AN INVESTOR’S GUIDE TO THE

Circular Economy
This report includes contributions from
ING Bank and the Ellen MacArthur Foundation.

July 14, 2022

www.iss-esg.com
An Investor’s Guide to the Circular Economy

The circular economy is an important topic for ISS ESG. The establishment of a Circular
Economy Taskforce within the organization in June 2021 enabled cross-team collaboration
and helped bring the topic to the top of the ISS ESG Research agenda. We acknowledge the
work of members of the Circular Economy Taskforce, which supported the production of this
report.

Going forward, ISS ESG will continue to work with clients to assist them in investing
according to circularity principles and to accelerate the transition to a circular economy.

CE Taskforce members:

▪ Brian Kennedy (ESG Index)

▪ Gavin Thomson (Integrated Portfolio Management)
▪ Hanna Taya (ESG Corporate Ratings)
▪ Leontine Schijf (Second Party Opinion)
▪ Lukas Lohrer (Climate Analytics)
▪ Reza Marvasti (ESG Product)
▪ Ronja Wöstheinrich (ESG Methodology)
▪ Yuka Manabe (Bespoke Research & Advisory Solutions)

Editor’s Note: Neither Institutional Shareholder Services Inc. (ISS) nor its responsible investment unit and
co-author of this paper, ISS ESG, endorse or recommend any commercial products, services, or policies
espoused by ING Group or the Ellen MacArthur Foundation, with which it is collaborating on this paper.
Reference to or appearance of any specific commercial products, services, or policies by trade name,
trademark, manufacturer, or otherwise, in this paper does not constitute or imply its endorsement,
recommendation, or favoring by ISS or ISS ESG. The views and opinions of the co-authors expressed in
this paper or in materials available through download from this paper do not necessarily state or reflect
those of the ISS, ISS ESG, or their clients, and they may not be used for advertising or product
endorsement purposes.

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Key Takeaways
▪ Humanity’s current global consumption patterns would require the resources of 2.3
planet Earths by 2050. Adopting a circular approach in our economic design and planning
offers an opportunity to turn this trend around.
▪ Cost of living concerns are on the rise, and circular economy thinking can combat
increasing prices for raw materials. The circular economy focuses on keeping resources at
their highest value and reducing waste, meaning companies with a circular business
model can provide more value to their customers while using fewer resources.
▪ This matters for investors – analysis suggests that the more circular a company is, the
lower its risk of defaulting on debt, and the higher the risk-adjusted returns of its stock.
▪ Product circularity is about more than just recycling – the concept needs to be built into
the design and planning stage if it is to truly deliver on its potential. Circular business
models offer tangible benefits to the management of real-world problems such as climate
change, working conditions, and threats to biodiversity.
▪ The banking sector is actively utilising the concept of circularity in the design of a range of
new corporate financing products.
▪ As the circular economy gains increasing prominence, regulators have a range of different
levers they can pull in order to maximise the economic benefits associated with new,
more transparent ways of doing business.
▪ ISS ESG continues to focus on this emerging area of sustainability thinking in our work
with investment clients to maximise the positive real-world outcomes associated with
their own responsible investment practices.

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Table of Contents
Key Takeaways ............................................................................................................................ 3
Table of Contents ........................................................................................................................ 4
Introduction ................................................................................................................................ 5
What Goes Around Comes Around: Investment and the Circular Economy .............................. 6
Product Circularity: Evolution of the Wheel ............................................................................11
Material Health: The Underrated Key to Unleashing the Circular Economy ............................19
Squaring the Climate Circle: How the Circular Economy Can Play a Role
in Net Zero Strategies................................................................................................................23
The Circular Economy: Potential for Emissions Reductions in the Food Industry ..............23
Current Climate Investment Strategies May Suffer from Carbon Tunnel Vision ................25
The Circular Economy: A Boon for Biodiversity Conservation? ................................................27
Global Efforts to Curb Biodiversity Loss ..............................................................................27
The Role of the Circular Economy in Promoting Biodiversity Conservation .......................28
Clean Energy Technologies Making the Case for Circular Design .......................................30
Circular Design Thinking in the ISS ESG Corporate Rating ...................................................31
Challenges and Outlook .......................................................................................................33
ING Contribution: The world has changed, and banking needs to change with it ...................34
EMF Contribution: Money flows into circular economy investments as the finance sector
targets better growth and a way to address climate change and biodiversity loss .................38
Conclusion .................................................................................................................................41

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Introduction
Sustainability must come full circle. The importance of decoupling economic growth from
resource consumption is highlighted by research demonstrating that current global
consumption patterns would require the resources of 2.3 planet Earths by 2050.

Keeping resources at their highest value and reducing waste is what the circular economy
(CE) is about. Companies with a circular business model can provide more value to their
customers while using fewer resources. Analysis shows that the more circular a company is,
the lower its risk of defaulting on debt, and the higher the risk-adjusted returns of its stock.

This report is written by the ISS ESG Circular Economy Taskforce, with contributions from the
Ellen MacArthur Foundation and ING Bank, to demystify the circular economy for investors
and financial institutions.

The question to start with is why. The first chapter of this paper, “What Goes Around Comes
Around,” introduces the concept of the circular economy and explains how ISS defines and
understands it. The different building blocks of a circular economy are described in detail in
the second chapter, “Product Circularity,” by drawing on practical applications of circularity
from the automotive industry. “Material Health” and why it is a key element of truly circular
products is explored in the next chapter.

The “Squaring the Climate Circle” chapter offers a clear explanation of the circular
economy’s role in climate change and especially Net Zero strategies. The chapter entitled
“The Circular Economy: A Boon for Biodiversity Conservation” looks at the positive
implications the circular economy can have for biodiversity.

The role of financial institutions will be vital in this transition, as explained by ING Bank in the
chapter “The world has changed, and banking needs to change with it.” In the final chapter,
“Money flows into circular economy investments as the finance sector targets better growth
and a way to address climate change and biodiversity loss,” the Ellen MacArthur Foundation
investigates the future by describing the regulatory and transparency preconditions that
need to be met if the economy is to move from awareness to scaled action.

This is not new information. The financial sector is aware of the circular economy concept
and regulators are trying to design rules to promote circularity, as illustrated by the EU
Green Deal’s Circular Economy Action Plan and the EU Taxonomy. The uptake of circularity
by investors remains low, however. ISS ESG works to assist clients interested in investing
according to circular principles through relevant information (such as this report) and tailor-
made CE solutions.

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What Goes Around Comes Around:

Investment and the Circular Economy
By: Hanna Taya, ESG Corporate Ratings Analyst, ISS ESG
Yuka Manabe, Senior Associate, Bespoke Research & Advisory Solutions, ISS ESG

“Humanity’s 21st century challenge is to meet the needs of all within the means of the
planet.” (Raworth, 2017)

Each year the Global Footprint Network measures humanity’s overall global
ecological footprint and estimates the day on which demand for natural resources
Humanity’s 21st century surpasses the amount the planet can regenerate within the same year. In 2021,
challenge is to meet the the so-called Earth Overshoot Day was July 29. In other words, by that date we
have collectively consumed more than the earth can regenerate within a year –
needs of all within the 1.7 earths would be necessary to meet humanity’s resource demand this year. In
means of the planet.” light of a growing global population, the demand for natural resources is only
expected to increase.

(Raworth, 2017) Figure 1 The development of humanity’s resource use since 1970

Our current economic system can be described as linear. We extract resources and turn
them into products, we use them, and then we dispose of the product and its components as
waste. This model leads to the loss of economic value through the wastage of resources and

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energy and is also behind the earth’s most pressing ecological challenges such as climate
change, biodiversity loss, and pollution.

One solution for tackling these challenges is the concept of a circular economy. ISS ESG
analysis references the definition of the Ellen MacArthur Foundation (EMF): “A circular
economy is an industrial system that is restorative or regenerative by intention and design.”
Such an economic model would be able to endlessly circulate materials and nutrients that
are safe for the environment and humanity.

