Why a circular economy is vital for ESG
Investments in ESG funds hit a record $649 billion in 2021. But finite resources threaten returns on investment as prices are pushed up. The answer is to shift to a circular economy, which can counteract resource depletion, increase resilience and improve risk management
08/03/2023
Climate change and sustainability are attracting growing attention in the financial sector. And investments in environmental, social and governance (ESG) funds have more than doubled over the past two years.
Reuters declared 2021 as “the year of ESG investing” after data from Refinitiv Lipper revealed that global ESG funds received a record $649 billion, up from $285 billion in 2019.
ESG funds now account for 10% of worldwide fund assets. This boom has led to companies of all sizes making ESG-scoring a major factor in how they do business.
"ESG is the current mainstream of sustainability in the financial sector. This is because policymakers have adopted this framework and are promoting it to steer financial capital toward a more sustainable economy"
Claudio Zara, Researcher, GREEN, Bocconi University
The entirety of the Ellen MacArthur Foundation’s work is focused around three principles: designing out waste and pollution; keeping products and materials in use for as long as possible; and regenerating natural systems. All of these approaches apply when designing cities for the future, says O’Carroll.
The Foundation is also behind the Circular Economy 100, a network of organisations working together to share ideas around building a new system. The group involves companies such as Google and Ikea, as well as cities such as Toronto and London. Milan is one of the most recent to join.
Before this, Milan was already implementing circular-economy practices to eliminate food waste and, with its Green Carpet awards, increase awareness around sustainability in the fashion industry.
The city has already set some priorities – planting three million trees by 2030, for example – as well as a pilot scheme for Milan’s covered market to make its entire supply chain and systems more circular.
“Of course, there is so much to do, but we believe working in partnership with organisations in the city will really make the difference,” says Lucia Scopelliti, head of the economic planning unit for the city of Milan.
Zara led a study by Bocconi University, in close collaboration with Intesa Sanpaolo, which aims to define the relationship between the circular economy and the financial sector.
One of the key findings is that the circular economy can help reduce a company’s financial risk and improve risk-adjusted performance. The research also found evidence that adopting circular business models can make the economy more resilient to external shocks.
“Companies that are more circular suffered lower negative performance and volatility during the Covid-19 pandemic and regained their original conditions more quickly post-pandemic,” says Zara.
Shifting to circular systems is a strategic priority for post-pandemic recovery. Intesa Sanpaolo is a lead player in the financial sector, with around €115 billion committed to the green transition in its 2022-2025 Business Plan.
The integration of ESG factors into its investment process plays a key role in this transition, as the framework ensures transparent, sustainable business practices that can be measured and reported.
Both the circular economy and ESG are crucial to financial services in terms of de-risking investments, delivering on climate commitments and capitalising on new forms of better growth.
