The circular economy can contribute to achieving the SDGs, however, circular economy solutions remain severely underfunded. Many emerging circular innovations and business models in low- and middle-income countries offer new investment opportunities for urgently needed private capital.
The United Nations Development Programme’s Human Development Report 2020 highlights the need to design and incentivize a transition to a circular economy to meet human development targets in the Anthropocene age. In practice, circular economy activities can contribute both directly and indirectly to achieving numerous social, economic and environmental targets of the SDGs, most obviously and directly SDG 12 (sustainable consumption and production). Given its connection with most other SDGs, through a focus on implementing SDG 12 targets via circular economy solutions, wider SDG progress is possible. For example, circular economy activities can make positive contributions to SDG 2 (zero hunger) by reducing food losses and food waste, and building circular, regenerative food systems. Reducing waste and food losses is also important in the agricultural sector. SDG target 12.3 pledges to ‘reduce food losses along production and supply chains, including post-harvest losses’ by 2030. Making agricultural supply chains more circular can address SDGs 2, 8, 12 and 15, and is key to improving food security and reducing hunger, especially in rural areas, while also creating income opportunities for producers and small rural businesses.
Furthermore, circular solutions can support SDG 3 (good health and well-being) through the reduction of waste and pollution; SDG 6 (ensure access to water and sanitation for all); SDG 11 (make cities inclusive, safe, resilient and sustainable), for example, by improving housing conditions in informal settlements; and SDG 13 (take urgent action to combat climate change and its impacts). In addition, both SDG 8 (inclusive and sustainable economic growth, employment and decent work) and SDG 9 (resilient infrastructure, sustainable industry and innovation) offer opportunities to apply circular economy solutions, by improving working conditions in informal sectors processing secondary resources, or by establishing industrial symbiosis networks for resource-efficient industrial development.
Making agricultural supply chains more circular can address SDGs 2, 8, 12 and 15, and is key to improving food security and reducing hunger while also creating income opportunities for producers and small rural businesses.
The question, then, is: how can circular economy finance be made to work for human development and the SDGs? In low- and middle-income countries, most circular economy-related development finance is directed towards waste management and recycling sectors. This is important to tackle the waste crisis facing many developing countries. For low-income countries, to achieve SDG 11, SDG 12 and SDG 15 (sustainably manage forests, combat desertification, halt and reverse land degradation, halt biodiversity loss) the estimated investment needs for large-scale waste treatment and recycling technologies ranged between $6 billion–$42 billion in 2015, which was expected to triple to $17 billion–$125 billion by 2040, given current population growth, urbanization patterns and increase in per capita waste generation.
Due to the job-creation potential of the circular economy, development finance also has an important role to play in supporting higher-value circular economy opportunities in developing countries to achieve SDGs 8 (decent work and economic growth) and 9 (innovation, industry and infrastructure). This is even more important now in the context of the COVID-19 pandemic, which has exposed vulnerabilities in both developing countries and global value chains (GVCs). For instance, developing countries specialized in textile and garment supply chains have seen a severe disruption of their manufacturing sectors and labour markets during the pandemic. Circular economy solutions for textile manufacturing, such as recovering, reusing and recycling textile waste, can save resources and create higher-value products. However, small and medium-sized suppliers face many capacity constraints in shifting from linear to circular modes of production and to new business models. These constraints include a lack of skills and management capacity for circularity, outdated technology and equipment, and a lack of finance to upgrade factories, facilities, and logistics systems. Promoting circular economy approaches in SME and entrepreneurship support in development cooperation programmes can be a way forward.
Another issue that circular economy finance could help to address is the prevalence of poor-quality employment and informality, through investments that improve working standards and increase incomes. This has been identified by the International Labour Organization (ILO) as the main issue for global labour markets, with millions of people being forced to accept inadequate working conditions. ILO research shows that a majority of the 3.3 billion people employed globally in 2018 had inadequate economic security, material well-being and equality of opportunity. Development finance institutions (DFIs) will need to generate data to measure the poverty-alleviation benefits of circular economy practices in order to make circular economy finance work for this area of human development – in particular for the poverty reduction goals of SDG 1, but also in terms of other social SDGs such as gender equality (SDG 5), reducing global inequality (SDG 10) and quality of work (SDG 8). For example, in addition to data on material use, waste reduction and environmental performance, data will be required on the total number of jobs created, as well as new metrics on the distributional impacts on the quality of work, upskilling, the division between skilled and unskilled jobs, formal and informal work, gender and youth, as well as rural and urban employment.
