We face a triple planetary crisis of climate change, biodiversity loss and pollution that pose systemic risks for investors.
Upcoming events such as the UN Conferences on Climate Change (COP27) and Biodiversity (COP15) will add momentum to addressing this crisis. We’ve seen an increasing number of financial institutions commit to reaching net zero (and in some cases tackling deforestation), while others are beginning to take explicit action on nature and biodiversity loss.
In seeking solutions to this global crisis, it makes sense to focus on the heart of the problem: namely the way we produce and consume materials and products.
A circular economy is an important part of the solution, and investors must play a role in supporting the transition to a circular economy through their investment and management decisions.
Some investors have started to incorporate the circular economy into their responsible investment policies, investment decisions and their engagement with companies. However, investor awareness of the concept, its connection to other ESG issues and investor actions need to increase significantly.
The circular economy opportunity
In 2017, we extracted 92 billion tons of biomass, fossil fuels, metals and non-metallic minerals (more than triple the 1970 level).[1] The way we are currently taking materials from the earth, making products out of them, and finally discarding them as waste is likely to contribute to that total doubling again – reaching 190 billion tons by 2060. This will also further exacerbate the environmental risks investors face. For example, our resource extraction and processing is responsible for around half of greenhouse gas emissions and more than 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. In addition, the circular economy offers new growth opportunities. 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 solve these problems. For example, the New Plastics Economy Global Commitment, led by the Ellen MacArthur Foundation in partnership with the United Nations Environment Programme, has mobilized over 500 signatories to work towards ambitious 2025 goals and create a circular economy for plastics.
Businesses and investors have also called for the development of an ambitious UN treaty on plastics, and international negotiations will begin later this year to set out a global deal to end plastic pollution by 2024.
Political and regulatory frameworks, particularly in Europe, explicitly include circular economy requirements for a number of product value chains, such as
Outside 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 14th Five-Year Plan (2021-2025) and Japan as part of its master plan to build a solid circular economy.
There is a direct link between transitioning to a circular economy and reducing climate emissions and wildlife loss, and therefore between achieving that transition and achieving the goals of international frameworks focused on tackling climate change and biodiversity loss (such as the Paris Agreement and the forthcoming Post-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 to outline how they intend to achieve the Paris Agreement) mentioned the circular economy. Investors must also recognize these linkages and act accordingly. For example, circularity of operations is becoming increasingly important for those who comply with the Taskforce on Climate-related Financial Disclosures and the forthcoming 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, but the measures need to be more widely adopted and scaled up.
In our new report, we explain what the circular economy is and why it matters. We also recommend investors, among other things:
- 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 provide financial opportunities;
- Working with holdings to implement circularity to address systemic environmental issues;
- Working with broader stakeholders to address the underlying barriers to a circular economy transition, including policymakers and disclosure bodies.
As COP27 drives action by financial institutions towards net zero and the COP on Biodiversity builds consensus on a post-2020 global biodiversity framework, now is a good time for investors, raising awareness of the concept of the circular economy and its cross to sharpen -cut relevance as a solution.
The PRI will continue to support investors to scale up their circular economy actions, building on our past work to help them tackle plastic waste and pollution.
We encourage signatories who wish to contribute to the development of further technical guidance to contact us and share their views at [email protected] and to visit us at PRI in person Barcelona on November 30th for a panel discussion on the topic .
Read the report
View the personal PRI agenda
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