We are facing a triple planetary crisis of climate change, biodiversity loss and pollution, which poses systemic risks for investors.
Momentum around solving this crisis is building with upcoming events such as the UN Conferences on Climate Change (COP 27) and Biodiversity (COP15). We’ve seen an increase in the number of financial institutions committing to net zero (and in some cases, tackling deforestation), while others are beginning to act explicitly on nature and loss of biodiversity.
When considering solutions to this planetary crisis, it is helpful to focus on the crux of the matter: namely, how we produce and consume materials and products.
A circular economy is an important part of the solution, and investors have a role to play in supporting a transition to a circular economy through their investment and management decisions.
Some investors have started to do this by considering the circular economy in their responsible investment policies, investment decisions and engagement with companies. However, investor awareness of the concept, its links to other ESG issues, and investor action all need to increase significantly.
The circular economy opportunity
In 2017, we mined 92 billion tonnes of biomass, fossil fuels, metals and non-metallic minerals (more than triple the amount mined in 1970). The way we currently take materials from the Earth, make products from them and ultimately tokenize them as waste, will likely contribute to that total doubling again – to 190 billion tonnes by 2060. It will also continue to exacerbate the environmental risks that investors are exposed to. For example, the extraction and processing of our resources is responsible for around half of greenhouse gas emissions and over 90% of water stress and biodiversity loss.
Beyond reducing waste and pollution, a circular economy has the potential to mitigate the adverse effects of climate change and biodiversity loss. Moreover, the circular economy presents new opportunities for growth. According to Accenture, a circular economy could generate $4.5 trillion in additional economic output by 2030, while the International Labor Organization estimates it could also create 6 million net new jobs by 2030.
The transition to a circular economy is underway
Companies are increasingly making voluntary commitments to address these issues. For example, the Global Commitment to the New Plastics Economyled by the Ellen MacArthur Foundation in collaboration with the United Nations Environment Programme, mobilized over 500 signatories to work towards ambitious 2025 targets to create a circular economy for plastics.
Businesses and investors have also called for the development of a ambitious UN plastics treatyand international negotiations will begin later this year to define a global agreement to end plastic pollution by 2024.
Policy and regulatory frameworks, particularly in Europe, explicitly incorporate circular economy requirements for a range of product value chains, such as the European Union Circular Economy Action Planthe EU directive on corporate sustainability reporting and the EU taxonomy.
Outside of Europe, several countries have joined regional alliances or adopted national policy frameworks that explicitly refer to a circular economy. This includes China as part of its 14e five-year plan (2021-2025) and Japan in its fundamental plan for establishing a sound material cycle society.
There is a direct link between the transition to a circular economy and the reduction of climate emissions and nature loss and, therefore, between achieving this transition and achieving the objectives of international frameworks focused on combating climate change. and biodiversity loss (such as the Paris Agreement and the upcoming 2020 Global Biodiversity Framework).
This is beginning to be understood by governments around the world. Last year, a third of nationally determined contributions (plans submitted by countries showing how they will achieve the Paris Agreement) mentioned the circular economy. Investors must also recognize and act on these links. For example, the circularity of holdings will be increasingly important for those who comply with the Taskforce on Climate-related Financial Disclosures and the upcoming Taskforce on Nature-related Financial Disclosures.
What should investors do?
It is important that investors develop greater awareness of the circular economy and its potential to solve environmental problems, while supporting the transition to a more circular economy. Some have already started to do so, but the action needs to be more widely adopted and scaled up.
In our new report, we describe what the circular economy is and why it matters. We also recommend, among other things, to investors:
- identify relevant sectors as part of their investment process and allocate capital to sectors or business models that support circularity and reduce environmental impact, and present financial opportunities;
- engage with holdings on implementing circularity to address systemic environmental issues;
- engage with broader stakeholders to overcome underlying barriers to a transition to a circular economy, including policymakers and disclosure bodies.
As COP27 builds momentum for action by financial institutions to achieve net zero and COP on biodiversity builds consensus on a post-2020 global biodiversity framework, now is the time for investors to raise awareness of the concept of circular economy and its transversality. -cut relevance as a solution.
The PRI will continue to help investors scale up their actions for the circular economy, building on our previous work to help them tackle plastic waste and pollution.
We encourage signatories who wish to contribute to the development of new technical guidance to contact us and share their views at [email protected] and to join us on November 30 at PRI in Person Barcelona, where we will be hosting a round table on the subject.
Read the report