The circular economy is distinct from the concept of recycling and goes beyond the three R-
framework of Reduce, Reuse, and Recycle. Recycling generally refers to “downcycling,”
which describes the process by which a product’s material decreases in value or quality. An
example of downcycling is when PET bottles are melted into a park bench at the end of their
life cycle. Experts note that to be truly circular, economic systems should strive for
“upcycling,” meaning that recycled product components maintain or enhance their value. An
example would be using car components in another car instead of sending them to a
scrapyard that downcycles the steel for building material.

Circular strategies can be described according to the 9-R concept in the figure below. In
particular, the “Refuse” strategy refers to refraining from using harmful chemicals. This
strategy ensures the health and safety of the environment as well as consumers and workers
along the supply chain. It also facilitates the upcycling of components into a similar or other
product of higher quality, and is ideally considered in the design phase of product
development. The importance of chemicals in a circular economy is supported by the United
Nations Environmental Programme Finance Initiative (UNEPFI) and is also a key element of
the Cradle to Cradle standard for product certification (the most comprehensive certification
for circular products)

Figure 2: Circular activities along the product life cycle, in order of priority

Source: Adapted from José Potting et al., Circular Economy: Measuring Innovation in the Supply Chain, Policy Report,
(The Hague, PBL Netherlands Environmental Assessment Agency, 2017), p. 5.

From an economic perspective, the circular economy is estimated to constitute a

“multi-trillion-dollar (…) opportunity.” Accenture’s estimate for the European market
concludes that the “circular economy could generate USD 4.5 trillion of additional economic
output by 2030 on an annual basis.”

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Figure 3: The circular economy’s expected economic growth in Europe

The financial market has started picking up on the topic as well. The number of circular
economy-themed public equity and private market funds, and bond issuances, has been
increasing over the last couple of years. One of the most prominent examples is
BlackRock’s Circular Economy Fund. Launched in 2019 with $20 million, the fund now has a
market capitalization of more than $2.3 billion.

Figure 4: The increasing trend of public equity funds and bonds in the last two years

Source: Ellen MacArthur Foundation

The United Nations Environmental Programme Finance Initiative (UNEPFI) calls for the
integration of the circular economy into the environmental, social, and governance (ESG)
evaluation of corporations and ultimately into the investment decision-making process. The
adoption of circular economy strategies has the potential to mitigate the earth’s most
pressing environmental challenges.

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The EMF points to the concept’s importance in delivering on two topics currently front and
center for the finance industry: climate change and ESG. Figure 5 below illustrates that 45%
of global greenhouse gas emissions can be tackled by rethinking and redesigning our
products as well as how food is grown, while the rest (55%) could be addressed by energy
efficiency gains and switching to renewable energy sources.

Figure 5: The importance of a circular economy in addressing climate change

In addition to climate change, the circular economy can contribute to the realization of the
UN Sustainable Development Goals by positively impacting air and water quality,
biodiversity, and soil.

As the EMF describes it: “Driving such an industrial transformation, the circular economy
boosts innovation, creates business opportunities, and enhances resilience, providing a
strong economic rationale that goes beyond ESG.”

Case Study
One example reflecting these positive impacts can be found in this case study by
Cradle to Cradle:

A textile company produced a garment without any toxic chemicals. The company
refrained from using around 8,000 chemicals that are usually part of the
production process. Consequently, employees were no longer required to wear
protective equipment against the harmful substances, fabric remnants could be
used as mulch, and the wastewater was as clean as potable water. Besides these
apparent social and environmental advantages, adopting circular practices also
included economic benefits for the company. The results included a decrease in
production costs.

ISS EVA has evaluated the financial materiality of the circular economy, concluding that, in
aggregate, circular economy-related companies are returning above their cost of capital,
creating true economic profit. The firms tend to be relatively expensive, however, so
investors need to be cautious when assessing the level of Risk-adjusted Profitability and
Valuation.

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Further research by the EMF, in collaboration with Bocconi University and Intesa Sanpaolo,
has taken a closer look at the causal relationship between the circular economy and
investment risk and return. The analysis finds that: “the more circular a company is, the
lower its risk of default on debt over both a one-year and five-year time horizon.” Therefore,
financing corporations that are in the process of moving towards a circular economy can
have a de-risking investment effect. In addition, “higher levels of circularity are driving
superior risk-adjusted stock performance for European listed companies.” This indicates a
positive effect of circular economy strategies on investment performance and on the default
risk for financed enterprises.

Given regulatory developments such as the EU Green Deal’s Circular Economy Action
Plan and the EU Taxonomy, the circular economy is increasingly being promoted in
Europe. France, for instance, passed a circular economy law in 2021. Other countries, such
as China and Chile, have also presented circular economy plans. The pressure on private
actors is expected to increase and regulatory drivers may affect investors, which is another
reason to stay ahead of the game and leverage circular economy investment opportunities.

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Product Circularity:
Evolution of the Wheel
By Hanna Taya, ESG Corporate Ratings Analyst, ISS ESG
Gavin Thomson, Head of Integrated Portfolio Management, ISS ESG

The Circular Economy is not new. It is becoming increasingly urgent, however, for circularity
thinking to be more fully adopted into corporate business models today, to protect not only
their profitability but also the future of the planet.

Through 2021 and at the start of 2022 there have been dramatic price increases for ‘virgin’
materials. Nickel, aluminium, and copper prices increased between 20% and 40%,
while energy prices were up over 50% last year. Plastic prices also increased by over 40%.
Supply chain shortages across industries have added to the lack of material availability. Some
companies have been able to offset input inflation through price hikes, but margins are
increasingly under pressure, as noted recently by the Chinese National Bureau of Statistics.
By reducing waste and keeping materials in use, the opportunity for an improvement to
profitability and margins over the long run is real.

The Circle Economy’s Circularity Gap Report finds that global material consumption amounts
to 100 billion tons annually, with only 8.6% of the current economy being circular. This
circularity metric is defined as the number of cycled materials divided by the overall
worldwide material input, and the result clearly shows that there is room for improvement
for governments as well as business.

This chapter sets out ISS ESG’s understanding of what makes a truly circular product,
examines some relevant scientific concepts, and explores best practice-using exemplars from
the automobile industry.

According to the Ellen MacArthur Foundation (EMF), building a circular economy relies on
three principles:

1.) Designing out waste by configuring products for disassembly

and reuse

Creating circular products is not only about closing the loop at the product’s end of life (for
example, through take-back systems), but also about taking the product’s next life into
consideration during the initial design phase. Knowing about the next use phase is crucial to
selecting the right, non-toxic materials in the first place. This in turn encourages upcycling
because it mitigates against the use of (for instance) composites that impede the reuse or
remanufacturing of the product. For example, the inability to remove a device’s
battery could make the whole product hazardous and unrecyclable.

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2.) Keeping products in the material cycle after the use phase by
differentiating between consumable and durable materials

When designing circular products, designers should consider the use scenario for the
material components and therefore distinguish between the biosphere and the
technosphere (see Figure 6 below). The green, biological cycle stands for the life cycle of
consumables, such as natural textiles and food. These biodegradable, eco-friendly materials
are either composted or reused for new products. The blue, technical cycle shows the life
cycle of durables such as electronic devices. After the use phase, take-back systems allow
companies to access valuable materials, separate the product components, and reintegrate
them for the next use phase.

Figure 6: The distinction between biosphere and technosphere

Source: Cradle to Cradle, EPEA

Designing products for a circular economy does not simply mean prolonging the use phase of
durables, as this may be harmful to the environment and innovation. For example, car tires
are more durable today, but still release micro plastic particles into the environment as
they wear down, resulting in the release of material which does not belong in the biosphere.

Designing circular products is also about defining the use phase for every product. For
instance, if what consumers actually want is to be mobile and drive a car, they may not need
to own the car. This offers an opportunity for a circular business model through offering the
product as a service. The consumer purchases mobility, but the car itself remains the
property of the car producer and is collected at the end of the defined use phase.
Consequently, the producer knows when to expect the return of the materials and can plan
its production processes accordingly. Some parts of the car may be reused in a new car,
others may be exchanged with technologically more innovative or efficient parts.
Additionally, a product-as-a-service business model can be an incentive for the producer to
use higher-quality materials.

