Last October, the Canadian Federal Government announced its plans to deliver ‘made-in-Canada’ sustainable investment guidelines, as well as mandatory climate-related financial disclosures for large, federally-incorporated private companies. These disclosures are designed to help investors better understand how large businesses are thinking about and managing risks related to climate change, ensuring that capital allocation aligns with the realities of a net-zero economy.
This is a huge step toward developing a sustainable finance taxonomy in Canada to identify “green” and “transition” investments, building on the foundational work of the Sustainable Finance Action Council (SFAC) – work that involved many of Canada’s leading financial institutions over the last couple of years, and is aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
However, as we take this important step forward, we are missing a critical opportunity: circular finance. Unlike other countries that have integrated guidelines for circular investments into their sustainable finance taxonomies and efforts, Canada’s plans include no such provisions. As a result, we could end up leaving money on the table that could be powerfully leveraged to advance not only net-zero targets, but socio-economic, biodiversity, and pollution reduction goals as well.
The circular economy (CE) is an economic model aimed at minimizing waste and getting the most value from our resources. Unlike the traditional linear economy which follows a ‘take-make-dispose’ model, the CE focuses on redesigning, reusing, repairing, refurbishing, and recycling materials to create closed-loop systems.
Circular finance encompasses investment strategies, financial products, and services that facilitate the transition to a circular economy, promoting investments and financial flows toward projects that enhance resource efficiency, reduce waste, and foster long-term ecological health.
Circular economy principles are intrinsically linked to broader environmental, social, and governance (ESG) goals and sustainable finance objectives. By prioritizing resource efficiency and waste reduction, circular strategies directly contribute to environmental sustainability.
Embracing the CE is also critical to achieving ‘net-zero’ as it enables the reduction of greenhouse gas (GHG) emissions across the entire life cycle of a product or asset. That includes the 45% of global GHG emissions that come from how products are manufactured and used. By bringing a circular lens to their investment strategies, financial institutions and institutional investors can create sustainable value on multiple fronts.
Financial institutions are exploring how investments into the CE can open up new market opportunities that drive long-term value, while simultaneously aligning with sustainable finance goals and objectives. Evidence shows that investments aligned with CE principles help financial institutions and other investors diversify portfolios and, as demonstrated by a recent European study, can curb investment risk while driving superior risk-adjusted returns, leading to long-term value creation.
Projects aimed at resource efficiency, waste reduction, and sustainable production can lead to cost savings and enhanced operational efficiencies for businesses. For example, by eliminating waste from production by applying ‘lean’ practices, manufacturers can cut costs. This, in turn, can drive profits, making circular investments not just environmentally sound, but economically attractive as well. Further, as environmentally-conscious consumers also seek more sustainable products, companies can embrace circularity to gain new customers and differentiate from competitors.
The transition to a CE requires significant capital investments across various sectors, from recycling and composting, to remanufacturing and repair. By focusing on CE initiatives, financial institutions and other investors can tap into emerging markets and industries that prioritize sustainability.
Despite the promising intersection of CE and sustainable finance, Canada’s efforts have largely overlooked it as an opportunity. Financial institutions have lacked the definitions and clarity required to confidently discern and invest in circular economy businesses and opportunities. As a result Canadian projects and industries are missing out on capital that could bring circular solutions to scale.
To address this gap, Circular Economy Leadership Canada (CELC), in partnership with the United Nations Environment Programme Finance Initiative (UNEP FI), launched a Guidance Document for Canadian financial institutions that provides a technology and sector-agnostic framework, harmonized with the EU and other jurisdictions, to help capital flow.
The Guidance can be applied to support lending and investment into circular economy business models, activities, and infrastructure, and serves as a critical foundation for integrating circularity principles into Canada’s broader sustainable finance framework, while avoiding the risk of ‘greenwashing’.
Ultimately, embracing the circular economy presents an opportunity for financial institutions to lead the charge in driving down GHG emissions while simultaneously delivering on other environmental and socio-economic imperatives. International players are already moving in this direction. Europe has integrated circularity into its sustainable finance taxonomy and Corporate Sustainability Reporting Directive (CSRD). In China, it’s baked into the country’s green bond framework, and in Latin America, countries including Brazil, Colombia, and Chile are all making strides on circular finance.
By adding a circularity lens to their lending and investment activities, financial sector stakeholders in Canada can tackle climate change while creating long-term value—not only within their portfolios but for society as a whole. As Canada’s sustainable finance agenda moves from theory to action, this is the moment to open the door for a circular economy.
Interested in learning more about circular finance? Check out the recording of our webinar, Financing the Circular Economy: Emerging trends and opportunities for Canada, which took place on December 5th, 2024 and explored the latest trends in circular finance, the current landscape in Canada, and how circular finance can support broader sustainable finance and ESG priorities.
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