In this series, White Marble's ESG team highlights the key themes that we believe will take centre stage over the next 12 months and beyond. In this fourth article, Elisa Magistrali takes a look at the concept of the circular economy - how it has gained traction in recent years, and the role the financial services industry can play.

Let's talk about the circular economy

The other day a dear - and much more fashionable than me - friend from Milan (where else?) sent me a silk scarf she made out of an old skirt by an Italian designer. Something personal that reminds me of her that was handmade, stylish, and recycled. Clever girl! Giving old or unused items a new life is also a perfect example of the circular economy in action, keeping products and materials in use rather than falling into the trap of always seeking to replace rather than repair, and contributing to the increasing problems of landfill and resource scarcity.

The concept of a circular economy is not a concept that can be traced back to one single author or school of thought, although the architect and industrial analyst Walter Stahel is probably one of the best-known contributors to the concept. Stahel is credited with having coined the expression "Cradle to Cradle", or regenerative design, summarising an approach to the design of products and systems that models human industry on nature's processes.

In 1976 he co-authored a research report with Genevieve Reday to the European Commission on 'The Potential for Substituting Manpower for Energy', where they envisioned an economy in loops (or circular economy) and its impact on job creation, economic competitiveness, resource savings and waste prevention.

In recent years, the practical applications of the circular economy have gained exceptional momentum, due in part to changing consumer attitudes and habits. And here the 'Millennials effect' comes into play.

Millennials have recently become the most populous generation in the workforce, with increasing spending power and disposable income. They are conscious consumers, willing to spend more for sustainable products, used to the concept of shared ownership (from rented accommodation to cars, from clothes to Netflix accounts) and unprecedented access to and use of social media platforms to express their ideas and support around sustainability issues.

For organisations to stay competitive, supporting charitable programmes or recycling office waste is not enough anymore. Organisations must rethink their core offering and the way they conduct business, relating to everything from materials, processes, packaging, recyclability, delivery and environmental impact to their operations and financing needs.

However, their effort can't stop there. Businesses have to become advocates of a more sustainable way to operate, and raise awareness around their efforts in promoting and implementing circular activities.

For all businesses deciding to embark on this circular transformation, access to financing is a priority. Financial institutions are important players in this economic transition and have been slowly starting to recognise the potentials, growth opportunities and value creation that a transition to a circular economy can bring.

Building back better

While the Covid-19 crisis has shown the weaknesses in our economic and social systems, it has also brought sustainability issues into the spotlight. The circular economy has found its role as a crucial player in the path that financial institutions (asset managers, banks and insurers worldwide) are taking towards contributing to a more sustainable economy and society, while also being presented with a multi-trillion dollar economic opportunity.

In June 2020, global leaders from the corporate world (including many from the financial services industry) officially endorsed the circular economy as a solution to 'build back better' in the wake of the pandemic. That event was the latest step in an ongoing journey that has witnessed an incredible rise in the financing of circular economy activity.

Just to mention a few numbers:

  • The number of private market funds with a circular economy focus has increased tenfold from 2016 to August 2020.
  • Since the beginning of 2020, assets managed through public equity funds with the circular economy as the sole or partial investment focus have increased sixfold, from $0.3 billion to over $2 billion.
  • By mid-2020, 10 public equity funds focusing partially or entirely on the circular economy had been launched and at least 10 corporate bonds to finance circular economy activity had been issued by leading providers.

Not to mention the many financial products launched in the past 18 months in bank lending, loans and insurance solutions related to circular economies.

Another important area in which financial services are actively contributing to promote the circular economy is by exercising their stewardship roles and actively engaging with and supporting corporations and governments in their transition.

It will be a long journey as more and better expertise, data, research and collaboration with the public sector is developed, but nonetheless it is an exciting and promising one.


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