Published in mid-July by the UN Environment Programme, as part of a single framework of principles for responsible banking in line with the SDGs and the Paris Climate Agreement, the two reports Leveraging the Nexus between Circularity and Sustainability Impact and Circular Economy as an Enabler for Responsible Banking are designed to be a guiding tool for financial institutions in their efforts to reach their climate targets and to highlight how the circular economy can enable and accelerate the transition to a more resilient economic system.
The link between circular economy, climate, nature and pollution
In addition to describing the principles of the circular economy and providing an overview of the current policy and regulatory framework, the three authors Peggy Lefort, Kavita Sachwani and Simona Weber make the link between the circular economy, climate, nature and pollution operational, focusing on how banking institutions can integrate support for the transition to the circular economy into their path towards the Principles for Responsible Banking, while creating synergies with other areas of impact.
The report identifies numerous areas and concrete actions that banks can take to integrate circularity into policies and processes and increase funding for circular solutions and opportunities throughout the value chain, including policies, internal processes, customer engagement, portfolio composition and cash flows, as well as advocacy and partnerships. It’s not just about investing in fully circular companies, but also about engaging and encouraging companies in every sector to move towards the ecological and energy transition.
In addition to the report Leveraging the Nexus between Circularity and Sustainability Impact, which offers examples of banks that are integrating circular economy into their practices and policies, a second report has been published. As one of the authors Kavita Sachwan put it, "The report delves into circular solutions to achieve climate goals, providing banks with practical insights and actions to integrate circularity into their climate plans.” The third and fourth reports are sector-specific appendixes, intended to be read in conjunction with the climate-focused report, to guide banks in developing specific financing strategies in the high-impact sectors of construction and textiles.
"Integrating circularity," according to Lefort, Sachwani and Weber, "not only allows financial institutions to meet their climate commitments and other environmental and social goals, but also allows them to tap into new and improved sources of growth, long-term value creation and competitive returns, while cautiously addressing the long-term risks associated with linear business models."
Healthy and inclusive economies
In light of the current environmental and geopolitical crises, companies and financial institutions are increasingly exposed to systemic risks and uncertainty, including price volatility, supply shortages and logistical challenges. According to a McKinsey research from 2020, over the next decade, businesses can expect to lose nearly half a year of profits due to supply chain disruptions if they don’t take action. Adopting circular principles, on the other hand, can increase resilience to macroeconomic shocks while reducing costs from raw material and energy consumption, waste management and emission control through reduced virgin resource inputs, increased asset utilisation, improved resource efficiency or increased recovery of value after use.
The transition to a circular economy, if fair, can create more inclusive communities and workforces, influencing employment dynamics and requiring new skills. This is a transition that can bring challenges such as job losses and the need for retraining, but it also offers opportunities for job creation and improved working conditions, which can increase trust and collaboration between different economic actors, while reducing regional inequalities. However, the reduction of traditional industries may lead to unemployment in some areas, requiring efforts to ensure a just transition. The circular economy can also improve food security and protect human rights and health, ensuring healthier and safer living conditions.
Circular companies are 28% less risky
Also in mid-July was presented at ESG Connect a study by Cerved Rating Agency that analysed the impact of the circular economy on the risk profile of Italian companies using a sample size of over 2,000 subjects. The study shows that companies that adopt circular economy models are more sustainable, with lower environmental impact and better ESG performance. They also show better economic-financial performance, even during periods of strong exogenous shocks, and have a better credit profile than traditional ones, even in contexts of multiple crises.
According to the report, as of June 2024, these companies show, "an average default probability lower by approximately 28%, regardless of the company size: large circular companies are associated with an average probability of default of 3.12% compared to 3.90% for large companies without circular economy models". This is also confirmed among SMEs, which show a differential of over 210 bps (or basis points, which measure the percentage variation in the value or rate of a financial instrument) between the default probabilities of circular and non-circular companies. In terms of risk exposure, if credit institutions were to finance circular businesses, they could potentially save approximately 4 euros for every euro of financing provided.
This article is also available in Italian / Questo articolo è disponibile anche in italiano
Image: Dulcey Lima, Unsplash