<h3>Financing circularity: An opportunity more than a challenge</h3>
A circular economy in which products are designed for durability, reuse, and recycling; resources are recovered from waste; and economic growth is decoupled from the use of finite resources marks a departure from the current &lsquo;take-make-waste&rsquo; model and is increasingly being recognized as vital for resource efficiency and climate change mitigation. Two notable examples include the European Union, which developed its Circular Economy Action Plan in 2015 and has allocated more than EUR2 billion for the implementation of circular economic projects; and China, which adopted circular economy principles in 2002 (European Commission, 2020; Geng &amp; Doberstein, 2010). While Egypt has had circular economy initiatives &ndash; despite not being referred to as such &ndash; to design closed-loop value chains, redesign products and processes and use natural resources more sustainably, obtaining finance for circular economic projects remains challenging due to its overestimated risks. Such projects are usually perceived as risky and thus non-bankable by financial institutions.
However, by managing these risks, financing circular economic projects can support financial institutions to achieve their Environmental, Social and Governance (ESG) commitments and relevant regulatory requirements, as well as act as vehicles for job creation, reducing inequality and improving economic value distribution. This opportunity can be optimized by scaling up and designing innovative financial solutions to finance projects targeting challenges related to resource use, scarcity and mitigating environmental degradation and its human costs. Ultimately the financial sector can be reshaped towards long-term economic value creation and reaching a well distributed, diverse and inclusive economy worldwide.
<h3>Financing circularity: Recent take off </h3>
Access to finance remains a key barrier to economic growth and circularity, particularly in Egypt, where micro, small and medium enterprises (MSMEs) contribute almost 80% of the national GDP yet only 6% have access to bank loans (El Said &amp; Ahmed, 2017). In examining the maturity of ecosystems for scale-ups (SMEs that have reached a stage of rapid growth) in five MENA countries, Egypt came last, with critical challenges including financing, regulations and access to customers and markets (Klat et al., 2018).
Financial constraints to transitioning to a circular business model may include the costs of investment in more resource-efficient technology, establishing recycling systems and switching to a sustainable energy source, to name but a few (Rizos et al., 2015). To mitigate these financial constraints, and in recognition of the importance of transitioning to a circular economy, financial services activity in the circular economy has increased dramatically worldwide. This includes early-stage investors such as venture capital, as well as banking and insurance companies such as Intesa Sanpaolo and AXA respectively, in addition to governments, multilateral development banks (MDBs), and development finance institutions (DFIs).&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The European Investment Bank (EIB), for example, has partnered with five of Europe&rsquo;s largest national promotional banks and institutions to launch an almost USD 11.8 billion loan and investment initiative dedicated to the circular economy (Ellen MacArthur Foundation, 2020).
<h3>Financing circularity: Incentives for unlocking barriers </h3>
While the appetite for investing in the circular economy has increased, far more funds, initiatives and activities are needed to eliminate barriers and unlock the full potential of the financial market to finance the circular economy.&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To support closing the current financing gap, the European Commission established an Expert Group on Circular Economy Financing in 2020 to include a group of experts, government officials, members of the civil society and representatives of the industrial and financial sectors worldwide. To improve the conditions for financing circular economy projects, the Expert Group started analyzing the different barriers and identified the following areas where incentives need to be provided (European Commission, 2019):
<ol>
<li style="text-align: justify;">Better level playing field that enables circular businesses to have a better chance of competing and succeeding in the market.</li>
<li style="text-align: justify;">Value-chain collaboration needs to be enabled and rewarded to optimize the circular solution, so that resources and materials remain in a constant loop.</li>
<li style="text-align: justify;">Long-term value creation: there should be actions to incorporate and reward product longevity in business models.</li>
<li style="text-align: justify;">Better market participation of consumers: to change their behavior to make products circular in the value chain (especially when products turn into waste).</li>
<li style="text-align: justify;">Integration of the public good: the cost of negative externalities and the benefits of positive externalities need to be considered to allow circular industries to compete more fairly.</li>
<li style="text-align: justify;">Finance knowledge build-up: financiers and investors need to know more about circular models to correctly value the business model and its longer-term economic potential, quantify linear risks and reward circular businesses.</li>
</ol>
<h3>Recommendations for stakeholders</h3>
Based on the analysis of barriers and incentives, the Expert Group addressed definite recommendations to financial institutions, manufacturers (large corporations and SMEs) and policymakers. These recommendations aim to create a guiding framework that if implemented altogether, access to finance circular economic projects shall improve significantly and can be summarized as follows:
