FEATURE: Like all good economies in the world, money makes the world go round, said Dr Jason Graham-Nye recently at the Australian Circular Economy Forum this year.
As the chairperson of Circular Australia, he was moderating a session on the role of finance and investors called Where’s the money? with keynotes included.
Drew Lanyon, executive director for sustainable finance and ESG at the Commonwealth Bank, provided clear insights into the finance landscape being generated by investment in the circular economy.
But first, Dr Kar Mei Tang, regional head of Asia and Oceania at the UN Principles for Responsible Investment, laid out the business case for change.
Australia, like many nations, faces “a profound dual systems transition,” in that while the nation is decarbonising in line with its climate commitments, it is also facing “a productivity transition”, Tang said.
“This relates to fundamentally rethinking how we work, not just in boosting labour productivity, but also maximising our materials productivity.”
Tang said the challenge now is to “do more with less” and to maximise value from every resource that we use.
We’re generally headed in the right direction, but the progress is not consistent across sectors or across jurisdictions.
And the pace of progress must accelerate to meet the nation’s planetary challenges, Tang said.
Resource-intensive countries like Australia and New Zealand, “are starting from a relatively low material productivity base compared to some of the other countries”.
The good news, Tang said, is that there is a rising focus on circular economy initiatives by governments and investors.
“The private sector has really led the way in many respects, things like participating in voluntary initiatives like the new plastics economy…”
This is also the year when countries will be announcing their plans to ratchet up commitments to the Paris Agreement.
“With the next round of NDCs (nationally determined contributions) due soon, governments need to recognise and build on this momentum.”
Tang said there was an “increasing confluence” around the world on target setting, standard setting, delivery plans, decision making and capital allocation at scale.
“We have a collective responsibility to weigh sustainable material use seriously, but it’s also important that we are not naive either.
But moving to a circular model is often not costless.
“If we are to see systems change, we do need a holistic approach that’s characterised by international commitment, industry-wide standards, and capacity building,” Tang said.
In a quick “sustainable finance 101”, Drew Lanyon, executive director for sustainable finance and ESG at the Commonwealth Bank Lanyon explained that there were two types of use of proceeds. One was financing used for specific assets or projects with strong environmental or social outcomes. And the second type is sustainability-linked financing, where the borrower has a range of sustainability goals.
“We look at those goals to make sure they’re material and ambitious, and if they meet those targets, they receive a discount on their financing; if they don’t meet them, they actually pay a premium.
“My observation is that lending and lenders have a really critical role to play in terms of helping institutions with their sustainability goals. Today, the focus has been on climate mitigation, particularly reducing emissions.”
According to Lanyon, now that emissions are “much better understood”, it’s important for lenders to consider other aspects of sustainability that “need that additional focus, not just in a singular sense, but also how different parts of sustainability can work together to achieve net zero holistically.”
Key steps for organisations now are to increase education and awareness of finance, Lanyon said. “Lenders are really important [to the] circular economy.”
While there had been “great education” on the importance of climate change and emission reduction for corporates and bankers, “what we want to do is move that conversation into other areas like the circular economy”.
Circular businesses, he said, also have enhanced business models that can be used to assess risk when making a loan.
Another way to support businesses in circular economy practices is to utilise available data and metrics to assess sustainable finances, especially as more of the circular economy industry adopts sustainable financing.
“We’ve seen waste management companies adopt SLLs (sustainability linked loans) both here in Australia and in New Zealand.
“We’ve seen [targets] that have a waste component, so [if] a corporation [is] reducing the amount of waste that goes to landfill, if we can assess that target as ambitious, we’re able to give them a discount on their financing.”
The International Capital Market Association (ICMA) and the Asia Pacific Loan Market Association, which help develop principles on how to structure these transactions credibly, each have circular economy and pollution prevention categorised in their structures, Lanyon said.
This helps better utilise proceeds towards the circular economy, which can be seen in the government space.
“We’ve seen a number of institutions, both state and sovereign level, adopting green finance, so issuing green bonds to put financing to work towards green projects.”
An example, he said, is the Queensland Treasury Corporation, which manages debt issuance for the Queensland Government. It has a Sunshine Coast materials recycling facility in its green asset pool.
This means institutional investors can invest in that green loan that potentially allocates funding towards the materials recycling facility.
The New Zealand government has made similar moves, issuing green bonds that have been allocated to projects such as upgrading recycling infrastructure, improving waste data and supporting programs that reduce waste to landfill as well.
“We’re starting to see more and more of this being adopted in sustainable clients, and we want to see more going forward.”
Jillian Reid, head of sustainable investment, investment management in the Pacific at Mercer, said that it was now time to transition from “material flows to cash flows,” and for institutional investors to think about how they will use capital.
“Think super funds, or from lenders, think banks and how we’re going to scale this transition.”
There had been a pause after 2021-22, said Reid, and it was likely because of investors trying to navigate Scope 3 emissions, nature and gathering metrics, but now “there is some new momentum”.
“It is absolutely possible to bring together the economic benefits, the way to achieve net zero objectives, nature positive objectives, and actually bring those multiple risk perspectives together into one place and look at a sector by sector based solutions approach.
“Really looking at how that circular transition can solve multiple risk issues at once is exactly what we need, because doing it one step at a time is proving quite exhausting.”