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Financial firms and other investors need to zero in on environmental, social, and governance considerations. The financial sector can play a decisive role in mitigating the risks inherent in linear economic models, and in transitioning to a more resilient, circular economy. The industry can choose between a business-as-usual approach, by continuing to finance extractive and highly-polluting industries like oil and mining, or it can help enable the shift to a more regenerative global economy - where waste and environmental damage are proactively limited. This shift is already evident in the form of new environmental rules and regulation, and heightened expectations for sound environmental, social and governance (ESG) principles in the face of a mounting climate crisis. Reputational risk and public pressure can help prompt banks and other investors to make the right decisions, nudge them in the direction of innovative, circular economy-focused businesses, and steer economies in a more constructive direction. Finance will inevitably play a vital role in adopting circular thinking at scale, not least by allocating the necessary capital to boost related projects, fund the necessary research, and build enabling infrastructure in the form of safe and renewable materials and products. There is clearly a growing amount of interest in environmentally- and socially-responsible investing. As of 2020, sustainable investing assets (those purchased by institutional investors like pension funds that take into account environmental, social, and governance factors) in Europe, the US, Canada, Japan, Australia, and New Zealand totalled $35.3 trillion, according to the Global Sustainable Investment Alliance - a 15% increase compared with 2018. Yet, many circular economy investment opportunities remain untapped. The finance sector can encourage and support businesses transitioning to a circular model by providing more related financial solutions and advisory services, and by honing their own understanding of the particular risk and return of circular business models - to help firms reorient strategy accordingly. Directly comparing the performance of traditional businesses with that of circular businesses can obscure the risks inherent in both - as circular models create value in novel ways. Ultimately, a circular economy could generate a wealth of new investment opportunities, and direct trillions of dollars in global capital in search of profit in ways that manage to protect the environment and bolster the social fabric.

Circular Finance

KEY TRENDS

Circular Economy