Why now is the right time for investors to unlock financing for the plastic circular economy

Momentum is building to end plastic waste and pollution. At UNEA 5.2, the “biggest green deal since the Paris Accord” has been agreed, aiming to tackle plastic waste and pollution through a comprehensive global framework. Amongst variety of actors needed to operationalize such an ambitious agreement to put a stop to plastic waste and pollution, what is the role of financial institutions????

A global framework to tackle plastic waste could have a big impact across both asset classes and regions. No doubt policy will be essential in driving action on plastic waste and pollution forward, especially at the national level, but there are huge opportunities for investors. As renewables have upended global energy markets over the last decade, there is opportunity and a need to scale investment in plastic waste management from impact investing alone, to becoming a mainstream ESG-led investment proposition. Such engagement, as outlined in the Global Plastic Action Partnership 's (GPAP) recent ‘Unlocking the Plastics Circular Economy: A Toolkit for Investment’ can offer proactive investors big rewards. https://bit.ly/3uJfNJG

Why investment in plastic waste and pollution matters??

Plastic pollution and waste remains a huge global environmental challenge. It is estimated that without significant action, 29 million tonnes of plastic will flow into the ocean every year by 2040. The transition to a circular economy will require investment of $1.2 trillion and a significant shift away from business-as-usual. Action on plastic waste needs to become a part of an increasing number of financial institutions own environmental strategies.?????

This global challenge also provides an economic opportunity for investors. Consider that the circular economy, which promotes the elimination of waste and the continual safe use of natural resources, offers an alternative that can yield up to $4.5 trillion in economic benefits to 2030.1 But today only 8.6% of the world is circular, meaning this transition is big and requires collaboration and a significant increase in investment (2).??

The role of finance??

While both the private and public sectors are mobilizing to address the challenge of plastic waste, significantly more action is needed to match the scale of the problem. We still have a long way to go. There is a gap for finance to fill, scaling growth and unlocking the capital flows required to turn the plastic waste crisis into a bankable circular-led growth.??

The models are increasingly clear and now need to be scaled.? The drivers of technological innovation and policy change are critical; however, they cannot solve the growing problem on their own. Those investors early to the sector and the opportunities it brings, will have competitive advantage on those that choose to stand on the side lines. Private investors can generate a market rate of return but must also deploy capital and collaborate with other stakeholders to realize the opportunity.???

?At the Global Plastic Action Partnership, we see three routes for action outlined in our toolkit recently launched, that investors can take to capitalize this opportunity.???

Investors can play an important role in boosting demand and supporting a circular economy for plastics. To do this they will need to work in partnership with private and public sector stakeholders to help create investment opportunities.? An example of this includes Morgan Stanley serving as a joint bookrunner for Coca-Cola FEMSA ’s green bond issuance which illustrates how the combination of early leadership by a corporate actor, the creation of a on-profit with a clear aim, supportive government policies and significant private capital can work to create a nascent industry.??

The story starts in the early 2000s when the Government of Mexico sought ways to improve waste management. They worked with Coca-Cola FEMSA – the world’s largest Coca-Cola bottling franchise and a leading Mexican beverage company – and other bottling and plastics industry peers, including PepsiCo , to establish ECOCE, A.C. Ecología y Compromiso Empresarial or Businesses Committed to Environmentalism, a non-profit designed to improve recycling rates in Mexico.

Through initially using price incentives to encourage greater bottle collection, the consequence was by 2018, the PET recycling rate in Mexico had increased from 8.8% in 2002 to 56%.???In acting as joint bookrunner for the issuance, Morgan Stanley contributed to its Plastic Waste Resolution, a commitment to prevent, reduce and remove 50 million tonnes of plastic waste from entering rivers, oceans, landscapes and landfills by 2030.??

The partnership between Coca-Cola FEMSA, Morgan Stanley and the Government of Mexico shows how governments, markets and investors can create new markets that provide good environmental and financial returns.??

Work with governments to mobilize capital???

