillion spent via linear models over the same period.

Table 2. Comparison of linear and circular corporate spending, 2019–21

Sector	Linear model value ($ billion)	Circular component	Circular model value ($ billion)	Circular as a proportion of linear
Fashion	1,500	Resale	7.00	5%
		Rental	1.26
		Artisanal	34.00
		R&D/new business models	2.00*
		Hemp	0.20
Electronics	2,000	E-waste market	42.00	2%
Construction	10,500	Retrofit market	132.80	3%
		Green cement	0.61
		Green construction	40.00
		Recycling	126.00
Mobility	2,000	Electric vehicles	52.00*	6%
		Battery recycling	1.00*
		Mobility-as-a-service	74.00
Food and beverage market	6,000	Vegan food market	12.69	2%
		Cell-based meat	0.02
		R&D	128.00*
Agriculture	8,000	Indoor farming	14.00	0.05%
		Food waste	34.00
		Insect feed	0.69
Non-specific waste	1,358 (less e-waste, food and construction waste and government expenditure)	Bioplastics	4.60	8%
		Plastic recycling	27.00
		Unaccounted-for recycling	79.00
Mining and extractives	3,600 (mining and oil and gas)	Waste to energy	35.00
		Waste to chemicals	N/A
		E-waste market	Already counted
		Carbon capture use and storage	10.45
Total	35,400		800.00	3%

Source: Lawlor and Spratt (2021), Circular investment.

Note: *Estimates.

Thus, while investment directed at the circular economy is significant and growing, in some sectors it equates to only a small percentage (in the low single digits) of overall corporate investment in the linear economy. Furthermore, precision is generally elusive in deriving these estimates. Due to a lack of indicators and vague definitions, it is impossible to identify to what degree spending in a specific sector is or is not circular. Finally, for all corporations, the tension between the financial imperative to sell an increasing number of products, business models based on principles of planned obsolescence, and the environmental need to reduce waste generation and to slow and narrow resource flows creates a difficulty for companies and regulators.

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