The circular economy needs the financial sector 10 November 2021
Following on from sustainability pledges, banks and insurers are supporting the transition to a more circular economy.
At this very moment, diplomats from all over the world are gathered at COP26 in Glasgow, Scotland. They are, we hope, hammering out the details of the next groundbreaking climate agreement that will save humanity. There is accordingly a lot of focus in various media outlets on environmental and sustainability matters. Obviously, there is no silver bullet to the climate crisis that is bearing down upon us. Instead, our approach – from governments to businesses to individuals – to dealing with rising temperatures will be multi-pronged.
One of those prongs is the circular economy. The circular economy is a transformed way of producing and consuming in our world. Instead of single-use, resources are used several times, maximizing their utility. Waste is reduced, resources are reused, and nature regenerates. The circular economy contains the processes that form the latter two parts of the “Reduce – Reuse – Recycle” slogan. Joseph Capurso, CommBank’s Head of International Economics, adds a fourth R: Recover.
There are incredible business opportunities in the burgeoning circular economy movement. Consumers are certainly demanding it. And when consumers demand something, so follows people who seek to supply. It then becomes a matter of financing. That’s where the financial sector comes into play. The role of the financial sector in addressing the climate crisis is well established. What is financed, and, perhaps more crucially, what is not, will determine the fate of the planet.
For the circular economy, money needs to be thrown at a wide range of projects. Some big, some small. But companies and people with bold ideas for transforming the way our societies consume and use resources need to be supported with financing. Not every one of these projects is guaranteed to succeed, but the more ventures that are backed, the more success stories will come to fruition. And the nature of the circular economy is such that it requires multiple stakeholders, working in conjunction, to build sustainable and reinforcing loops of production and consumption.
Investing sentiment and appetite has been strong and is growing considerably. The Circular City Funding Guide highlighted the growing attention from commercial banks, looking at initiatives from the FinanCE group, Intesa SanPaolo, and ABN AMRO. They include dedicating EUR 5 billion to innovative companies and projects in the circular economy as part of Intesa Sanpaolo’s 2018-2021 business plan. ABN AMRO has incorporated circular principles into its investment assessments, emphasizing that circularity increases not just sustainability but also value and profit.
In Eastern Europe, the European Bank for Reconstruction and Development (ERBD) launched its first ever “Circular Economy Regional Initiative”. It will support SMEs in the region and aim to improve chemical and waste management. BNP Paribas is offering its clients the chance to give their investments a more sustainable bent, with an index-tracked ETF fund that focuses exclusively on the circular economy.
Insurers also have a role to play. As Efma member AXA put it, “The circular economy offers an opportunity to insure new activities related to product disassembly, refurbishing and recycling, as well as to imagine new kinds of insurance to promote the circular economy.” With ownership of items being shared and things being used differently, it calls for a reimagination of how things are insured. This is something you see when the insurance industry interacts with the biggest tech firms like Uber, AirBNB, or BlaBlaCar.
The headlines might be focused on Scotland. But a lot of the real action is taking place on the ground, all around the globe. Every day, new ideas are being pitched and put into motion. As I’ve written previously, the transition from slogans and value statements to real action is happening very quickly in the financial sector. The circular economy is yet another example of banks and insurers playing a crucial role in the transition to a more sustainable world. More needs to be done, certainly, but momentum is building and the financial sector is right there as an essential partner.