The concept of a circular economy is an important building block for achieving the Paris Climate Agreement and the Sustainable Development Goals. With the entry into force of the EU taxonomy for sustainable economic activities from 2023 and its environmental objective 4 “Circular Economy”, the circular economy gains a new quality from a financing perspective. What still seems elusive to many market players today will then be defined by the European Commission with concrete activities and provided with specifications for measurement. In cooperation with the Gesellschaft für Internationale Zusammenarbeit GIZ, the Frankfurt School - UNEP Collaborating Centre for Climate & Sustainable Energy Finance has prepared the study Financing Circular Economy - Insights for Practitioners. It has been published at the UN environment conference Stockholm+50 in June 2022.
Prevailing production and consumption practices lead to immense waste of resources, pollution, loss of natural ecosystems and biodiversity, and are incompatible with the global climate goals. In the past two decades, global resource consumption has doubled to 100 billion tonnes in 2019. 90 percent of all materials used are discarded after use. The core principle of the circular economy stands in opposition to this linear economy. By circulating materials and products, production and consumption are decoupled from the consumption of finite resources.
Clear guidelines necessary
The study shows that, on the one hand, the demand for financial products facilitating green and circular projects has risen sharply in recent years. On the other hand, unfavourable legal framework conditions contribute significantly to the fact that investment flows continue to be steered towards linear activities. Important regulatory building blocks, such as extended producer responsibility according to the polluter-pays principle, can help to address the prevailing market failure. Regulatory adjustments have a significant impact on the competitiveness and related financing opportunities of circular business models. In addition, guarantees or procurement criteria are able to boost circular business models.
Measures by policymakers and the financial sector
The study describes lighthouse initiatives of public and private actors – for example circular building standards, recycling quotas or equity funds of certain asset managers – as well as public-private partnerships such as the eco.business Fund of the German development bank KfW. Finally, the authors of the study use the example of five countries – Albania, the Dominican Republic, Colombia, Rwanda and Vietnam – to show to what extent established and innovative financing mechanisms such as bonds, product and financial leasing can be used more intensively and derive recommendations for German development cooperation.