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Accelerating the transition to the circular economy: improving access to finance for circular economy projects

A report by the Informal Commission Expert Group “Support to Circular Economy Financing”
Waste management Recycling Economics Finance Circular economy Policy Waste minimization European Union

The transition to a circular economy in the EU is at an early stage. The activities of economic operators are influenced by the systems that have been developed and optimised for the prevailing linear production and consumption systems. Regulations, markets, investment tools and practices, including financial risk assessment, are adjusted to linear models, and externalities linked to linear business models are largely not taken into account. This poses a problem for the emerging circular models, which have to contend with the challenge of accessing finance, as the financial sector sees circular projects as highly risky and often not bankable.

To improve the conditions for financing circular economy projects, the Expert Group on Circular Economy Financing analysed barriers and identified the main areas where incentives need to be provided. A number of incentives should be provided through a series of well-designed and coordinated actions. These are incentives for:

  1. a level playing field: this will enable circular businesses to have a better chance of competing and succeeding on the market. It will result in better financing conditions for their businesses;
  2. collaboration along the value chain: different organisations in the value chain need to collaborate to optimise the circular solution, as resources and materials remain in a constant loop;
  3. the creation of long-term value: there should be a need to incorporate product longevity in business models;
  4. market participation: end-users play a crucial role in the value chain to make products circular. Currently, it is the part in the value chain where products often turn into waste. There is a need to ensure a better participation of these stakeholders to change this;
  5. the integration of the public good: the cost of the negative externalities of the linear model and the benefits of the positive externalities of the circular model need to be considered in order to allow circular companies to compete more fairly. On average, these circular companies contribute more to public goals and/or help to reduce societal costs;
  6. the build-up of finance knowledge: there is a need for better knowledge/understanding and adjustments with financiers. Often, circular businesses are significantly different. It is important that financiers and investors understand the differences to be able to value the business model correctly;
  7. first movers: demand pull is part of the success of new business models. This demand pull works as a magnet for new entrants and/or current businesses to change their model. No matter how perfect a value chain is organised, if people are not willing to pay, there will be no viable businesses.

Based on the analysis of barriers and incentives, the recommendations are addressed to three stakeholders groups — policy makers , financial institutions and project promoters. The experts recommend that stakeholders focus on the following actions as a high priority:

  1. characterise circular economy projects through metrics and taxonomy.
  2. promote and clarify the enabling role of public authorities.
  3. build capacity to make the transition to a circular economy.
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