3.) Enhancing instead of depleting natural systems

An example of depleting a natural system can be found in cases where conventional

agricultural practices exhaust the soil, resulting in erosion and reduced productivity.
Regenerative agricultural measures exist with the potential to enhance, for instance, the

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amount of humus in the soil. This in turn can lead to more fertile land, the repair of depleted
soil, and the storage of carbon dioxide.

Product circularity can only be achieved when taking the whole product life cycle into
consideration. Thus, different aspects need to be considered for different product types in
the design phase:

Table 1: Different aspects of product circularity in ISS ESG’s Corporate Rating

ASPECTS DESCRIPTION EXAMPLES

Repairability The products are designed and made to The Lovesac Co. uses modular designs
be easily repairable. for most of its furniture products so
that the products can be easily
repaired, and individual pieces
replaced.

Reusability Extending the product’s life span as the Brødrene Hartmann A/S produces egg
product can be used in the same/similar trays which can be reused 5-10 times
way multiple times. before the packaging is returned to the
company’s molded fiber production.

Separability Building materials that are easy to DIRTT Environmental Solutions

separate after use. Ltd. designs interior construction
materials for disassembly.

Recyclability Products are designed to be easily ASUSTek Computer, Inc. strategically

recycled and use recyclable materials. designs its computer and consumer
electronic products to facilitate
recycling and disassembly.

Upgradeability Products can be upgraded, so that the ABB Ltd. offers extensions, upgrades,
product can be used longer, and it is not and retrofits for its electronic devices
necessary to purchase a new version of a and software products.
product.

Source: ISS ESG

ISS ESG assesses whether a company takes the product life cycle into consideration during
the design phase. This can be an important way of addressing product circularity in not only
closing the loop, but also in how to most effectively close the loop. The assessment is
incorporated into the rating structure of each of the 20 industries covered, including the
industries with the highest CE-related impact: Automobiles, Auto Components, Chemicals,
Electrical Equipment, Packaging, and Textiles. At this stage, very few companies demonstrate
product circularity commitments or actions, only referring to the topic as a general
commitment.

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The top 10 companies listed in Table 2 below are the best performing firms in terms of
considering relevant product life cycle aspects:

Table 2: Best performance on product life cycle

COMPANY INDUSTRY

DIRTT Environmental Solutions Construction Materials

Henkel AG & Co. KGaA Household & Personal Products

Kao Corp. Household & Personal Products

Koninklijke DSM NV Chemicals

HP Inc. Electronic Devices and Appliances

Clariant AG Chemicals

Sika AG Chemicals

Societe BIC SA Household & Personal Products

Renault SA Automobile

Amcor Plc Packaging

The Automotive industry has been identified by the EMF and the United Nations
Environment Programme Finance Initiative (UNEPFI) as an industry with high growth
potential in a circular economy and is a good example of an industry that requires significant
changes to align with product circularity in the future. Figure 8 below from the World
Economic Forum’s Circular Cars Initiative (CCI) shows the timeline of the five levels to
achieve full circularity, with the ultimate aim of becoming a net positive contributor to the
environment. Each level can be determined based on characteristics of both the product and
its use.

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Figure 7: The five levels of circularity for the automobile industry

Source: Circular Cars Initiative (Note: reman = remanufacturing)

Today, roughly half the cost of producing a new vehicle comes from manufactured materials,
according to the CCI. At the end of life, little of this value is recoverable, due to non-circular
design practices and a lack of circularity-focused business models. Just as vehicles consume
non-renewable fuel and produce pollution and GHG emissions, they also consume vast
quantities of currently non-renewable materials that result in large volumes of liquid and
solid waste. These are usually landfilled, processed, or downcycled at the end of life.

The term “circular car” refers to a theoretical vehicle that has maximum material efficiency.
The vehicle would produce zero material waste and zero pollution during the manufacturing
process, utilization, and end disposal. While cars may never be fully “circular,” the
automotive industry can significantly increase its degree of circularity. Doing so has the
potential to deliver economic, societal, and ecological benefits.

One of the most relevant topics when looking at the Automobile industry from a product
circularity perspective is the extension of the useful product life. This incorporates the design
aspect by assessing the company’s commitment to and procedures for extending the useful
life of products. To achieve a high grade, the company must have a strategic approach to
integrating longevity, repairability, and recyclability into the product design.

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Designing a vehicle with full life-cycle value optimization in mind (including end-of-life
disposal) is not an easy task.

Figure 8: A car’s life cycle

Source: CCI

The Ford Motor Company created the Model U concept back in 2003. The concept was
hailed as the Ford Model T (one of the first mass-produced cars, released in 1908) for the
21st century. It is described as a cradle-to-cradle car with its use of polyester body panels
and fabric designed to be a technical nutrient (see Figure 6 above). The bodywork can be
recycled into base elements and reprocessed into material fiber again and again without
losing any performance qualities and is made from eco-friendly substances. The fact that
until recently there had been little progress in real world development shows the difficulty in
designing a car with product circularity fully incorporated.

New platform and power train development through the adoption of Electric Vehicles gives
auto manufacturers a significant opportunity to incorporate product circularity at the design
phase. One option is increased modularity, which makes it easier for a vehicle to be taken
apart and its parts reused. In line with the CCI’s ‘moderate circularity’ stage, Ford’s ambition
for 2025 is to use 20 percent recycled and renewable plastics in new vehicle designs for
North America and Europe.

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Figure 9: Ford’s circularity ambition for 2025

Source: Ford Motor Company

In real-world examples of promoting circularity, in 2020 the Ford Otosan team implemented
a 50 percent recycled plastic fan shroud on the Transit van and launched the Re3 project,
aimed at reducing, reusing, and recycling waste within the assembly plant. The fan shroud
cut CO2 emissions by 2.2 kg per vehicle while achieving a 17 percent materials cost
reduction.

Figure 10: Renault’s life cycle of an electric vehicle

Source: Renault Group

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Renault is the only auto company in the top 10 of ISS ESG’s life cycle performance table (see
Table 2 above). This is evidence of Renault being a leading carmaker in terms of directly
investing capital into promoting circularity thinking in its product design. The company
earlier this year also started a dedicated CE factory for reuse and mobility. Renault is a
signatory to the French government’s circular economy roadmap.

One of the latest auto manufacturers to outline its CE strategy is BMW, with the BMW i
Vision Circular. BMW is looking to launch a compact BMW in 2040 that is focused squarely
on sustainability and luxury. The focus for the i Vision Circular was to create a carbon-neutral
Electric Vehicle through the application of ‘circular economy’ principles, with the design brief
of ‘rethink, reduce, reuse, and recycle.’ The concept vehicle was produced using 100%
recycled materials, all of which can subsequently be recycled, including its solid-state
battery. Battery recycling and reuse will be one of the key initiatives to be addressed for the
auto industry.

The car industry is transitioning through a revolution from internal-combustion-engine-

powered platforms to zero-emission vehicles, with many European OEMs committed to full
Electric Vehicle product lineups. This gives companies an almost clean sheet of paper to
rethink the design of vehicles. Whether through the incorporation of modularity or
alternative materials, the opportunity is there for the industry to significantly improve
product circularity.

Looking at all sectors, ISS ESG research identifies very few companies that have fully
addressed the issue of product circularity. Investors should be aware of the risks and
opportunities for investee companies arising from product circularity and the circular
economy. Thinking beyond risk, the opportunity to examine links between improvements in
profitability and product circularity will be an interesting future topic.

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Material Health: The Underrated Key

to Unleashing the Circular Economy
By Hanna Taya, ESG Corporate Ratings Analyst, ISS ESG
Ronja Wöstheinrich, Associate Vice President, ESG Methodology, ISS ESG

The modern economy largely follows a linear system: we design products that ultimately
become waste. Often the use of toxic chemicals in materials such as adhesives, binders, or
antioxidants inhibits a possible reuse of products at their end of life, and we
are left with no choice but incineration. As an example, several decades ago
“Chemicals and the printed IKEA catalogue was found to contain around 90 substances of
materials used in the concern to human health or the environment. This number has since dropped
to 50: an improvement but still a number that renders the paper in the
product are selected to catalogue unsuitable for composting and prevents the material from staying
prioritize the protection ‘in the loop.’

of human health and the This and other examples demonstrate the importance of material health and
environment, generating the selection of chemicals when designing products for circularity. This
chapter explores the risks and opportunities associated with material health
a positive impact on the and highlights the dormant potential of corporate strategies for the reduction
quality of materials of substances of concern in products.
available for future use The Cradle to Cradle Products Innovation Institute describes the concept
and cycling.” of material health as follows:

“Chemicals and materials used in the product are selected to prioritize the
protection of human health and the environment, generating a positive impact on the
quality of materials available for future use and cycling.”

