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Dr Antonios Koumbarakis
Sustainability & Strategic Regulatory Leader, PwC Switzerland
Circular strategies and business models allow economic agents to maximise the value of capital and recyclable materials and contribute in a meaningful way to reaching environmental and climate goals. Circular finance has a key part to play in this. If we are to achieve these aims, however, there needs to be a systematic shift from linear to circular ways of thinking and acting, which also has implications for the investment process. Read more about why this transition is moving ahead slowly, even though it is vitally important for our planet.
Sustainable financial systems, sustainable investing, the circular economy – it is not easy to keep track of all the different terminology used in the area of sustainability. To help readers we will start by defining a number of key green economic concepts:
The business principles we have been taught for years are linear. We invent, develop, manufacture, advertise, consume, separate, dispose of and recycle goods. The majority of raw materials do not find their way back into the economic cycle or – like PET – leave it after just a few recycling cycles. As a result, valuable resources are wasted or permanently lost.
This is precisely what a circular economic model aims to prevent. The end of the lifecycle of a product or service can be the beginning of a new one. The circular economy has four strategies to reduce resource dependence (see Figure 1).
Figure 1: The circular approach has four strategies to bring about a sustainable economy.
Consumption of resources and emissions are at the heart of the climate debate. Most greenhouse gases result from linear processes, e.g. in the construction industry or energy consumption. Hence the international community has set itself ambitious environmental and climate targets in recent years, for instance in the Paris Climate Accord, the UN Sustainable Development Goals (SDGs), the EU action plan on financing sustainable growth and the Swiss Federal Council’s 2050 climate policy. We will only meet these targets if we concentrate 100% on circularity. Circular finance creates incentives to direct investments towards circular projects and promote climate-neutral innovation.
Playing a part in the circular economy in general and circular finance in particular opens up a whole variety of opportunities for businesses. First of all, they will contribute meaningfully to meeting climate targets. Secondly, businesses show they are forward-looking, bolster their reputations and secure a valuable competitive advantage. Circular finance means businesses have to examine their entire value chain and re-orient it if necessary. This can involve everything from procurement of raw materials or semi-manufactured goods to reviewing dependence on monopoly suppliers and seeking out alternative procurement methods, through to gradually reducing toxic chemicals and investing in innovation.
Those within the financial industry who want to transition to the circular finance principle need to update all the phases of their investment process (see Figure 2).
Figure 2: Circular finance involves the entire investment process.
Banks, insurers and other financial services providers sit at the interface between the financial economy and the real economy. They can guide flows of capital to support the transition from a linear to a circular economic model by setting incentives, leading the discussion and providing circular loans, and so facilitate circularity. Some examples for illustration:
The capital of Swiss investors can make a real difference, not just internationally, but also locally. Circular finance will create new activities and business models – in other words new jobs and job profiles. By acting as facilitators, the Swiss financial industry will significantly strengthen the external trade position and attractiveness of Switzerland as an economic centre.
The transition to a circular economic model will entail the risk of resource shortages. The financial industry has a duty to raise awareness and understanding of this risk, for example as regards price volatility. It must take account of it in structuring its offers and define how companies and investors will address the issue.
If the paradigm shift towards circularity is to advance in an orderly fashion, the state needs to establish the best possible regulatory framework. Recent domestic and international legislation has underlined the key role of the financial industry, for example Regulation 2020/852 of the European Parliament and Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment or the EU’s delegated act of 6 July 2021 on the Taxonomy Regulation. In Switzerland the Federal Council published a report and guidelines on sustainability in the financial sector on 24 June 2020.
Today’s economy is linear and as such is damaging to the planet. Digital technologies have created new opportunities to conserve resources and contribute to reaching our ambitious climate targets. Circular finance is just such an opportunity.
At the moment, not enough people have heard of circular finance. It not only needs to have a greater presence, but people also need to have a bigger emotional connection with it. In order to achieve this, a recognised regulatory framework, clear measurability via performance indicators and metrics and uniform taxation of circular operations are needed. Only then will banks, investors, customers and governments be speaking the same language and be able to exploit synergies.
But that alone will not be enough. Only if every individual changes their consumption behaviour and energy use and we shift from being utility maximisers to maximising our contribution to the greater good will we be able to tackle the big problems such as climate change and the loss of biodiversity in a sustained way. This transformation is proceeding slowly but is more essential than ever.
Sustainability & Regulatory Leader, PwC Switzerland
Tel: +41 58 792 45 23