Investment into plastics circularity can help us reach our climate goals faster

COP27 will be remembered as the event at which the world started to count the staggering cost of inaction - one that developing nations increasingly must bear. With a report from the governments of Egypt and the UK estimating that investments of $2 trillion USD a year by 2030 will be needed for emerging economies to cut emissions, boost resilience and deal with the loss and damage, it is evident that it is a cost that governments cannot meet alone.
Focusing our attention on how to generate the significant capital needed, we must recognise the potential that investing in enabling mechanisms -- such a circular economy -- can have in attaining our climate goals. Financing cannot only be limited to widely discussed areas such as renewable energy and energy efficiency. In fact, without further intervention, up to 13% of the global carbon budget by 2050 will be attributable to greenhouse gas emissions from the plastic lifecycle alone.

With COP27 climate talks and the first meeting of the UN-led Intergovernmental Negotiating Committee to develop a legally binding instrument to end plastic pollution now behind us, we have a unique opportunity to ensure the outcomes of these two landmark events will dovetail. Lessons on public-private collaboration can be taken from existing approaches to drive investment into circular economy solutions for plastic waste.

COP27 concluded with a historic decision to establish a loss and damage fund for developing nations, though it is yet to be seen whether developed nations will deliver on the promise. Recent estimates from the OECD have shown that less than $84 USD billion was provided by developed countries in 2020 - the highest amount mobilised in a single year - although still short of the $100 billion USD a year promised in the 2015 Paris Agreement. In particular, mobilisation of private climate finance has been less than anticipated.

The chorus coming from business and world leaders, on both climate and circular plastics, is that blended financing will be integral to any financing roadmap, with governments and development financial institutions (DFI) playing a key role to accelerate investment. For instance, the International Finance Corporation (IFC) anchored a blended finance deal by providing $13 million USD in 2009 to PetStar, a Mexico-based alliance, to construct a PET plastics recycling plant in Toluca, Mexico. The initial funding created enabling conditions for new innovations and attracted subsequent investment from investors who saw the opportunity for financial and impact returns. By 2018, a total of $339 million USD had been invested in 16 plants - from both private and DFI-sourced capital.

Governments can also drive the development of domestic capital markets through thematic bond issuances and loans. In 2018 the Indonesian government launched the world’s first green sukuk (Islamic) bond with a $1.25 billion USD issuance. Similar green and SDG (Sustainable Development Goals) bonds were subsequently introduced to raise capital for infrastructure, including waste management solutions. Although these financial instruments are still in their early stages in the region, the government is furthering market familiarity and acceptance with each issuance, involving more investors and participants in national environmental ambitions.

The UN plastics treaty - heralded as what could be one of the world’s most ambitious global sustainability agreements - will set the stage for countries to adopt and implement policies designed to incentivise and de-risk investments from the private sector.

We are already observing some encouraging developments in Asia. India, for example, is in a unique position to lead the way towards plastic circularity, in part because of supportive regulatory frameworks which have set the stage for transformation and investment. The government’s implementation of a voluntary Extended Producer Responsibility scheme created a market opportunity that has prompted the establishment of would-be service providers, seeking to help brands and manufacturers comply with their new recycling obligations.

In this context, Recykal, an online circular economy marketplace, was able to raise funds from Indian investors, who were then joined in 2021 by Singapore-based impact investment firm Circulate Capital. More recently, the company raised an additional $22 million USD from Morgan Stanley and other investors, with Morgan Stanley comparing the industry to the development of India’s renewable energy market in the mid-2000s - beginning with limited funds, but benefiting from national government policies that removed hurdles to capital allocation.

As the world continues to move forward with critical climate negotiations and ambitions, the message is consistently clear; investment will need to drastically ramp up. There is a dearth of financing to address both climate change and plastic pollution, and investors need to look at these cross-cutting issues holistically and through innovative mechanisms. Investment into circular plastics should be seen as a mechanism to address climate change. If action on either interconnected challenge is to happen on time and at scale, policymakers, private investors and the holders of public capital must work together to bridge the financing gap that stands in our way.