Various important commitments are required to achieve this goal, including the following:

▪ Avoiding the use of organohalogens and other toxic substances, e.g., those included
in the Cradle to Cradle Restricted Substances List and/or ChemSec’s SIN List.
▪ Knowing which chemicals the product consists of and is in contact with during the
production process.
▪ Assessing the substances’ compatibility with human and environmental health.
▪ Establishing a roadmap towards prioritizing the application of substances that are
assessed as compatible with human and environmental health.
▪ Use of safe chemicals.
▪ Ensuring indoor and outdoor air quality and the health of employees and
consumers/users.
▪ Refraining from using hazardous substances in the supply chain.

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Reducing the use of substances of concern is crucial to a circular economy. According to the
UN Environment Programme Finance Initiative (UNEPFI):

“Every product is made out of chemicals so the chemical sector rightly calls
itself the ‘industry of industries.’”
“Every product is
made out of chemicals The true secret of circular product design is that you can only make the right
decision on material and chemical ingredients if you know what the product’s
so the chemical sector next life will look like. To illustrate: it is estimated that 98% of plastics are not
rightly calls itself the recycled into a closed loop system, and that more than 14 million tons of
microplastic end up on the ocean floor. This represents not only a massive loss
‘industry of of materials, it also causes significant harm to the biosphere.
industries.’”
At first sight, it may seem like a good idea to collect this ocean plastic and use
it to manufacture packaging—for cosmetic products, for example. This is easier
said than done, however: the ocean plastic may contain harmful chemical ingredients that
are emitted into the cosmetic product itself, which are then applied on human skin in the
form of a creme or shower gel. Without knowing that used materials are free from
hazardous substances, these cannot serve as input materials for many new products. End-of-
life solutions are not always the answer – more effective solutions can be found in the design
phase.

As pointed out by the International Chemical Secretariat, hazardous substances tend to

accrue if continuously recycled and, in turn, will remain in use for a long period, despite
having been potentially prohibited for use in new products in the meantime. This
demonstrates the importance of determining in the design phase what the product’s next
life is going to be and selecting safe chemical ingredients accordingly. It is this sort of thinking
that differentiates the circular economy from the recycling economy.

Win-Win: Improved Material Health Keeps Materials

in the Loop and Reduces Community Health Risks
The creation of new jobs is often cited as the positive social impact in the context of a
circular economy. According to the ILO, a transition to a circular economy could generate
between seven to eight million jobs by 2030 worldwide. Apart from employment, a true
circular economy that considers material health in the design phase has the power to have
further positive social impacts: by relying on healthy materials, consumer health as well as
the health of employees in the production process can be assured.

One product group which can have a significant impact on consumer health is interior
fittings. In the 1980s and 1990s, Ikea was facing scandals regarding some of its products that
released formaldehyde fumes above legally permitted thresholds. Formaldehyde is known
for its adverse effects on human health when certain thresholds are exceeded. It can cause
irritation to the skin, throat, nose, and eyes and may even cause cancer. The Swedish
furniture retailer responded positively to this issue and has been reducing formaldehyde
emissions from its products ever since, but formaldehyde can also be found in flooring, home
insulation, tobacco smoke, candles, disinfectants, cosmetics, and textiles.

Leading manufacturers not only refrain from using hazardous substances, they develop
products with a positive impact. For instance, a carpet manufacturer offers carpet tiles that
do not release toxic fumes and actually improve indoor air quality.

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Regulators are Stepping into the Arena, but a Broad

Corporate Response is Yet to be Unlocked
Chemical regulation may not be front page news, but regulatory pressure is growing,
particularly in Europe. The European Commission acknowledges the importance of the
chemical industry for circularity: as part of the European Circular Economy Action Plan, for
instance, which forms part of the European Green Deal. Moreover, the EU’s chemicals
strategy for sustainability towards a toxic free environment aims, among other goals, to ban
harmful chemicals from consumer products.

In the past, governments had committed to reduce the hazards of chemicals by 2020. At a
global level, the next International Conference on Chemicals Management (ICCM5) has been
postponed due to the COVID-19 pandemic, but when it takes place it will need to address
global action on safe chemical use beyond 2020. Manufacturing that uses only safe
chemicals is still a far-off ambition, but substances of concern have made it onto the agenda
of legislators.

An analysis of ISS ESG data shows that companies in jurisdictions with more advanced
chemicals regulation also show a better performance related to material health. The ISS
ESG Corporate Rating assesses companies’ performance on the use of substances of concern
on a scale from 1 (worst) to 4 (best). It is evident from this dataset that European companies
are on average more advanced than their peers in other regions of the world, although Asian
companies are catching up.

Figure 11: Performance on substances of concern

Source: ISS ESG Corporate Rating (as of January 2022)

The potential hazards stemming from the use of substances of concern are gaining attention,
as is an understanding of the impediments these represent for the transition to a circular
economy. ISS ESG data shows that corporate action on the matter is still lagging, however. As
demonstrated in a previous analysis by ISS ESG, the vast majority of chemicals companies in
the ISS ESG universe underperform when it comes to appropriate chemical management,
and a similar picture emerges when looking at a broader set of sectors.

This deficit becomes most apparent when the issue of chemical use is contrasted with more
front-page ESG matters such as climate change. While in both areas most companies are
assessed as having an overall ‘Poor’ performance, strategies to reduce climate impacts are
more prevalent than systematic approaches to phasing out the use of substances of concern

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in products. In fact, over 70 percent of companies whose approach towards substances of

concern in products was assessed by ISS ESG’s Corporate Ratings team were found not to
report on any relevant policies or measures (assessment result: D-), while this holds true for
only 42 percent of companies when it comes to climate change strategies.

Figure 12: Contrasting performance

Corporate Performance on Substances of Concern in Products

D+, 7.7%
D, 1.8%
Excellent, 2.4%

Good, 4.3%

Other, 81.4%
D-, 71.9%
Medium, 11.9%

Corporate Performance on Climate Change Strategy

Excellent, 7.4%

D+, 7.7%

D, 16.3%
Good, 10.2%

Other, 66.3%

D-, 42.4%

Medium, 16.2%

Source: ISS ESG Corporate Rating (as of January 2022) (Note: Percentages do not
add up to 100 due to rounding)

Unleashing the Potential of a Circular Economy

To unleash the tremendous potential of the circular economy to address ‘overlooked
emissions’ and tap into the economic opportunities that come with a transition to a circular
economy, a greater emphasis on material health is necessary. ISS ESG data allows investors
to evaluate which companies are acting to reduce the use of substances of concern in
products and improve material health.

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Squaring the Climate Circle: How the

Circular Economy Can Play a Role in
Net Zero Strategies
By Lukas Lohrer, Climate Analytics Consultant, ISS ESG
Yuka Manabe, Senior Associate, Bespoke Research & Advisory Solutions, ISS ESG

The transition to a Net Zero economy will struggle if the underlying system of linear
extraction is not transformed into a circular one. Nevertheless, the circular economy and
related metrics do not seem to play a role in many climate investment strategies.

Avoiding the use of non-renewable resources is a key principle of a circular economy.

Although the concept of a circular economy has attracted more interest recently,
with circular economy-themed investment opportunities on the rise, its potential in fighting
climate change has yet to be promoted.

The Circular Economy: Potential for Emissions

Reductions in the Food Industry
Two areas where the circular economy Figure 13: Circularity in the Food System
could drive emissions reductions are
industrial materials and the food system.
The reductions could be achieved
through strategies such as ‘product
reuse’ and ‘eliminating food waste.’ With
our current food system accounting for a
third of global GHG emissions, these
strategies need to play a crucial role in
combatting climate change. According to
EMF, a circular scenario for food could
reduce annual CO2e emissions of the
food system by 49% in 2050.

