The Circular Economy & Circular Finance

What is a Circular Economy?

The circular economy (CE) is a transformative approach to how society produces, consumes, and disposes of goods. In contrast to the traditional linear economy model — “take, make, dispose” — the circular economy is designed to be restorative and regenerative by nature. Its main goal is to decouple economic growth from the consumption of finite resources.

The circular economy encourages practices such as redesigning and repairing products to reduce waste, reusing materials, and recycling, ultimately creating closed-loop systems where the value of products, materials, and resources is maintained in the economy for as long as possible. As such, the circular economy not only helps mitigate the environmental pressures associated with overproduction and overconsumption, but also offers significant economic opportunities. In fact, based on research by Accenture, the circular economy could generate $US 4.5-trillion of additional economic output by 2030.

Projects aimed at resource efficiency, waste reduction, and sustainable production can lead to cost savings and enhanced operational efficiencies for businesses. For example, by eliminating waste from production with the application of ‘lean’ practices, manufacturers can cut costs. This, in turn, can drive profits for businesses, making circular investments not just environmentally sound, but economically attractive as well. Further, as environmentally conscious consumers also seek more sustainable products, companies can embrace circularity to gain new customers and differentiate from competitors.

What is Circular Finance?

Circular finance is an important enabler of the circular economy. Circular finance encompasses investment strategies, financial products, and services that facilitate the transition to a circular economy, promoting investments and financial flows toward projects that enhance resource efficiency, reduce waste, and foster long-term ecological health.

Financial institutions in Canada and abroad have been exploring how investments into the CE can open up new market opportunities while simultaneously aligning with sustainable finance goals and objectives. Evidence shows that investments aligned with CE principles help financial institutions and other investors diversify portfolios and, as demonstrated by a recent European study, can curb investment risk while driving superior risk-adjusted returns, leading to long-term value creation.

What is the Global State of Play for Circular Finance?

Globally, the concept of the circular economy is gaining traction - with circular finance emerging as a critical component of sustainable finance, complementing broader environmental efforts to tackle climate change, nature loss, and pollution while also spurring innovation and delivering socio-economic benefits. Between 2019 and 2023, the circular economy has mobilized more than $US 350-billion from financial institutions.

In many regions, financial institutions are beginning to integrate circular principles into their investment strategies. In addition, a circular economy has been identified as a critical environmental objective within many sustainable finance taxonomies and green bond frameworks, including in the European Union, Asia, and Latin America.

The European Union (EU) has been a front-runner in implementing circular economy policies, particularly through the European Green Deal and its Circular Economy Action Plan. These policies aim to reduce waste, enhance recycling, and promote sustainable product design. The European Sustainability Reporting Standards (ESRS) 5, part of the broader EU Corporate Sustainability Reporting Directive (CSRD), mandates companies to disclose their sustainability practices, including CE initiatives. This transparency is helping to drive investments into CE-related projects.

Countries in Asia are also recognizing the potential of the circular economy model. In its 14th Five-Year Plan, for example, China prioritizes CE principles, promoting resource efficiency and sustainability. The government is actively developing financial mechanisms, such as green bonds, to fund circular projects. Initiatives such as the Circular Economy Promotion Law are encouraging businesses to adopt sustainable practices, with financial institutions playing a pivotal role in providing the necessary capital.

In Latin America, countries including Brazil, Colombia, and Chile, are making strides in circular finance, with policies that promote sustainable development and waste reduction. Collaborative efforts between governments and the private sector aim to create a regulatory landscape that encourages investment in CE initiatives.

What is the Circular Finance Landscape in Canada?

In Canada, many banks and financial sector players are actively involved in financing circular economy businesses and projects - in sectors such as textiles, bioeconomy, construction, and plastics. Desjardins for example has been investing in a number of Circular Economy Labs in Quebec to support the local innovation ecosystem. Cycle Capital has launched the Circular Innovation Fund in collaboration with Demeter and L'Oréal, the largest venture capital fund in Canada focused on CE.

However, there remains a significant gap when it comes to integrating circular finance into Canada’s sustainable finance frameworks. Despite the Canadian government announcing plans to establish sustainable investment guidelines and mandatory climate-related disclosures, aligning with broader global efforts such as the framework put forward by the Task Force on Climate-Related Financial Disclosures (TCFD), the circular economy is not being considered as part of this framework.

Furthermore, without clear definitions, frameworks, and investment criteria for supporting circular economy initiatives, the Canadian financial sector risks missing out on vital opportunities to scale circular economy projects and drive long-term value creation.

To begin addressing this gap, Circular Economy Leadership Canada (CELC), in partnership with the United Nations Environment Programme Finance Initiative (UNEP FI) and a number of leading finance sector partners, released a Financing the Circular Economy Guidance Document for Canadian financial institutions in February 2024.

The Guidance is harmonized with the EU and other jurisdictions and provides a technology and sector-agnostic categorization or ‘definitional’ framework that can be applied to support lending and investment into circular economy business models, activities, and infrastructure. The Guidance serves as a critical foundation for integrating circularity principles into Canada’s broader sustainable finance framework while avoiding the risk of ‘greenwashing’.