1.Recommendations for Financial Institutions:
<ul style="text-align: justify;">
<li>Set up a multidisciplinary working group of recognized experts with a clear mandate and working plan to finance circular projects.</li>
<li>Develop definitions, classification, and tools to measure the &lsquo;circularity&rsquo; of projects.</li>
<li>Increase awareness and knowledge within the financial sector of the circular economy.</li>
<li>Analyze the risk of linear business models and adjust credit risk assessment methods to consider linear risks.</li>
<li>Design special financial instruments fit for financing circular economy projects.</li>
<li>Establish risk-sharing financial instruments and create a pool of experts available for financial institutions to assess the technological risk of innovative circular technologies.</li>
</ul>
2.Recommendations for Manufacturers:
<ul>
<li style="text-align: justify;">Identify circular sources of revenue and update their strategy by reviewing processes, developing new business models and assessing risks.</li>
<li style="text-align: justify;">Participate in circular economic communities to identify opportunities and form partnerships.</li>
<li style="text-align: justify;">List their environmental and social benefits through credible methods.</li>
<li style="text-align: justify;">Develop their organizational and staff capacity to design and implement circular economy projects using training and advisory services.</li>
</ul>
3.Recommendations for Financial Policymakers
<ul>
<li>Develop reporting standards for the linear risks of investments and companies and incorporate them into standard accounting practices.</li>
<li>Develop a definition of circular economy finance by classifying circular economy activities, setting criteria and benchmarks for the environmental performance of economic activities.</li>
<li>Prioritize financing circular economy projects.</li>
<li>Design and offer technical and financial advisory services to support circular economy businesses.</li>
</ul>
4.Recommendations for non-Financial Policy Makers
<ul>
<li>Create favorable framework conditions for circular economy projects through specific policy actions:</li>
</ul>
<ul>
<li style="list-style-type: none;">
<ul style="list-style-type: circle;">
<li>Set circular targets and indicators at national, regional, and sectoral levels.</li>
<li>Map and eliminate subsidies to the linear model.</li>
<li>Announce financial/fiscal incentives for the circular economy.</li>
<li>Support eco-design for the repair and recycling of products to foster repair activities and achieve an increasingly higher quality of recycled materials.</li>
<li>Set benchmarks for the circular aspects of products in the market.</li>
<li>Reward the best performing products via fiscal and reputation tools.</li>
<li>Perform a fitness check on all relevant policies and regulations.</li>
</ul>
</li>
<li>Make public authorities act as facilitators of a circular economy:</li>
<li style="list-style-type: none;">
<ul>
<li>Analyze the potential of a circular economy at different geographical locations.</li>
<li>Develop national and regional circular economic strategies and link them with other regional development strategies, climate mitigation and industrial policies.</li>
<li>Create collaborative platforms to facilitate business collaboration on circular economy projects within and between value chains.</li>
<li>Apply circular business models by the public sector.</li>
<li>Create markets for circular economy projects and products (e.g., via public procurement).</li>
</ul>
</li>
</ul>
<h3 style="padding-left: 40px;">Conclusion and application in the case of Egypt</h3>
To facilitate the move towards a circular economy, all relevant stakeholders (financial players, manufacturers, and policy makers) should take responsibility and implement the recommendations presented above. In Egypt, this includes the Egyptian government, the Central Bank of Egypt, the Egyptian Financial Regulatory Authority, banking and non-banking financial institutions, producers, and consumers. To move towards a circular economy, achieve climate targets and build a resilient economy, all these players need to adjust their mindset, standards, strategies, practices and cooperate.
To capitalize on the above presented momentum, Egyptian financial institutions need to design circular specific circular economy financial products and services and provide technical advisory services to support their clients transforming into circular business models. However, to do so, the Egyptian government needs to immediately standardize definitions and metrics for circular activities, provide economic incentives and invest directly in circular economic activities and innovation.
Furthermore, the Central Bank of Egypt and the Financial Regulatory Authority need to integrate the circular economy concept into risk assessments, modelling, and financial reporting standards and regulations and gather more transparent and consistent data on circularity performance (both on historical and current initiatives). This includes:
<ul>
<li style="text-align: justify;">Raising the awareness of the banking and non-banking institutions on the benefits of financing circular economic activities.</li>
<li style="text-align: justify;">Adopting accounting rules that enable more representative valuation of circular business models and linear risks.</li>
<li style="text-align: justify;">Designing mechanisms that can enable effective pricing of positive and negative externalities.</li>
<li style="text-align: justify;">Encouraging formalizing the informal sector through adjusting the classic financial tools and frameworks, such as credit approval processes.&nbsp; &nbsp; &nbsp; &nbsp;</li>
</ul>
<hr>
References
<ul>
<li>
ABN Amro (July 2018). Circular economy Finance Guidelines.