The ISS ESG Corporate Rating assesses

these key circular economy strategies for
reducing carbon emissions in food-
related industries. The relevance of Source: Ellen MacArthur Foundation, Completing the
minimising food waste is captured for Picture, p.41
the entire value chain, assessing a food
company’s strategies for its own operations, suppliers, and consumers. Food waste and
losses in the early stages of the value chain are scrutinised, such as during harvesting,
storing, and transportation, as are measures to match food supply with demand and
packaging to prevent food waste during and after distribution.

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On the topic of composting and regenerative agriculture, ISS ESG’s Corporate Rating looks for
food companies to promote sustainable soil and biodiversity management in agricultural
production along the value chain, through measures such as prevention of soil erosion,
balancing use of fertilisers, and preservation of soil fertility over the long term. As of March
1, 2022, only a very small share of companies had strategies and measures in place to
transform the food industry (Food Products, Beverages, Restaurants) into a circular one
(A being the top and D the bottom score).

Figure 14: Food industry circularity strategies

Source: ISS ESG

The circular economy strategies outlined above often require dedicated products from
solution providers. But how can investors identify these and measure their impact on GHG
emissions reductions?

One example that stands out is Chr. Hansen, a global bioscience company based in
Hørsholm, Denmark, that develops natural solutions for the food, beverage, nutritional,
pharmaceutical, and agricultural industries. Chr. Hansen’s contribution towards a circular
economy is captured in ISS ESG’s SDG Solutions Assessment, which measures how
companies’ product portfolios contribute to or obstruct the UN Sustainable Development
Goals (SDGs). Chr. Hansen’s product portfolio is considered to significantly contribute to the
objective of ‘sustainable agriculture’ by offering biological yield enhancers.

Further, according to an impact study the company conducted, Chr. Hansen’s bioprotection
solutions can extend the shelf life of dairy products, thus avoiding food waste and, in turn,
GHG emissions that would otherwise originate from the production of additional dairy
products. ISS ESG recalculated these Potential Avoided Emissions by applying a more
conservative baseline than the company’s impact study. While there are various challenges
inherent in calculating avoided emissions, the data suggests that potential avoided emissions
from Chr. Hansen’s bioprotection products could amount to more than two-thirds of the
company’s total GHG emissions (Scope 1, 2, & 3) in the fiscal year 2019/2020, as disclosed by
the company.

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Figure 15: Avoided emissions from circularity

Sources: ISS ESG, Chr. Hansen

Current Climate Investment Strategies May Suffer

from Carbon Tunnel Vision
Given its enormous potential for reductions in GHG emissions, it is surprising how notably
absent the concept of a circular economy seems to be from many investor-level Net Zero
frameworks and climate investment strategies. A case in point is the latest edition of the Net
Zero Asset Owner Alliance’s Target Setting Protocol, which only mentions ‘circular business
models’ as one of several approaches to reducing emissions in the ‘Constructions and
buildings’ sector. The less detailed guidance documents of the Alliance’s equivalents for
asset managers and banks seem not to take notice of the circular economy’s opportunities,
risks, and overlaps with Net Zero at all.

On the regulatory front, the European Union’s taxonomy for sustainable activities already
includes activities at the intersection of the circular economy and climate change mitigation,
such as manufacturing of secondary aluminium, bio-based chemicals, or the recycling of
plastic waste. And the EU’s delegated act on the circular economy is still to be published,
although it is expected in 2022.

The regulation on climate benchmarks, another part of the EU’s Action Plan on Sustainable
Finance, seems to take a narrower view. Climate performance is operationalized by GHG
emissions and fossil fuel exclusions, but the regulation stops short of requiring a ‘green to
brown ratio’ that could facilitate the direct integration of circular economy solutions into
climate indices. Even the original proposal by the EU’s Technical Expert Group (TEG) limited
‘green activities’ to energy-related activities.

Overall, the impression remains that current ESG investing practices may suffer from carbon
tunnel vision if climate change is considered an issue separate from the wider ESG sphere
instead of a part of it. This seems to be especially true if a climate investing strategy focuses
narrowly on operational GHG emissions without considering the climate impact of an
investee’s product portfolio. In an extreme case this may lead to portfolio managers being

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forced to exclude providers of climate solutions if the companies’ GHG emissions exceed a
predefined emissions threshold.

Certainly a rapid decarbonization of all parts of the global economy – including the
operations of climate solution providers – is needed to remain within planetary boundaries.
Nevertheless, an inflexible focus on the GHG emissions of a particular sub-system – for
example, a single company or portfolio – may not be able to capture the full picture.
Solutions to the wicked problem of climate change have benefitted from systems thinking in
other disciplines, and this may well be what current climate investing strategies need more
of.

Of course, this is easier said than done. A starting point, however, can be the use of multiple
metrics instead of reducing and thereby oversimplifying a complex issue into a single
number. This would allow for the identification of more synergies and opportunities, as well
as more contradictions.

As shown in the example of Chr. Hansen’s bioprotection solution above, investors may
benefit from comparing a company’s GHG emissions to the GHG emissions avoided by the
company’s products when assessing the company’s overall climate performance. Similarly, a
climate investing strategy embedded in an investor’s ESG strategy may also consider
company assessments in line with the SDGs and dedicated circular economy datapoints to
derive a truly holistic picture with fewer blind spots.

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The Circular Economy: A Boon for

Biodiversity Conservation?
Nature is in dire straits. Its degradation has been widely documented and corroborated by
numerous studies. At the same time, the loss of species and ecosystems and the
accompanying disruption of ecological functions and services lay bare
humanity’s dependence on the natural world. There is now ample evidence of
the devastating consequences of ecological collapse for the global economy and human
health. Nature provides us with a raft of multi-faceted benefits, generally grouped according
to the UN-backed Millennium Ecosystem Assessment into four main categories:

Table 3: Ecosystem services provided by nature

Regulating services Purification of water and air, pollination, climate

regulation, carbon sequestration, waste
decomposition, erosion and flood control, etc.

Provisioning services Supply of food, crops, drinking water, raw materials,

medicinal resources, energy, etc.

Cultural services Recreational experiences, spiritual and educational

value, etc.

Supporting services Primary production, photosynthesis, nutrient cycling,

soil formation, etc.

Source: Millennium Ecosystem Assessment

If biodiversity, which underpins many of these ecosystem services, continues to decline

unabated, nature’s ability to supply essential resources, attenuate environmental pollution,
and absorb external shocks will be severely impaired. This will in turn have sweeping
repercussions for global supply chains, business continuity, and corporate bottom lines, and
ultimately for the achievement of many of the Sustainable Development Goals.

Global Efforts to Curb Biodiversity Loss

Previous government efforts to protect nature have failed to forestall environmental
degradation, with none of the 20 biodiversity targets set by the global community for the
2011-2020 period having been fully met.

Many conservationists and sustainability leaders are therefore pinning their hopes on the
second leg of the fifteenth meeting of the Parties to the Convention on Biological Diversity
(COP 15) late in 2022. The overarching goal of the conference is to flesh out a new global
framework for the protection of the world’s flora and fauna and to galvanize a
transformation in society’s relationship with nature.

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In a first draft of the post-2020 global biodiversity framework, 21 targets and 10 milestones
have been proposed to put biodiversity on a path to recovery by 2030, en route to the vision
of ‘living in harmony with nature’ by 2050. Among the most attention-grabbing and widely
publicized proposals are plans to protect 30% of the global land and sea area. Further
measures include efforts to rein in pesticide use and pollution, climate change mitigation,
ecosystem restoration, the elimination of harmful subsidies, the fight against invasive
species, and more sustainable production and consumption.

Still, the road to a Paris-style agreement with meaningful, actionable, and realistic targets
is fraught with challenges, as many of the critical sticking points are yet to be thrashed out.
Experts have picked numerous holes in the draft and criticized its lack of ambition and clarity
in terms of concrete actions and the absence of legally binding commitments. It has also
been argued that its focus on environmental protection and restoration will be insufficient to
bring about the systemic change that is urgently required.

