AMPLIFY VOL. 36, NO. 10
The circular economy (CE) includes a series of practices intended to close the production-consumption loop, extend product use, reduce the number of resources needed to provide the same goods and services, and regenerate and restore ecosystems. These practices can occur at the individual level, in multiple levels within organizations, between organizations, across supply chains, and across geographic regions.
Investments in CE and sustainability initiatives by various investment institutions, organizations, and governments are expected to be in trillions of US dollars, with anticipated returns across the triple bottom line of sustainability initiatives (economic, social, and environmental).1
In the US, the Bipartisan Infrastructure bill, which contains many sustainability and CE investments, is budgeted for US $2 trillion. The European Green Deal policy is looking to invest tens of billions of euros, likely reaching hundreds of billions on various projects, including CE initiatives. In Asia, China has invested billions of yuan in circular economy, sustainable supply chains, and decarbonization of industry, with some investments going back decades.
Private investment organizations are providing their customers with multiple environmental, social, and governance (ESG) investment opportunities as well. Organizations such as BlackRock have proposed programs and funds that will invest in companies incorporating CE practices. This investment is part of a wider vista of US sustainability investing, estimated at US $8.4 trillion in 2022.2
Organizations looking to invest in CE initiatives (and sustainability practices) must make capital budgeting decisions and determine both strategic and tactical investment decisions. These decisions are diverse and include operational and strategic concerns. Should they shift to closed-loop systems? Should they invest in research and new equipment for byproduct usage? Should they introduce leasing (service-based) models? As they do this, companies must look beyond their stockholders to satisfy a variety of stakeholders, including consumers, supply chain partners, and communities.
There are concerns associated with these CE and sustainability investments.3 For example, government agencies need to determine the mega-projects in which they will invest and make this investment in a socially equitable and inclusive way. Similarly, investment portfolio managers must determine which organizations are actually CE-friendly — a difficult proposition given that the definition of circular economy is a contested and polysemous term. Individual organizations must determine whether the hurdle rates and investment models to support their decisions are appropriate for the circular economy and sustainability.
In This Issue
This issue of Amplify explores how businesses and public entities can manage investments in the circular economy in light of complex concerns that overlap many dimensions of social, technological, environmental, and economic systems.
We begin with a broad perspective of CE investment through a systematic literature review by Lihua Sun and Zhuowen Chen. Their review reveals six key aspects of CE investments: government, financial institutions and instruments, cooperation and collaboration, corporate governance, technology, and assessment tools. The remaining five articles further unpack these major dimensions.
In the next article, Ghulam Sorwar describes how bonds and loans, government financing, capital markets, and fintech can impart a solution for an effective circular economy. He acknowledges the need to consider complexities and says planning is a paramount objective in these activities; he then proposes coordinated local initiatives as an important way forward.
By nature, the circular economy involves multiple stakeholders. Thus, incentivizing investments in organizations with circular business models and facilitating better risk assessment for circular collaborative ventures are crucial. In their article, Ani Melkonyan-Gottschalk, Denis Daus, Lara Johannsdottir, and Daniel Goldmann introduce a framework in which physical infrastructure design, regional development strategies, and supply chain governance take place across society, industry, science, and policy. Best practices from around the world are showcased, highlighting places where society, industry, science, and policy have come together in multi-stakeholder partnerships to facilitate circular transformations. The authors draw attention to the role of finance and investment in the success of these initiatives.
Next, the focus shifts to a material that has caused serious environmental concerns. Plastic pollution is a very visible indicator of the negative externalities associated with linear systems of consumption and production. One obstacle to addressing plastic pollution is a lack of investment due to insufficient market incentives. In this context, Henning Wilts and Virginia Pillmann recommend plastic credits as a financing mechanism for investment in circular plastic systems. Echoing the framework of Melkonyan-Gottschalk et al., the need for collaboration between government (policy), industry, and society (consumers) is clear when it comes to promoting plastic credits. The article takes us to a developing region of the world via case studies about three Indian cities. Wilts and Pillmann discuss the conditions that can support plastic credit programs without undermining incentives for waste prevention and extended producer responsibility in India and present lessons for a variety of other contexts.
Scant data availability and poor data quality make it difficult for investors to choose where to invest and how to evaluate their investments. In their article, Tien-Shih Hsieh and Zhihong Wang identify new sources of data and emerging technology that can be deployed to offer a more comprehensive understanding of circular investments and performance. The authors provide insights into how waste management companies and manufacturers can use the Internet of Things and blockchain to capture real-time data. The digital tools introduced can store data in a transparent manner to support decision-making and corporate governance. The authors also consider how to interpret news and social media data using sentiment analysis and how to employ artificial intelligence to analyze large amounts of ESG data in real time to inform investment decisions.
Staying on the theme of supporting corporate governance, our final article tackles the challenges of applying traditional accounting methods to organizations with circular business models. Subhasis Ray and Ritesh Kumar Dubey say organizations face several challenges when adapting circular accounting systems, including determining the traceability of products and materials, verifying the value of products and materials, recognizing revenue, and disclosing circular performance. Ray and Dubey say companies can address accounting complexities of the circular economy through lifecycle assessment, impact accounting, movement-based accounting, and new accounting standards. These approaches help drive activities that lead to successful organizational investment in CE and sustainability initiatives.
From Circular Economy to Circular Society
Collectively, the articles in this issue of Amplify shed light on how businesses and public organizations can address CE investments. They describe how organizations can monitor and measure investments in CE initiatives (both specific facilities and the entirety of the supply chain); how managers and investors can overcome data limitations in assessing CE performance and risks; and how technology can support CE investment determination, allocation, dispersion, deployment, and monitoring.
Proactively seeking interaction across government, industry, science, and society should be seen as an enabling strategy for organizations seeking to invest and support sustainability and CE initiatives, but it requires overcoming the complexities that come with these endeavors. Making sense of the myriad of financial instruments at the disposal of government and financial institutions, coupled with knowledge of the regulatory environment and international financial-reporting standards, is part of the complexity faced by policymakers, executives, and managers.
We close by drawing attention to areas still in need of investigation, including how CE investment priorities differ across countries and regions. There are a variety of cultural and socioeconomic contexts that need to be overcome — simply identifying some of these issues is an important initial effort.
How finance can be directed toward inclusive, just, and equitable circular projects in various institutional contexts is a necessity. Although alluded to in the articles here, a more explicit evaluation beyond economic, environmental, and business decisions is needed. We need a holistic, systemic evaluation of how government, financial institutions, and industry can optimize investment synergies.
Circular projects are currently measured on how they achieve improvements in circular outcomes, but they need to move beyond doing no harm to mitigating climate change and protecting biodiversity (i.e., regenerative investment, not maintaining the status quo). Such investments should be seen as the gold standard.
As you read through the articles in this issue, consider how you and your organization can make a significant difference. The discussion will no doubt continue, and we hope a clearer image is emerging for a circular economy that can advance to a circular society with appropriate and sustainable investment.
References
1 Lacy, Peter, and Jakob Rutqvist. Waste to Wealth: The Circular Economy Advantage. Palgrave Macmillan, 2015.
2 “2022 Report on US Sustainable Investing Trends.” US Sustainable Investment Forum (SIF), accessed October 2023.
3 Dewick, Paul, et al. “Circular Economy Finance: Clear Winner or Risky Proposition?” Journal of Industrial Ecology, Vol. 24, No. 6, June 2020.