Financing the SDGs and circularity
While the SDGs have achieved several of their objectives since they were initiated in 2015, as highlighted in 2020 by the UN’s special rapporteur on extreme poverty and human rights, they are currently failing in relation to key goals such as poverty eradication, economic equality, gender equality and climate change. There are calls for the SDGs to be recalibrated in response to the COVID-19 pandemic, the accompanying global economic recession and accelerating climate change. Based on calculations by the International Monetary Fund (IMF) and UNCTAD, the funding gap for the realization of the SDGs in developing countries alone is estimated to be $2.5 trillion per year for the sectors of power, transport, telecommunications, water and sanitation, food security and agriculture, climate change mitigation and adaptation, ecosystems/biodiversity, health, and education. According to the Sustainable Development Solutions Network (SDSN), the average SDG financing gap per year for all low-income developing countries (numbering 59 in 2019) was to be around $400 billion between 2019 and 2030.
International development finance relying on ODA alone will not be able to address this gap. Pre-pandemic, total ODA fell by 4.3 per cent in 2018, and ODA to least developed countries (LDCs) by 2.1 per cent. In 2020, total ODA rose by 3.5 per cent in real terms compared to 2019, to reach the highest level ever recorded. This positive development is in part due to the support given by members of the OECD’s Development Assistance Committee (DAC) to an inclusive global recovery from
Still, the current global context poses risks in terms of reductions in the financing available to developing economies. Developing nations are facing debt distress, exacerbated by the pandemic, which further decreases the amount of public funding available for sustainable development initiatives. The OECD estimates that external private finance inflows could drop by $700 billion in 2020 compared to 2019 levels, which would exceed by 60 per cent the impact caused by the 2008 global financial crisis.
Such outcomes would exacerbate the threat of major development setbacks that would increase global vulnerability to emerging environmental and public health risks: future pandemics, climate change and other global public damages such as biodiversity loss or plastics pollution. In the current context of the post-COVID-19 economic recovery, the mandates of DFIs mean that they will be expected to offer countercyclical financing to provide sufficient financial stability for low- and middle-income countries to address long-term challenges. However, this has the potential to have a negative impact on investment volumes dedicated to SDG and climate finance, through the provision of increased working capital and refinancing.
Globally, UNCTAD expects that foreign direct investment (FDI) will fall from its 2019 value of $1.54 trillion to below $1 trillion in 2021. Developing economies are expected to see the biggest fall in FDI, because they rely to a greater extent on investment in GVC-intensive sectors such as manufacturing and extractive industries. For some countries, this could imply a need to reindustrialize, or even to cope with a premature deindustrialization. Upgrading along the GVC development ladder becomes more difficult for developing countries in the post-pandemic recovery.
Against this background, the new developments in instruments and other ways to finance the circular economy could provide opportunities to contribute to the SDGs through specific circular economy solutions and business innovations across a range of different sectors: these could include textiles, plastics and packaging, renewable energy, water and sanitation, electronics including e-waste, automotive, and food and drink.
How is the circular economy currently financed across the SDGs?
How is the circular economy currently being funded through international development finance in the context of the SDGs? Overall, existing circular economy initiatives and projects are small in scale, and inadequate to address the entirety of sectoral investment needs. In the case of Africa, the African Circular Economy Alliance has identified multiple opportunities for increased circularity and the SDGs in five key sectors: food systems, plastics and packaging, the built environment, electronics and e-waste, and fashion and textiles, at the same time emphasizing the need for new investment activities and instruments. Investments and adequate incentives are required to make the economic and financial case for the circular economy in the context of international development.
Both DFIs and climate funds (e.g. the Green Climate Fund, which resides within the UN Framework Convention on Climate Change) have a role to play in providing concessional finance – lines of credit that can help to scale up circular economy finance. Since many waste management and circular economic activities in developing countries rely on the informal sector (e.g. for the repair, refurbishment or repurposing of second-hand materials) this informal aspect also makes it difficult to scale up existing activities with formal finance mechanisms.
So far, current circular initiatives have been relatively small in scope, and accelerating investments for the SDGs requires access to additional financing instruments and a transformative change by participating stakeholders. Focusing on SDG 12 – the core SDG for the circular economy – is a reasonable proxy, since SDG 12 targets relate most closely to the 9R circularity behaviours framework. Although the SDGs do not map perfectly on to circular economy categories and business models, there is some overlap. Most importantly, SDG 12 concerns sustainable (responsible) production and consumption, which is obviously core to the circular economy. Elements of the circular economy models are also contained in other SDGs, such as SDG 6 (clean water and sanitation), SDG 9 (industry, infrastructure and innovation) or SDG 15 (life on land) to assess the importance that donors place on circular economy issues in their ODA strategies.
According to the OECD’s SDG Financing Lab, annual flows of ODA that can be directly associated with SDG 12 varied within a relatively slim range in 2012–17, having reached $3.4 billion (in nominal US dollar terms) in 2012 and a low of $2 billion in 2014 before rising to $2.9 billion in 2017. The share of ODA that can be associated with one or more SDGs varied between 1 per cent and 2 per cent over the same period, with no clear upward trend being discernible in either case. Cumulatively, ODA investment totalled $16.1 billion in 2012–17.