</li>
<li style="font-size: 10pt;">
<a href="https://circulareconomy.europa.eu/platform/sites/default/files/ce_finance_guidelines.pdf">https://circulareconomy.europa.eu/platform/sites/default/files/ce_finance_guidelines.pdf</a>
</li>
<li style="font-size: 10pt;">
Geng, Y., &amp; Doberstein, B. (2008). Developing the circular economy in China: Challenges and opportunities for achieving 'leapfrog development', International Journal of Sustainable Development &amp; World Ecology, 15(3), 231-239, <a href="https://doi.org/10.3843/SusDev.15.3:6">https://doi.org/10.3843/SusDev.15.3:6</a>
</li>
<li style="font-size: 10pt;">
<a href="https://www.egypt-business.com/company/details/egypt-business-directory-1">Egypt Business Directory </a>(February 2018). Applying Circular Economy in Egypt.
</li>
<li style="font-size: 10pt;">
<a href="https://www.egypt-business.com/news/details/1806-Applying-Circular-Economy-in-Egypt/217479">https://www.egypt-business.com/news/details/1806-Applying-Circular-Economy-in-Egypt/217479</a>
</li>
<li style="font-size: 10pt;">
Ellen Macarthur Foundation (2020). Financing the Circular Economy: Capturing the Opportunity.
</li>
<li style="font-size: 10pt;">
<a href="https://www.ellenmacarthurfoundation.org/assets/downloads/Financing-the-circular-economy.pdf">https://www.ellenmacarthurfoundation.org/assets/downloads/Financing-the-circular-economy.pdf</a>
</li>
<li style="font-size: 10pt;">
Ellen MacArthur Foundation (2019). Material Economics, Completing the Picture: how the circular economy tackles climate change.
</li>
<li style="font-size: 10pt;">
El Said, H., &amp; Ahmed, R. (2017). Micro, small and medium enterprises in Egypt. In R. Ayadi &amp; E. Sesse (Eds.), Micro, small and medium sized enterprises development in Egypt, Jordan, Morocco &amp; Tunisia. Euro-Mediterranean Network for Economic Studies.
</li>
<li style="font-size: 10pt;">
European Commission. (&nbsp;&nbsp;&nbsp;&nbsp; 2019). Accelerating the transition to the circular economy &ndash; Improving access to finance for circular economy projects.
</li>
<li style="font-size: 10pt;">
<a href="https://www.climate-kic.org/wp-content/uploads/2019/03/accelerating_circular_economy_032019.pdf">https://www.climate-kic.org/wp-content/uploads/2019/03/accelerating_circular_economy_032019.pdf</a>
</li>
<li style="font-size: 10pt;">
European Commission. (&nbsp;&nbsp;&nbsp;&nbsp; 2020). Categorization System for the Circular Economy: A Sector Agnostic Approach for Activities contributing to the Circular Economy.
</li>
<li style="font-size: 10pt;">
<a href="https://circulareconomy.europa.eu/platform/sites/default/files/ki0420074enn.en_.pdf">https://circulareconomy.europa.eu/platform/sites/default/files/ki0420074enn.en_.pdf</a>&nbsp; &nbsp; &nbsp;&nbsp;
</li>
<li style="font-size: 10pt;">
Klat, A., Rizk, M., Makki, M., Goussous, A., &amp; Goussous, R. (2018). Scaling up MENA SMEs: How a handful of firms can fast-forward economic growth. Strategy&amp; and Endeavour.
</li>
<li style="font-size: 10pt;">
The Platform for Accelerating the Circular Economy. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2020). The Circularity Gap Report 2020.
</li>
<li style="font-size: 10pt;">
file:///C:/Users/reem.mahmoud.PSME/Desktop/The-Circularity-Gap-Report-2020.pdf
</li>
<li style="font-size: 10pt;">
Rizos, V., Behrens, A., Kafyeke, T., Hirschnitz-Garbers, M., &amp; Ioannou, A. (2015). The Circular Economy: Barriers and Opportunities for SMEs (CEPS Working Document No. 412).&nbsp; &nbsp;
</li>
<li style="font-size: 10pt;">
The United Nations Environment Programme Finance Initiative (2020). Financing Circularity: Demystifying Finance for Circular Economies. file:///C:/Users/reem.mahmoud.PSME/Desktop/UNEPFI_DemystfyingFinanceCircularity-2020-2.pdf
</li>
</ul>

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