Methodology
In preparing this research paper, the authors applied a mixed-method approach that included a desk review of circular economy-related literature, both grey and academic literature, and reports on sustainable finance initiatives, SDG finance and UN publications.
In addition to the literature review, the authors conducted two stakeholder discussion workshops, in March and October 2020, with experts from the finance sector and the circular economy research and practitioner community.
Furthermore, to inform our analysis and recommendations, the authors conducted an online expert survey on circular economy finance trends, the role of policy, and other measures to overcome current barriers. The methodology of the quantitative analysis of circular economy financing is published as a separate working paper by Just Economics that was commissioned by Chatham House. The working paper is entitled Circular investment: A review of global spending and barriers to increasing it. As well as details of the approach used, it includes more granular data on circular spending, which could not be included in full in this research paper for reasons of space.
For the quantification of current levels of spending and investment in circular economy businesses, programmes and initiatives, both top-down and bottom-up approaches to data analysis were used. For the former, areas of spending/investment relevant to the circular economy (waste management, energy efficiency and so on) were identified, and global estimates compiled by other organizations were collated. To obtain these, the authors conducted internet searches for specific countries, companies or economic institutions with the largest economic or environmental footprints using key search terms (e.g. circular construction + investment). For some corporates, the annual reports of key actors were accessed to extract data.
Estimating public spending on the circular economy was challenging, due to a lack of consistency in how the circular economy is classified. Appropriate breakdowns of spending on environmental protection are lacking in most public financial statistics. Moreover, there is no single entity that consistently tracks and verifies announcements. This paper used a top-down approach that aggregates estimates of public spending on waste, R&D, international development and energy efficiency and a bottom-up approach that involved searching and collecting data from a variety of key countries and companies, such as annual reports and online searches.
Data for the SDG analysis was drawn from the OECD’s SDG Financing Lab. Analysis of circular economy spending as part of green economic stimulus packages is based on the Greenness of Stimulus Index (GSI).
Despite these caveats, the authors believe that the data presented in the working paper and this research paper give a useful indication of the scale and pattern of current circular economy spending, including how it compares with investment in the linear economy. Due to the limitations listed above, it is recommended that the data presented in the working paper and this paper are used for illustrative purposes only. It is the authors’ hope that this work can be developed over time so that circular economy spending can be effectively tracked both sectorally and globally.
Data gaps in quantifying circular economy finance
Lack of data continues to be a major barrier that has limited the implementation of circular economy strategies. While the literature on the circular economy, financial products and initiatives promoting circular initiatives has grown significantly, there remains an absence of systematic data collection methods and a great variety of definitions, elements and underlying models around the circular economy. At this point in time, non-standardized and varied types of data are used to measure circularity.
Although the circular economy is, by definition, a holistic concept, different actors tend to focus on particular elements, reducing comparability. Some activities may be positive from a circular economy perspective, but are not defined as such by those engaged in them – i.e. they are inherently circular, but have not been seen in this way traditionally. In many cases, unless explicitly described as such, circular economy investments are not externally identifiable. In some instances – recycling projects, for example – the circular economy link is obvious. In most cases, however, an activity can be undertaken on a circular or a linear basis. Data on investment in manufacturing, for example, does not contain information on whether this has circular features or is purely linear. Not least because of these difficulties, there is a paucity of data on circular economy investment in terms of overall level, composition and trends over time.
The absence of consistent data of coherent quality makes it difficult for investors to evaluate the impact of prospective circular economy projects and companies. Investment decisions impelled by contestable understanding and inadequate information could also prove counterproductive and could direct capital towards projects with suboptimal environmental outcomes. The same lack of information is also an obstacle to scaling up small circular economy start-up businesses and pilot projects. There is often not sufficient publicly available data on SMEs, for example, to determine whether they meet green or circular finance criteria. A lack of standardized and comparable data is therefore one of the key challenges for the banking sector, especially when it comes to SME financing for the circular economy.
