Exploring the role of finance within a circular economy: Part 1

25 February 2021


Written by: Ryan Stodart, Bankers without Boundaries

Globally, the transition towards net-zero must be accelerated if we are to avoid the worst effects of the climate crisis and environmental degradation. If drastic action is not taken, the cascading effects of the varied challenges we face will result in irreversible socio-environmental harms. To respond, we must rethink our systems and economic models. Implementing circular economy principles, globally, regionally and locally is a critical solution in this response. We have worked across different circular economy focus points, particularly, at a city level.

Bankers without Boundaries (BwB) focuses the experience of finance experts to the most challenging socio-environmental issues faced by societies around the world. Our work centres on implementing solutions between the public and private sector, on the premise that interdisciplinary collaboration and cross-sector support are intrinsically linked to successfully scaling projects and technologies at the necessary pace to meet socio-environmental development needs.

BwB has a wide range of experience with circular economy projects across several different concept areas. This includes strategies to drive forward circular economy business models and innovation by stimulating start-up ecosystems within cities, regions or countries. We also work on innovative pilot projects that prove circular technologies or business models as demonstrated, practical case studies, providing a roadmap for replication, best practices and further innovation. Learn more about this work below and in their next blog coming soon.

Start-up ecosystems

The support systems critical to a start-up ecosystem are not new concepts and are well proven. Start-ups require a broad range of support and expertise and have varied funding requirements depending on their stage of development. Support can be provided through common structures such as early-stage incubators; accelerators; and investment funds. Typically, the incubation stage provides support for the development of an idea through workspace provision, technical assistance and mentoring through to low-level funding and deeper support within accelerators, supporting start-ups towards fundraising from investment funds that want to fuel the growth of innovative companies in exchange for equity. However, the current venture capital ecosystem has limited knowledge or practical experience in circularity and the development of circular economy solutions. It is therefore crucial that circular-economy-focused growth apparatus is designed and implemented.

The Circular Economy Investment Fund, administered by Zero Waste Scotland, is an example of a funding mechanism with the mandate to stimulate a circular economy ecosystem within Scotland. It differs from the aforementioned examples, as it exclusively disperses public funds, through grants, in line with its circular economy funding criteria. The mechanism is a finite funding facility provided by the European Regional Development Fund. On the private side are private investment funds like Circularity Capital in Edinburgh, where private capital is used to drive forward opportunities presented by the circular economy, however, contrastingly to the Circular Economy Investment Fund, equity stakes are taken and investments are made to create returns for investors rather than through grant funding.

It is clear that a combination of public-private participation within such models could accelerate the development of a circular economy. Public finance can be used to support the earliest stage or least commercial opportunities. This would provide the support that early-stage innovative solutions require but often cannot secure from the private sector due to the level of risk and low commercial opportunity. Public finance and institutions are however, unsuited to the more capital-intensive growth stages of investment. It is at this point, where a blended structure of public and private finance allows for private investors to participate, using their commercial experience and expansive resources to drive forward viable technologies and solutions.

Public finance, therefore, supports solutions that would otherwise stagnate, de-risking the investment opportunity by providing resources during the highest risk stages, while private finance provides the growth capital and expertise that public finance cannot. This mechanism would set criteria in line with national or city-specific criteria, ensuring support is only given to solutions that meet socio-environmental needs of the city and citizens, but also solutions that will benefit from broader policy changes being implemented. This would therefore provide the tool to generate the requisite scale of financing to accelerate circular solutions at a city-wide level. Public-private partnerships are not a new concept and although the suggested structure is still relatively niche, it is currently implementable. We are in active dialogue with regions and local councils within the UK to develop such mechanisms.

Part 2 of this guest blog mini-series will be shared next week and looks at the link between construction and finance in creating a circular economy.