Investors must work with governments to mobilize private capital through thematic bond issuances and loans to address plastic waste in emerging markets. To achieve this engagement, we can look at the case of Credit Suisse and the Government of Belize , where an innovative financing approach, supported by Development Finance Institutions (DFIs) and a global non-profit organization, allowed the Government of Belize to tackle a key environmental objective.???

?The coastal area of Belize is an outstanding natural system consisting of the largest barrier reef in the northern hemisphere, offshore atolls, several hundred sand cays, mangrove forests, coastal lagoons, and estuaries. For this reason, it is an area of UNESCO outstanding beauty. However, financially the country has been struggling and this difficulty was accelerated by the COVID-19 pandemic which had a devastating impact on crucial tourist revenues.? After four debt restructurings in fifteen years, the Belize government in 2021 had to place a suspension on debt service and explore restructuring options for its debts.???

Together with Credit Suisse and The Nature Conservancy (TNC), the government devised a debt conversion for marine conservation financial structure under the support of TNC’s Blue Bond for Conservation program. This approach enabled the government to redeem $546m in outstanding sovereign debt at a 45% discount while committing to undertake a legally enforceable marine spatial plan with an aim to almost doubling the country’s marine protected area. The government also embarked on a 20-year project to establish and finance a conservation fund under independent control that will support planning for and protecting Belize’s marine ecosystem.???

This novel approach could pave a path for financing plastic waste and pollution solutions in emerging markets. The transaction has the potential to foster the development of several blue economy financial instruments, increasing future issuances (which may support solid waste management or circular economy projects), and demonstrate the potential of blended finance.????

Collaborate to deploy blended financing mechanisms

Lastly, investors can collaborate to deploy blended financing mechanisms to de-risk investment in unproven business models and markets, taking learnings from renewable energy, where public policy and coordination of key actors have combined to help develop the market and attract private capital.??

Providing a template for stimulating access to capital for small and medium-sized enterprises is the Sustainable Use of Natural Resources and Energy Finance (SUNREF Nigeria ) initiative created by the Agence Fran?aise de Développement (AFD) and implemented in Nigeria by Access Bank Plc Bank and UNITED BANK FOR AFRICA (UBA).??

Following the Paris Climate Agreement in 2015, there was a renewed global impetus to remove financial and technical obstacles that prevent financial institutions in emerging markets from extending credit for investments that further the transition to a green economy and support the UN’s Sustainable Development Goals (SDGs).???

The program is tailored at the country level, providing a combination of loans, guarantees, grants and technical assistance to local partner banks and the companies and projects that they subsequently finance. In addition to facilitating access to green capital, the program supports related policies of host governments and builds partner banks’ capacity to finance green investments.??

?The SUNREF program demonstrates the potential for bilateral and local financial institutions collaborating to secure finance for environmentally beneficial infrastructure, including as relevant to analogue sectors such as plastic waste collection and recycling.??

Time for financial institutions to seize the opportunity?????

The UN treaty on plastic pollution has moved action on plastic waste up the agenda. The above case studies show that there is a big economic opportunity for financial institutions. To seize this opportunity, financial institutions must act with a clear ask for stakeholders to join forces, collaborate and help build and realize investments that deliver tangible, commercially viable solutions to addressing plastic waste. Similarly, policies to support, incentivize and drive action by investors are emerging.

However, much further progress required is still required.??At the Global Plastic Action Partnership, we know that policy change can stimulate investor interest by creating a cohesive ecosystem for plastics, incentivizing investment, and reducing risk, such as through the development and implementation of National Plastic Action Partnership roadmaps. I’m optimistic that investors will realize the economic opportunity for addressing plastic waste and help grow the market.? They must do so quickly, or risk being left behind.???

1 https://newsroom.accenture.com/news/the-circular-economy-could-unlock-4-5-trillion-of-economic-growth-finds-new-book-by-accenture.htm????

2 https://www.circularity-gap.world/2020???

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