Among other things, concerted action is needed to radically change human production and
consumption patterns. The circular economy appears particularly conducive to many of the
proposed actions in the draft global biodiversity framework and can concurrently help to
address the root causes of biodiversity loss. Circular design principles do not feature strongly
in the current draft, however. This was also highlighted by Business For Nature, a global
coalition of businesses and conservation organizations, which advocates for a stronger
emphasis on circularity.

The Role of the Circular Economy in Promoting

Biodiversity Conservation
By tackling the elimination of waste and pollution, extending the use of products and
materials, and regenerating natural systems, the circular economy can make significant
contributions to biodiversity conservation, not least by aiding in the reduction of
environmental pressures caused by resource extraction, production, consumption, and
waste generation.

Figure 16: Circular economy benefits for biodiversity

Source: Ellen MacArthur Foundation

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The circular economy is underpinned by progressive design thinking that circulates products
and materials in two cycles: the technical cycle (shared product use, product and component
reuse, repair, maintenance, remanufacturing, recycling); and/or the biological cycle (return
of nutrients to nature, regeneration, use of renewable natural resources). In that regard, it
addresses the fundamental ills of unsustainable production and consumption.

The global economy is largely linear in structure, and it has been reported that only 8.6% of
all materials extracted from nature are cycled back into the economy. At the same time, an
estimated 90% of biodiversity loss and water stress has been attributed to resource
extraction and processing. Circular design aims to decouple economic activity from excessive
resource extraction and consumption, thereby helping tackle the main stressors that harm
biodiversity.

Table 4: How the circular economy counters biodiversity loss

DRIVERS OF BIODIVERSITY LOSS BENEFITS OF THE CIRCULAR ECONOMY

Land and sea use change Lower land requirements due to reduced
resource extraction and long-term use of
products and materials

Overexploitation of natural resources Long-term and sustainable management of

renewable natural resources such as fish stocks
and forests
Climate change Lower greenhouse gas emissions due to
reduced need for virgin resources and long-
term use of products and materials

Pollution of soil, water, and air Elimination of harmful substances (hazardous

chemicals, GHG emissions, single-use items)
throughout product life cycles

Invasive alien species Reduced introductions via the

– elimination of waste on which invasive alien
species can be transported to new ecosystems;
and
– transformation to a more service-oriented
trade system and local circular solutions

Source: Adapted from the Ellen MacArthur Foundation

All industries can harness the potential of the circular economy to mitigate pressures on the
environment and enhance positive effects. This holds particularly true for high-impact
sectors such as food and agriculture, buildings and construction, fashion, extractives, and
packaging.

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Clean Energy Technologies Making the Case for

Circular Design
As the energy transition gathers pace around the globe, clean energy technologies are
becoming the fastest-growing segment of demand for critical minerals. This essentially
concerns electricity and heat generation, energy storage, mobility, and power grids. Solar
panels, wind turbines, and electric vehicles commonly contain more minerals and rare earth
elements than their fossil fuel-based counterparts.

Figure 17: Mineral requirements of energy generation technologies (in kg/MW capacity)

Source: International Energy Agency

In addition to the above, typical electric vehicles require six times the mineral inputs of
conventional cars. Power grids, which are a key facilitator of the energy transition, rely on
copious amounts of copper and aluminium. Electrolysers, which are deployed in ever greater
numbers for the generation of hydrogen, need nickel and zirconium, while fuel cells are
particularly dependent on platinum-group metals.

Large-scale mining activities will put considerable strain on natural habitats via land use
changes (or sea use changes in the case of deep-sea mining), infrastructure development,
and environmental contamination. The production of many metals and minerals is
particularly water- and pollutant-intensive. In this context, the application of circular design
principles can help to ease environmental pressures.

The International Energy Agency (IEA) calls for stronger efforts to improve recycling of
energy transition metals such as lithium, nickel, cobalt, and rare earth elements. Waste
streams from wind turbines, solar panels, and batteries are expected to increase significantly
in the next few years and decades. But recycling, which is commonly seen as the least
favored option of the circular economy’s technical cycle due to inherent losses in value, can
only be part of a more comprehensive bundle of measures.

More innovative product designs are required that allow for the effective separation of
constituent components and materials. Wind turbines are a case in point in that regard.

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While most turbine components can be reused or recycled, the majority of rotor blades are
landfilled or burned as the use of highly durable composite materials makes it an arduous
task to break them down to their constituent parts. As many wind turbines erected in the
early 2000s reach the end of their operational lives, huge numbers of blades will need to be
dealt with in the coming years.

Some utility companies such as Ørsted and Vattenfall have recently committed to avoid
landfilling in the future. Some pilot projects and small-scale approaches to material
extraction or blade reuse are also underway. Overall, product design needs to ensure a more
efficient use of materials and enable maintenance, substitution, reuse, repurposing, and/or
recovery. All these measures are at the heart of the circular economy and have the potential
to reduce primary mineral extraction and environmental pollution.

Circular Design Thinking in the ISS ESG

Corporate Rating
The circular economy draws its inspiration from nature, and essentially rests on a novel
vision of how products are manufactured and used throughout their life cycle. Both the
pertinence and prevalence of circular design principles can vary significantly from one
industry to another. The following table provides a snapshot of relevant ISS ESG Corporate
Rating indicators for a select group of industries:

Table 5: Circular design indicators in the ISS ESG Corporate Rating

INDUSTRY TOPICS COVERED

Textiles & • Life cycle assessments

Apparel • Extension of useful product life
• Disclosure of key materials used in products
• Material efficiency of products and in production processes
• Strategy to reduce use of substances of concern in production
processes
• Disclosure of substances of concern contained in products
• Monitoring regarding substances of concern
• Strategy to increase the use of environmentally preferrable
materials
• Percentage of cotton (textiles) certified to an environmental
standard
• Strategy to ensure sourcing of hides from sustainable farming
• Strategy on the prevention of marine microplastics pollution
• Use of volatile organic compounds (VOCs) during final
footwear production

Food Products • Food safety management

• Disclosure of key materials used in products
• Measures to promote sustainable soil and biodiversity
management in agriculture production along the value chain
• Share of raw materials/products from certified organic
farming
• Percentage of certified palm oil
• Strategy to minimize food waste

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• Measures to reduce the impact of packaging

Construction • Safe product design and development

Materials • Safe production processes
• Life cycle assessments
• Extension of useful product life
• Disclosure of key materials used in products
• Material efficiency of products and in production processes
• Percentage of recycled materials
• Facilitation of take-back and recycling

Source: ISS ESG (Note: List is not exhaustive; applicability of indicators depends on business models)

Circular design principles touch on all the different phases of a product’s life cycle, ranging
from material procurement to processing and production/construction, the use phase,
decommissioning, and disposal. Importantly, biodiversity benefits can thus accrue at all
stages.

An analysis of circularity efforts in high-impact industries reveals significant room for

improvement, however, and substantiates the aforementioned finding that the
preponderance of the global economy still follows linear principles. The graph below
illustrates companies’ aggregated performance in terms of circular design-related, sector-
specific indicators as used in the ISS ESG Corporate Rating (grading scale ranging from 1
[poor performance] to 4 [excellent performance]):

Figure 18: Average circularity score for selected high-impact industries

Source: ISS ESG as of February 17, 2022 (Note: This an internal assessment and is not part of the standard ISS ESG
product suite. The score is calculated based on sector-specific, circular economy-linked indicators – see Table 5 as an
example – and associated weights)

Overall, out of nearly 1,300 companies under review, only 67 businesses achieve a circularity
score above 2.5 and a mere 13 companies score above grade 3. Such subpar performance
across product life cycles in virtually all high-impact industries goes hand in hand with
significant pressures on the environment in terms of recurring resource extraction, excessive
consumption, large-scale waste generation, and pollution.

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Challenges and Outlook

The circular economy has been credited with a range of positive environmental impacts that
can ultimately also benefit biodiversity. They include a reduction of primary resource and
land requirements, lower emission and pollution levels, and improved land productivity and
soil health. While the circular economy will not be able to stave off the biodiversity crisis on
its own, it can certainly help move the needle on preserving nature in conjunction with other
measures outlined in the COP15 draft framework.

