To ensure that future taxonomies support the circular transition, policymakers must consider how to integrate the holistic and transformational nature of the circular economy within a taxonomy’s architecture, its usability and the wider enabling policy and regulatory environment.
Realizing global environmental goals at the same time as building economic resilience will require the widespread transition to a circular economy. Yet, due to its systemic nature, early stage of development, low data availability and limited awareness among the financial sector of circular business models, adoption of circular practices remains low and a significant financing gap exists.
Sustainable finance taxonomies promise to provide financial markets with clarity on the economic activities that substantially contribute to a circular economy, while at the same time directing finance towards those activities. Nonetheless, taxonomies themselves are also in the early stages of maturity, particularly when it comes to embedding the circular economy.
There are several unique challenges involved in embedding the circular economy within a sustainable finance taxonomy. The lack of binding multilateral agreements or targets on the circular economy, as well as globally recognized definitions, standards and methodologies for metrics and reporting makes it difficult to develop objective goals, substantial contribution and DNSH criteria. Furthermore, the current circular economy policy and legislative landscape is becoming increasingly fragmented and lacks the ambition and clarity necessary to encourage widespread investment in substantial contribution activities. The EU CEAP takes a step towards this but remains limited in its economic scope.
Existing taxonomies are also limited in that do not consider equally the need to shift away from significantly harmful linear activities or the need to encourage transition activities in sectors where substantial contribution to the circular economy cannot be achieved. Nor do they consider the need to continue financing activities that currently ‘do no harm’ but are important enablers of the circular economy transition.
Finally, the complexity of circular economy reporting should not be underestimated. Levels of maturity in terms of metrics and methodologies remain low, while access to the relevant data required to report is limited. Lack of available data and the cost associated with gathering such data can result in low levels of enthusiasm and participation among companies.
To ensure that taxonomies being developed around the world support the circular transition, policymakers and practitioners must consider the following actions. These recommendations have been divided into the three categories detailed in Chapter 3 and derive from a series of roundtable sessions hosted by Chatham House and E3G that brought together over 100 public, private and third sector stakeholders involved in the development or operationalization of a sustainable finance taxonomy.
Strengthening taxonomy architecture
- Engage with and learn from industry associations and individual companies that have managed to integrate circular economy principles into a profitable business model and disseminate lessons to wider stakeholder groups;
- Task Technical Working Groups to seek solutions to further embed and incentivize the adoption of the waste hierarchy principles, measurable thresholds, and requirements and mechanisms that foster wider supply-chain collaboration;
- Ensure DNSH criteria for the circular economy are consistent and objective by engaging with science-based expert advice, reached by consensus with all stakeholders represented (including civil society);
- Consider how mechanisms for continuous improvement are built into a taxonomy – paying particular attention to creation of objective, qualitative criteria in place of qualitative TSC and DNSH; and
- Assess the merits of extending existing taxonomies to account for the circular economy transition and enabling activities.
Improving taxonomy usability
- Provide financial and capacity-building support to further develop and improve adoption of circular economy metrics, data collection and reporting processes;
- Increase targeted awareness-raising on the circular economy as a business strategy via peer-learning and business campaigns; and
- Train accountants, legal and fiscal specialists to navigate the added layers of complexity that circular economy requirements, minimum performance standards and the use of waste hierarchies entail.
Creating an enabling policy and legislative environment
- For governments and policymakers seeking to introduce, discuss and vote into law objective and legally binding national targets for the circular economy: Ensure the goal of the circular economy objective within their taxonomy aligns with and supports such targets;
- Participate in, and encourage, multilateral discussions on:
- Harmonizing circular economy elements of taxonomies in a context of increasing policy and legislative fragmentation; and
- Providing financial and capacity-building support to suppliers in critical supply chains that will be most affected by the circular economy transition (particularly SMEs in low-income countries).
- For existing working groups on sustainable finance, such as that of the G20: Improve global comparability and interoperability of taxonomies; and
- For multilateral development finance institutions: Provide regulators engaged in developing taxonomies with conceptual frameworks and procedural guidance on how to include circular economy objectives and criteria (see, for example, the World Bank framework on developing a national green taxonomy).
