ECO-INNOVATIONat the heart of European policies
The European Investment Bank's (EIB) InnovFin Advisory service received requests from the European Commission's Research and Innovation Directorate General (DG R&I) and from the government of Luxembourg to study issues related to risk financing for circular economy projects. The result was a report1, published in late 2015, which made recommendations about the role of financing in the transition to a circular economy. Shiva Dustdar, Head of the Innovation Finance Division in the EIB Advisory Services Department, discusses the research and some of the main findings.
What issues does the report tackle?
Shiva Dustdar: Our circular economy mandate came about because, first, the European Commission's DG R&I wanted advice on how the EIB and the Commission, through our risk sharing instruments, could be better placed to finance circular economy projects. The question was: were our funding instruments fit for purpose to support circular economy projects? The government of Luxembourg meanwhile had made the circular economy a national priority. Because of Luxembourg's position as financial centre, the Luxembourg Ministry of Economy was also interested to understand the new innovative financing mechanisms and how it might be possible to get the banking sector and fund industry better informed and leveraged to bring more capital into the circular economy.
This presented the EIB with a very interesting situation. We realised that the bank had financed a number of what we would label new circular economy projects but we didn't really use the term “circular economy”. We talked about resource efficiency and energy efficiency, water management, waste management, the bioeconomy. We also realised that the circular economy hadn't been mainstreamed into the EIB’s thinking. So this advisory mandate raised awareness in the EIB and the European Commission that financing the circular economy requires a more systemic, holistic approach and mindset change: that circularity could be part of all sorts of projects, including manufacturing and services, and therefore the bank should take a much more proactive approach to bring more circularity into the projects it finances.
With that came a clear recommendation to look at the eligibility criteria for possible projects. The InnovFin programme2 had up to that point supported technological innovation, but the eligibility criteria were too narrow, because to take a systemic approach and help the transition, business model innovation must be included, and that had not been explicitly eligible. For example, some companies might not produce a new product, but the way they go about producing that product is innovative; it requires a whole change of processes and supply-chain management. If they need the funding to rejig those production processes in order to become more circular, that should also be eligible.
Here I must compliment the European Commission because as we were crystallising this recommendation in the third quarter of 2015, the Commission took it up and quickly approved an amendment to our InnovFin Delegation Agreement that made business model innovation eligible3. It was remarkable that they managed to do that with such speed and it really showed they were serious about wanting to support more the circular economy.
Should the public sector get very involved in the circular economy transition? After all, the circular economy, in principle, makes good business sense?
Shiva Dustdar: We concluded that the market must spearhead the transition, but without public sector support it might take longer. In the systemic approach you need also the right regulation, and to make sure that public sector support creates some sort of buffer for private-sector investment. There is a catalytic role that public sector financing can play, and our own risk sharing products should be put to use in that way.
Financing is especially important for SMEs. From the Luxembourg advisory mandate, we got a real taste that a lot of these circular economy activities happen at the SME-end of the market, which is not the target for direct EIB financing. Hence it is important that we ensure that the intermediaries with whom we share risks are able to identify projects, and that our risk sharing gives them the right incentives to finance those projects. SMEs that find their place in this process of re-engineering towards more circularity can bring a lot of new job creation.
What is needed to move forward with financing for the circular economy?
Shiva Dustdar: We very often think of the transition to the circular economy as increasing the risk, while the linear model is seen as the safe bet. A change of mindset is needed. The linear model has embedded supply risk, which is what triggered a lot of the thinking on circular economy. Resources come from countries that might in the future not readily provide them to us and this could disrupt our manufacturing and economic production. Because we have a tendency to underplay or downplay or not even be aware of that supply risk, we may have an imbalanced view. Perhaps we have linear risk embedded in our existing portfolios, and moving towards more circular type models is a way to mitigate the linear risks.
The EIB is also part of a working group that published a report in March 20164 saying that there is a huge business opportunity for banks and institutional funds to support more the circular economy and to raise awareness that moving to circularity could be a hedge. This is an important part of the follow-up work we are now doing internally and with our intermediaries.
With that awareness, sometimes we see ways to bring circularity in to even the most basic infrastructure projects. You might have a water sanitation project and you could perhaps bring in a phosphate recovery angle to it and that in itself could create some circularity. It is something that the bank and the project promoter might not have thought of before.
1 Assessment of access-to-finance conditions for projects supporting Circular Economy, available at http://www.eib.org/attachments/press/innovfin-advisory-report-on-circular-economy-full-report-public.pdf
4 Money makes the world go round, FinanCE Working Group, available at http://www.sustainablefinancelab.nl/files/2016/04/FinanCE-Digital.pdf.