Challenges
Existing bond guidelines and standards are not firmly aligned with CE practices
While existing sustainable bond guidelines and standards address aspects of the CE, they may not be conducive in developing financial instruments that encourage a CE transition. Existing guidance broadly outlines “green” or “sustainable” activities, which reduce environmental impacts without necessarily contributing to a circular economic system. For instance, a waste-to-energy project may increase renewable energy capacity, thus considered “green,” but such a project sustains a linear resource flow.
Furthermore, while some guidelines outline eligible activities and indicators under a CE category, they extensively focus on circularity in the technosphere – the human-made-environments. This limits the critical circular aspects of the biosphere, the natural systems providing resources and services such as purified water. For instance, a CE will require the use of materials and stocks derived from the biosphere, which necessitates regeneration for closed loop cycles.
Based on the limited definition of CE in existing guidelines and standards, caution is expected to be applied by stakeholders when utilizing these frameworks for circular financing. Due to public outcry of greenwashing from some green bonds, skepticism persists on the impact of green bonds.
US regulation on sustainable finance is lagging other jurisdictions
In the United States, sustainable investments and disclosures are largely governed by voluntary, private-sector-led processes, protocols and norms. In response to feedback from stakeholders, the Securities and Exchange Commission's actions are predicted to be cautious, concentrating on safeguarding ESG investors via the constrained lens of financial materiality with a limited focus on circularity. The limited regulatory guidance in the US on sustainable finance reflects a level of immaturity in integrating circularity in financial mechanisms and leaves investors to their own devices.
In contrast, the EU is taking a methodical and prescriptive approach to climate change and sustainability disclosure. Companies that fall under the Corporate Sustainability Reporting Directive (CSRD) purview will have to conduct a double materiality assessment. As such, businesses that have significant impact on resource use and waste will have to take accountability for impact and be obliged to have conversations about CE transition and associated financing options. In addition, EU legislators are successfully advancing the creation of an EU Green Bond Standard, which would provide harmonization across the sustainable bond market.
As part of the largest economy, US regulators can generate tremendous impact in creating conducive market conditions to support sustainable financing. Collaborations with other countries and regions on relevant matters such as harmonizing the definitions of sustainable activities are important to building cohesion and efficiency in the global financial market, thus funneling more funds into the critical, time-sensitive projects in response to climate change and material depletion. Such collaborations include creating dialogue in circularity’s role in emerging changes in finance.
Stakeholders can drive a path forward for CE finance
Transitioning to a CE likely requires systematic change and financing on each element of the system. Consequently, return on investments for circular projects may be augmented with complementary initiatives that bolster other parts of a circular system. Conversations and constructive collaborations should be started among market participants to bring clarity and synergy into the process.
As noted in Circular Economy: Navigating the evolving global policy landscape, rapid shifts in policy on circularity are underway. Governmental action is expected to hold a key role in the circularity transition by providing standards for transparency around sustainable financial instruments, including green bonds.
As the legislative progress may be lengthy, bond issuers and underwriters should champion circular finance by defining, monitoring and disclosing third-party-verified, CE-related UoP and KPIs, while proactively engaging policy makers and industry organizations toward the development of an aligned, more prescriptive framework.