Misum's Hanna Setterberg in new IVA report: The role of the financial sector for a circular economy
The 2-year project has assembled more than 50 companies, organisations and public authorities around the vision of Sweden ’being the leading nation as a resource-effective, circular society’. The analysis takes a societal approach and has studied business and partnerships models along value-chains focusing on the material flows of food, plastics and textiles, as well as the social functions of mobility and facility/space. The goal is to ‘move from words to actions by creating action plans that address the following: What should be done? Who should have the authority and responsibility to act? When should it start/end?’
“There is increasing interest and willingness to invest in ‘sustainable assets’”, Hanna Setterberg points out, but to get financial actors on track for the circular transition a range of systematic challenges have to be addressed, as outlined in the report:
The financial sector in general struggles with integrating environmental, social and governance (ESG) issues into their financial decisions and this also impacts the sector’s ability to provide financing for a transition to circular business models. The transition to circularity adds another layer of complexity in that the emphasis is on new, innovative business models. The financial sector looks for investment, but favors long-term, tried and tested, profitable projects in various industries and technology areas. Circular business models can rarely demonstrate the same documented history and success and thus run the risk of not being financed. In addition, circular business models have very different cash flow patterns which makes old benchmarks and targets obsolete. The report states that, through cooperation and innovation, new standards and indicators could be produced to facilitate the financial sector’s assessment of the potential of projects focused on circularity and resource effectiveness.
More generally, if the financial sector fails to fund the transition to a circular economy there might be a need for public authorities to step in. This can be done by taxation, subsidies or trading schemes to reflect negative and positive externalities like pollution, waste, or waste reduction in market prices. Furthermore, governments need to think about targeted funding schemes in collaboration with private actors in order to ramp up strategic circular businesses and help them overcome “the valley of death”. ‘Public funding is available for the research and pilot phases, but when actors want to take the next step and need more financing, they encounter a gap in the capital market. The capital requirements are often too large for government grants, too small for investment banks and institutional investors, and too new and unknown for commercial banks.’
The report also sheds light on labels and international initiatives that are already available, for instance guidelines for green bonds, the Task Force for Climate-related Financial Disclosure (TCFD), SDG assessment tools developed by the United Nations’ Development Program (UNDP), and ongoing projects of the European Union. In particular, the fact the circular economy is a prioritised objective in the EU’s taxonomy is promising. It is, however, important to increase investments aimed at making operations more resource-effective, and not only in those that are already “green”.
Read the full report here.