Several challenges remain, however. For the circular economy to truly harness its potential,
collaborative, system-level, and value chain-wide approaches will be required by all actors.
Also, if not applied judiciously, the circular economy may entail unintended trade-offs for
biodiversity. Many natural resources such as forests or fish stocks are already stretched to
the limit by overexploitation. The shift from non-renewable to renewable sources, as
espoused by the circular economy, could send strained ecosystems into a tailspin and further
compromise their regenerative capacities. For example, the large-scale use of bioplastics for
packaging or timber for construction could exacerbate land use pressures. Rebound
effects may also nullify some of the initial resource and consumption savings.

Last, it has been argued that there is still a frequent misalignment of circular economy and
biodiversity conservation policies and action plans. This applies, for instance, to the EU
Circular Economy Action Plan, the EU 2030 Biodiversity Strategy, and the previously
highlighted COP15 draft framework. It remains to be seen whether the upcoming COP15
conference will award a more central role to the circular economy and make sustainable
production and consumption a key pillar of the post-2020 biodiversity framework.

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The world has changed, and banking

needs to change with it
By Joost van Dun, Circular Economy Lead, ING Sustainable Finance

ING’s purpose is to empower people to stay a step ahead in life and in business. This also
means helping customers and society stay a step ahead of the challenges they’re facing.

One of the biggest challenges for society is ensuring sustainability, in all its forms. Climate
change threatens both the planet and its people. People may struggle with inequality, poor
financial health, and even a lack of basic human rights.

As the challenges increase, there’s a growing sense of urgency that governments and
businesses must step in and help tackle them. The world has changed, and banking needs to
change with it.

Growth at all costs should no longer be a goal. Sustainability must be at the heart of what
financial institutions such as ING do. Such institutions have a social responsibility to define
new ways of doing business, where planet and people are just as important as economic
growth.

ING wants to be a pioneer in defining those new ways to do business and be a banking leader
in building a sustainable future for the company, its customers, society, and the
environment. The company plays its part in the social and low-carbon transformation that’s
necessary to achieve a sustainable future, steering its financing towards meeting global
climate goals.

ING finances this change, because being sustainable is not just about reducing the company’s
own footprint, but about all the choices ING makes—as a lender, as an investor, and through
its services to customers. As a financial institution, ING can have more impact by helping its
clients to become more sustainable through sustainable financing.

ING focuses not only on financing but also on collaboration: working with clients to achieve
their own sustainability goals and increasing ING’s impact through partnerships and
coalition-building.

Circular Economy: An Important Means to Reach

Global Climate Goals
The circular economy is an important means to reach global climate goals, while preventing
pollution and harmful impacts on biodiversity.

Efforts to mitigate climate change emphasize the transition to renewable energy and
activities related to energy efficiency. These measures can address only 55% of emissions,

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however. The remaining 45% comes from producing the cars, clothes, food, and other
products we use every day.

Advancing the circular economy is therefore an essential step towards achieving the Paris
Climate Agreement goals as well as the UN Sustainable Development Goals. The circular
economy’s importance has also been recognized by the European Commission. The
transition to a circular economy is one of the main building blocks of the European Green
Deal.

The aim of this EU New Circular Economy Action Plan is to reduce the EU's consumption
footprint and double the EU's circular material use rate in the coming decade. This means
focusing on making products more durable, reusable, and reparable; making more use of
recycled materials; and increasing recycling capacity.

Transitioning to a more circular economy is high on the agenda of ING’s clients, so it is also
part of the company’s integrated climate approach. ING supports clients in financing circular
business models and activities, with an emphasis on those value chains that use the most
resources and have high potential for circularity such as plastics, packaging, construction,
textiles, batteries, vehicles, and electronic/ICT equipment.

Financing Circular Activities and Businesses

ING offers the following finance solutions to fund the circular activities of our clients:

▪ Sustainability-linked products, such as sustainability-linked loans or bonds. To

stimulate the transition to more sustainable and circular business models, ING created
in 2017 the sustainability-linked loan (SLL). This loan can be used for general corporate
purposes, but its interest margin is linked to the improvement of the client’s external
ESG score or tailored KPIs. These KPIs can be related to circular ambitions. AB InBev,
the world’s largest brewer, for example, issued one of the world’s largest SLLs, where
one of the KPIs was a circular one: an increase of PET (that is, plastic) recycled content
in PET primary packaging.
▪ Green loans and green bonds. The proceeds of these loans or bonds are fully
dedicated to the financing or refinancing of circular projects or assets (see the textbox
below for a description of a green circular bond).
▪ Financing new circular business models. In the circular economy new circular business
models arise, such as sharing or product-as-a-service business models. Here, the
customer does not buy the product but simply pays to use the product. These models
require their own approach to financing. An ‘as a service’ business model takes into
account usage and cashflows linked to that usage instead of focusing only on financing
the asset. To find the right solution, ING’s sustainable finance team works closely with
their Sustainable Structured Finance team (for project finance) and Sustainable
Investments (for providing equity/subordinated debt). For example, ING finances the
subscription company Ebike-to-go. E-bike-to-go offers e-bikes in a subscription model,
making sustainable transport accessible to a wider audience. But E-bike-to-go also
focuses on extending the bikes’ lifetimes by refurbishing them after four years, which
helps them to last another four years.

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▪ Beyond banking. The circular economy is also about value chain collaboration. Choices
made upstream in the value chain have consequences for the downstream part. Think
of ‘Design for recyclability’: products should be designed in such a way that they can
be easily repaired or recycled at the end of their life span. To contribute to the further
transition to a circular economy, ING supports clients by bringing the right parties
together to enhance collaboration across the entire value chain. The company has
recently done this for the Textile Value Chain, for example, to support clients in
achieving their sustainability and circularity goals by leveraging ING’s network.

Case Study

Smurfit Kappa Group (SKG) produces paper-based packaging solutions and

mandated ING and Rabobank in 2021 to structure their Green Finance Framework.
To ensure SKG’s sustainability and circular profile were sufficiently captured, the
team designed an approach whereby circularity served as an umbrella theme to
identify SKG’s productive assets related to reclamation, recycling, milling, and
packaging conversion—all activities that contribute to the circular nature of SKG’s
business. To assess SKG’s circular business model, the team used the EU
Categorization System for a Circular Economy.

This publication is also being used as input material for the development of the EU
Taxonomy for the transition to the circular economy (expected in H2 2022). Shortly
after the Green Finance Framework establishment and SPO finalization from ISS
ESG, SKG issued a €1bn 8-year and 12-year inaugural Green Bond. This is one of
the first bonds in the market (and a first for ING) where circularity is the main
theme, based on circular business practices. The bond was very well received
among investors.

Looking Forward: Clear Targets and Definitions and

Accurate Measurement Will Support Allocating
Funding to Circular Activities
We see that both the number of sustainable finance transactions as well as the ‘share’ of
circularity items in such transactions is increasing. This growth is pushed by changing
consumer demand (as consumers become more aware of companies’ sustainability efforts)
and also by changing regulations arising from the European Commission’s New Circular
Economy Action Plan. The Single-Use Plastics Directive, for example, bans the use of plastic
cutlery, plates, straws, etc., but it also requires that PET beverage bottles should contain 25%
recycled content. This regulation contributes to an increased demand for recycled PET.

The EU Taxonomy gives clear guidance on what economic activities contribute to climate
change mitigation and climate change adaptation. Clear thresholds are defined, often
expressed in a maximum level of CO2 per produced item. For the circular economy,
however, these criteria are in most cases not yet described in such detail. In the circular
economy, CO2 reduction in the production of goods, for example, is realized by replacing
virgin materials with renewable or recyclable materials. This means either less production of
those virgin materials or making more intensive use of existing assets (like car-sharing). This
is a ‘derived’ reduction, which makes the actual calculation of the CO2 reduction a bit more
difficult: a product’s complete life cycle and broader impact must be taken into account to
make a fair comparison with a ‘non-circular product.’ Next to lowering CO2 or GHG

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emissions, the absolute reduction of the use of (virgin) materials is an important driver from
a circularity point of view. But this should also be translated into clear goals, thresholds, or
pathways. When can a product be called circular?

