The Rising Momentum of Responsible Investments and the Circular Economy

While climate change has become a central topic of discussion in recent years, it has been a part of our lives for much longer. The planet is now 1.2°C warmer than in pre-industrial times, a change that didn’t happen overnight. The Paris Agreement’s target to limit global warming to 1.5°C is increasingly viewed by scientists as an increasingly unlikely goal. Nevertheless, the European Union, along with many other nations, remains resolute in its commitment to preserving that target, as reflected in the discussions at COP27 in Sharm el-Sheikh this year. This indicates that significant steps are likely to be taken to reduce greenhouse gas emissions, curb air pollution, protect biodiversity, and enhance climate resilience.

For years, climate change experts have emphasized the importance of accessing financial resources to achieve tangible results, but they hadn't received enough support from investors. Although governments have been raising the issue of climate change on international platforms for over 30 years and even establishing international agreements, the inability to reach a common global consensus and the lack of stable, concrete climate policies had caused businesses and investors to be cautious. However, this agenda is now shifting. Awareness of climate change and its impacts significantly increased in 2021, marking a turning point for sustainability commitments. Since then, over 3,000 companies, including some of the world's leading ones, have committed to net-zero emissions strategies based on Science-Based Targets. This shift has also gained traction among investors, making it a key focus today.

As the global conversation on climate change shifts from awareness to action, the responsibility for addressing the crisis is increasingly being placed in the hands of supranational institutions, rather than solely on individuals, companies, and governments. A significant development in this new landscape was the establishment of the Glasgow Financial Alliance for Net Zero (GFANZ) during COP26, where 450 financial institutions managing over $130 trillion in assets committed to funding the transition to net-zero emissions over the next 30 years.[1] This move is seen as a critical step in driving climate finance, with projections indicating that global investment in low-carbon projects could reach $125 trillion by 2050, with 70% of this capital coming from the private sector. These commitments are a sign of growing momentum in the financial world, underscoring the pivotal role of sustainability-focused investments in shaping the future economy[2].

In summary, investors are stepping up their involvement in financing climate solutions, driven by a growing awareness of the climate crisis. This shift is redirecting investment away from sectors plagued by environmental and social risks, towards companies that offer climate-friendly solutions. As sustainability becomes a key consideration, the financial landscape is being reshaped by this evolving trend.

The Rising Focus of Finance: The Circular Economy

While renewable energy remains a central focus in the battle against global warming, it is far from the only solution. Nearly half of global greenhouse gas emissions are tied to the products and food we produce and consume. This reality underscores the need to shift from the traditional "take-make-dispose" linear economy to a circular economy model that prioritizes resource reuse and waste reduction. To illustrate the potential of this approach, the Ellen MacArthur Foundation analyzed five key sectors: cement, aluminum, steel, plastics, and food. The study predicts that by adopting circular economy principles, these sectors could reduce emissions by 9.3 billion tons of CO2 by 2050, equivalent to eliminating all transportation-related emissions worldwide[3]. This insight highlights the transformative power of circular economy practices in tackling climate change.

As governments, supranational institutions, businesses, and financial organizations grow more attuned to the potential of addressing climate change, many are now shifting their focus toward the circular economy. Increasingly, they are making commitments to transition to this model, which are being integrated into policies and regulatory frameworks that expedite the shift. Recent climate-focused developments, including the EU Circular Economy Action Plan, the Corporate Sustainability Reporting Directive, and the EU Taxonomy, are incorporating circular economy requirements, signaling a deeper commitment to sustainability and accelerating the transition to a more resource-efficient future.

The finance sector and investors are increasingly focusing on the circular economy as a key opportunity for sustainable value creation. According to data from the UN Principles for Responsible Investment (PRI), the number of investors referencing circularity and the circular economy surged from just 14 in 2017 to 229 in 2021. PRI's 2021 reports also revealed a growing commitment to environmental issues, with 448 investors addressing biodiversity and 2,080 highlighting climate change.[4] These figures underscore how sustainability is becoming an integral part of investment strategies, reflecting a broader shift toward long-term, responsible growth.

Since mid-2020, leading fund providers such as BlackRock, Credit Suisse, and Goldman Sachs have begun offering capital funds focused either partially or entirely on the circular economy. In addition, more than ten corporate bonds focused specifically on the circular economy have been issued by major financial institutions including Barclays, BNP Paribas, HSBC, ING, and Morgan Stanley. A similar trend is emerging in bank loans, project financing, and the insurance sector. In addition to international financial institutions, insurance companies are also developing new solutions to support business models centered around the circular economy.

BlackRock is signaling a shift in investment trends with its Circular Economy Capital Fund[5], launched in 2019, aimed at increasing investments in companies advancing the transition to a circular economy. This move not only underscores the firm’s commitment to sustainability but also sets a clear signal for other investors and companies, helping to steer global investment strategies in this direction. Beyond major players like BlackRock, a growing number of investment firms are being established specifically to focus on circular economy investments. According to research by Morningstar's ESG rating agency Sustainalytics, the size of the top 10 circular economy-themed funds has surged from $4 billion to $11.4 billion in 2020, reflecting a significant uptick in interest and capital flow into the sector[6].

In short, investor interest in the circular economy is growing by the day. As companies adopt circular economy principles and implement low-carbon models, access to green finance becomes easier, and the investment landscape for sustainable ventures continues to expand.

[1] Race to Zero, Race to Zero and GFANZ, https://climatechampions.unfccc.int/race-to-zero-and-gfanz-ensuring-the-rigour-and-impact-of-financial-sector-net-zero-commitments-and-action/

[2] Usher, B. (2024). Investing in the era of climate change (Paperback edition). Columbia Business School Publishing.

[3] Ellen MacArthur Foundation, Completing the Picture: How the Circular Economy Tackles Climate Change, 2021, https://emf.thirdlight.com/file/24/cDm30tVcDDexwg2cD1ZEcZjU51g/Completing%20the%20Picture%20-%20How%20the%20circular%20economy%20tackles%20climate%20change.pdf

[4] UN PRI, Closing the Loop, 2022, https://www.unpri.org/download?ac=17130

[5] BlackRock, BlackRock Circular Economy, https://www.blackrock.com/americas-offshore/en/products/310165/blackrock-circular-economy

[6]Peter Cripps, Environmental Finance, Circular Economy Funds Grow and Outperform in 2020, https://www.environmental-finance.com/content/news/circular-economy-funds-grow-and-outperform-in-2020.html