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The SDGs have shown us where we want to go. This is how finance and the circular economy will help us get there.

If the Goals are the roadmap to global transformation, and we are the drivers, then the vehicle that will get us there – our economy – is in drastic need of an overhaul, argues Michiel de Smet

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“We have a big, bold agenda before us – now we must work to make it real in people’s lives everywhere,” declared UN Secretary-General Ban Ki-moon ahead of the landmark Sustainable Development Summit at the UN’s New York headquarters in September 2015.

But there can be few surveying the ground in 2020 who can comfortably say we are on course to meet the SDGs’ 2030 deadline. If those goals are the roadmap to global transformation, and we are the drivers, then the vehicle that will get us there – our economy – is in drastic need of an overhaul.

In today's economy we take, make, waste; the more we make, the more we take and waste, over and over again. The result is that 45% of global greenhouse gas emissions come from producing the cars, clothes, food and other products we use every day. Beyond that, 11 million tonnes of plastics leak into our oceans each year, devastating coastal communities and vital natural systems; and by 2050, five million people a year could die due to industrial food production factors – four times the number of people currently killed in road traffic crashes globally.

By mid-2020, 10 public equity funds focusing partially or entirely on the circular economy had been launched by leading providers including BlackRock, Credit Suisse and Goldman Sachs. Since the beginning of 2020, assets managed through these funds have increased six-fold

But by redesigning production and consumption systems, the circular economy can play a crucial role in tackling these challenges, and achieving the other SDGs. The circular economy is about looking for solutions that address the root causes of challenges, not the symptoms; it’s about eliminating waste, not simply managing it better or cleaning up; it’s about using materials and resources rather than using them up; and it is about regenerating our natural world, rather just trying to reduce the damage we do. By remembering these principles we have an opportunity to deliver meaningful solutions to the issues people really care about, with positive social, environmental and economic outcomes.

Published by the Ellen MacArthur Foundation and Material Economics during NY Climate Week 2019, the Completing the Picture report showed how the circular economy can reduce greenhouse gas emissions associated with making products and growing food. For example, circulating products and materials – instead of producing new ones – can help cut energy demand, by maintaining the embedded energy that went into making them. In agriculture, adopting circular principles can not only generate fewer emissions but can build healthier soils that store rather than release carbon and make our food system more resilient.

Beyond those benefits, it has been shown that applying circular economy principles can improve air quality, reduce water contamination and enhance biodiversity. For example, in the packaged goods sector, packaging would be reused, recycled or composted, eliminating ocean pollution at source. In the fashion sector, circular business approaches, such as resale and subscription models, increase clothing utilisation rates and thereby reduce the amount of water needed for production and decrease industrial water pollution from the dyeing and treatment of new textiles. In agriculture, regenerative practices can reverse soil depletion, enhance food security, and improve the nutrient content of food.

By transforming entire industries, the circular economy is an opportunity for new and better growth opportunities, going far beyond ESG. It presents a vision for reshaping entire industries towards long-term value creation. We can already see this transformation happening; in fashion, clothing resale is expected to be bigger than fast fashion by 2029; and in plastics and consumer packaged goods, profit pools along the value chain are being transformed by increasing regulation, public pressure and innovation. In the food industry, Balbo Group, the leading organic sugarcane producer in Brazil, has demonstrated how shifting to regenerative agricultural practices – including restoring nutrients to the soil, eliminating chemical inputs, increasing biodiversity and up-skilling workers – leads to ESG best practice while improving yields by 20% compared to conventional sugarcane production.

And in finance, the circular economy market is taking off, with very rapid growth of activity in all corners of the sector over the last 18-24 months. While no such fund existed in 2017, by mid-2020 10 public equity funds focusing partially or entirely on the circular economy had been launched by leading providers including BlackRock, Credit Suisse and Goldman Sachs. Since the beginning of 2020, assets managed through these funds have increased six-fold, from $0.3bn to more than $2bn. In the first half of 2020, on average, these funds performed 5.0 percentage points better than their Morningstar category benchmarks. In the last 18 months, at least 10 corporate bonds to finance circular economy activity have been issued by global companies such as Alphabet, BASF, Orange, PepsiCo and Philips. A similar trend is visible across the financial sector in private market funds, bank lending, project finance and insurance. For example, Italian bank Intesa Sanpaolo launched a €5bn credit facility to support circular companies.

Now is the time for the financial services sector to build on this initial momentum and scale circular economy finance, in collaboration with governments and corporates. Doing so, finance will contribute to achieving SDGs, while capitalising on new forms of better growth.

 

Michiel de Smet is Finance Programme Lead at the Ellen MacArthur Foundation




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