Currently, in line with the New Circular Economy Action Plan, the European Commission is
working on an extension to the EU Taxonomy in which more detailed Technical Screening
Criteria will be published to describe which economic activities contribute to the transition to
a circular economy and – equally important – the associated thresholds to label a circular
activity as such. The first steps are being taken to measure the level of circularity, with
different parties working on methodologies or certifications to capture it. A good example is
WBCSD’s Circular Transition Indicator (CTI) methodology, which calculates the level of
circularity of a certain business, independent of sector or geography, by looking at input
material use and recovery potential.

Combining the criteria and thresholds that define circular activities (EU Taxonomy/upcoming
legislation originating from the New Circular Economy Action Plan), as well as developing
tools to measure these activities’ circularity (such as CTI), will support the allocation of
(green) funding to circular activities. Circularity will likely take its fair share in the sustainable
finance market in the coming years.

Finally, both the reporting obligation under the Non-Financial Reporting Directive and the
upcoming Corporate Sustainability Reporting Directive, in which part of the revenue, capital
expenditure, and operational expenditure of a company is associated with EU Taxonomy-
related activities, will increase transparency on the sustainable and circular performance of
ING clients and ING’s own portfolio. Creating more transparency allows all stakeholders to
assess where they need to steer in order to contribute to a more sustainable world.

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Money flows into circular economy

investments as the finance sector
targets better growth and a way to
address climate change and
biodiversity loss
By Emily Healy, Finance Initiative Lead, Ellen MacArthur Foundation

A circular economy transforms production and consumption systems by eliminating waste,

keeping resources in circulation, and regenerating natural systems. It’s an idea that has
gathered a lot of support over recent years, with increasing numbers of companies and
public bodies adopting circular economy strategies to create value, reduce costs, and
manage risks.

For the finance sector, the transition to a circular economy offers access to new and better
growth potential, while also addressing climate change, biodiversity loss, waste, and
pollution.

This transition means a fundamental change in the way business models, products, and
services are designed — all with the aim of gradually decoupling the use of ’virgin’ resources
from production. Finding ways to extend the usable life of products is key. In the fashion
industry, resale, rental, repair, and remaking offerings are already worth more than $73
billion – and are growing. Since 2019, seven resale and rental platforms — Depop, Rent the
Runway, The Real Real, Vinted, Poshmark, Vestiaire Collective, and ThredUP — have reached
billion-dollar valuations. These business models have the potential to grow from 3.5% of the
global fashion market today to 23% by 2030, becoming a $700 billion opportunity, while also
providing significant environmental savings from increased use.

Adopting circular practices also reduces risk and increases resilience through business model
diversification, as well as by better anticipating stricter regulation and changing customer
preferences. Analysis by Bocconi University of more than 200 listed European companies
across 14 industries has shown that the more circular a company is, the lower its risk of
defaulting on debt and the higher the risk-adjusted returns of its stock.

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Figure 19: Circularity and risk

Source: EMF, Bocconi University

The circular economy is also a large part of the solution to tackling climate change. By
adopting the principles of the circular economy, emissions associated with industry,
agriculture, and land use can be addressed. Two years on from Blackrock CEO Larry Fink’s
assertion that “climate risk is investment risk,” the financial sector has become aware of the
scale of the problem. In response, major banks, asset managers, and insurers are starting to
assess climate risks and opportunities in their portfolios, making Net Zero commitments,
setting targets, and developing strategies and capabilities.

COP26 revealed an escalation in capital chasing decarbonisation solutions when the Glasgow
Financial Alliance for Net Zero (GFANZ) announced that $130 trillion from 450 financial firms
had been committed to Net Zero targets over the next three decades. To have a chance to
limit warming to 1.5°C, however, this capital will have to extend beyond the energy
transition and tackle emissions generated by the materials economy across supply chains.
Thus, the circular economy needs to be a crucial component of the financial sector’s
decarbonisation plans.

This opportunity is already being captured by the finance sector, with significant growth in
circular economy financing across asset classes over the last three years. For example, the
total amount of assets with a circular economy focus managed through public equity funds
increased 28-fold since the end of 2019, from $0.3 billion to almost $9.5 billion by December
2021, with providers including BlackRock, Credit Suisse, and Goldman Sachs launching
circular economy funds.

Similar growth patterns can be seen on the fixed-income side, and in venture capital, private
equity, bank lending, and project finance. Within the annual issuance of corporate and
sovereign bonds, those with a circular economy focus increased five-fold between December
2019 and December 2021, with at least 40 bonds issued in the last three years by global
companies such as Alphabet, BASF, Henkel, PepsiCo, and Philips.

Banks are increasingly dedicating capital to circular economy opportunities, including an €8

billion extension to Intesa Sanpaolo’s circular economy credit facility announced in 2022,
following the success of the first €6 billion iteration that extended financing to circular
projects between 2018 and 2021.

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Beyond direct finance and investment, financial institutions are also building their knowledge
and expertise on the circular economy to engage companies, supporting clients in their
transition through capital raising and providing structured products and expert advisory and
support services. Examples include tailored products and technical and financial advisory
support by ING, ABN Amro, BNP Paribas, EIB Advisory, Intesa Sanpaolo (e.g., through its
Circular Economy Lab), and Rabobank, among others.

In tandem with the growth of the circular economy financing market, a supportive regulatory
environment is rapidly evolving, particularly in Europe. The circular economy is one of the six
environmental objectives of the EU Taxonomy. The upcoming non-financial reporting
standards will require 50,000 companies in the EU to disclose their circular economy
performance by 2024.

Looking globally, the International Financial Reporting Standards (IFRS) Foundation

announced the establishment of a new International Sustainability Standards Board to
develop the rules needed to establish consistent disclosures on sustainability matters,
starting with climate. Beyond disclosure, there is a trend towards stricter regulations tackling
waste and pollution, such as the EU’s Single-Use Plastics Directive trade restrictions,
Extended Producer Responsibility (EPR), or mandatory recycled content targets, which
favour the adoption of circular business models.

Momentum is building behind the circular economy as companies and policymakers are
increasingly connecting the dots between economic recovery and tackling global issues. The
increasing investment in circular economy activities shows that the finance community also
understands this opportunity. Increased disclosure of high-quality, publicly available
information from companies regarding their circular economy activities will also enable
investors and financial institutions to better identify opportunities for and track progress
towards positive environmental and business outcomes.

The finance sector is at a watershed moment. The challenge now is to move from a point of
awareness to scaled action, investing in circular innovations such as business model
transformations and regenerative agriculture practices for better growth, and to address
climate change, biodiversity loss, and pollution.

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Conclusion
The last decade has welcomed a major increase in the investment community’s awareness of
the importance of environmental, social, and governance (ESG) factors. Unfortunately, this
awareness has come hand in hand with an increase in the negative real-world impacts of
issues such as climate change, reductions in biodiversity, and working conditions in a
globalized supply chain.

This paper makes the case that circular economy thinking is crucial to the development of
truly sustainable solutions to the problems the earth faces right now. By building circularity
into product planning, design, and beyond, companies can reduce their environmental and
social impacts at the same time as improving their risk and return profiles for the increasing
number of responsible investors taking these issues into account.

As noted in the contributions from our partners in this project, ING Bank and the Ellen
MacArthur Foundation, the circular economy is at its most effective when it is taken up at a
whole-of-system level, including among the banking sector and regulators promoting market
transparency.

ISS ESG stands ready to assist our clients in building circular economy thinking into their own
investment processes.

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AUTHORS

Leontine Schijf, ESG Consultant

Hanna Taya, ESG Corporate Ratings Analyst
Yuka Manabe, Senior Associate, Bespoke Research & Advisory Solutions
Gavin Thomson, Head of Integrated Portfolio Management
Ronja Wöstheinrich, Associate Vice President, ESG Methodology
Lukas Lohrer, Climate Analytics Consultant

WITH CONTRIBUTIONS FROM

Joost van Dun, Circular Economy Lead, ING Sustainable Finance

Emily Healy, Finance Initiative Lead, Ellen MacArthur Foundation

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