Circular Economy, Channels, Climate Change, Sustainable Finance

Decarbonization through a Circular Economy

Racia Yoong | Mar 09, 2022

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Is a circular economy possible?

Setting the stage: a net zero transition

The world is in a race against time. Corporates are not only a critical player in the net zero transition, but they are also at risk of challenges that come with the climate crisis and the economic impacts of a net zero transition. 

Since the Paris Agreement on climate change, a host of countries have announced major commitments to significantly cut their carbon emissions, promising to reach “net zero” in the coming years. Although very ambitious, the goal is to reach net zero by 2050. 

The term “net zero” is a global rallying cry and a necessary step to beat back climate change. It is frequently cited and used interchangeably with “carbon neutrality” or “low carbon” which describes an economy whose power needs are not derived primarily from carbon-intensive sources that are fossil-based, but from ‘cleaner’ and less carbon-intensive energy sources comprising of solar, hydroelectric, wave and geothermal, amongst others.

A strategic positioning to sustain decarbonization

The growing aspiration to achieve carbon neutrality has become a key focus in Singapore’s economy resulting in the launch of the Singapore Green Plan 2030 – a nation approach towards sustainable growth. As an open economy, Singapore is strategically positioned to capture the next wave of opportunities that comes with this changing geopolitical and trade landscape. 

Singapore’s ambition to use ‘cleaner energy’ and ‘increase [its] energy efficiency to lower our carbon footprint’ would then tie in well with the evolution of international carbon markets where carbon trading offers companies and institutional investors an opportunity to treat and exchange carbon as a commodity more responsibly. 

Amid a rapidly changing regulatory and business environment, corporates need to act on ESG issues more urgently and step up significantly in their reporting cycles to ensure that carbon trading is not seen as a dangerous or false distraction to the problem of climate change.

Therefore, to achieve the necessary progress towards environmental and social goals, corporates will need to set clear ESG indicators and targets to guide their sustainability efforts – visibility in the reporting scope should capture information that is material to the business, making relevant claims and disclosures in the sustainability report.

Figure 1: Different carbon accounting standards originate from a variety of organisations

Common international accounting standards include GHG Protocol, Carbon Disclosure Project, IPCC (Intergovernmental Panel on Climate Change) and ISO Carbon Standards 14064/5. Typically, GHG Protocol is perhaps the most user-friendly standard for businesses looking to develop tools to create comprehensive, reliable inventories of their GHG emissions. As scrutiny on disclosures are growing and closing in on businesses, companies choosing to embark on the decarbonization journey must ensure that the quality and consistency of climate-related disclosures are accounted for.

A phased approach

Because decarbonization can be a rather complex process, businesses are advised to take a phased approach. For listed entities that are larger and exposed to higher climate risks; a more ambitious timeline should be considered. But prior to that, businesses must first determine what their ‘risk profile’ or ‘risk appetite’ is in order to define an effective risk management toward decarbonization. 

Subsequently, for corporates shifting capital towards green and transition finance activities, instead of entirely avoiding carbon intensive sectors, they should maintain some exposure to companies within these sectors that are likely to make a successful and sustainable transition. This is because excluding entire sectors could mean missing out on opportunities to facilitate transition – therefore reducing portfolio diversification benefits. 

Finally, carbon pricing is a common tool used to better “price” the cost of carbon, and only possible if both financial and non-financial-related considerations of climate-related risks are adequately considered and calculated.  

Using circular economy to reach carbon neutrality

As part of reaching decarbonization, corporates must look for opportunities to improve resource efficiencies. Rather than being viewed as two silos, a circular economy can be used as a mechanism to achieve decarbonization. So then why aren’t more businesses talking about ‘circular economy’ and ‘decarbonization’ as a collective?

With commitments to net-zero, a resource management framework that prioritizes regenerative resources, preserves what is already made, and uses new business models that decrease extraction needs3 is a step further to reach carbon neutrality. 

Often, tackling production-based emissions alone is only half of the full picture; consumption-based emissions have proven to be the blind spot of current mitigation efforts. Therefore, circular economy initiatives that target the design of products and aim at reducing resource extraction early in the supply chain will help address greenhouse gas emissions in a systemic manner, thereby contributing indirectly to climate neutrality goals. This approach is proven to work in some cities such as Finland and has alleviated economies to new employment opportunities and remained resilient to the COVID-19 crisis.

A circular transition

Figure 2: 5 processes to engage in the circular transition

Inherently, linear business models may be profitable in the short run, but over time, they will expose companies to market, operational, legal, and business risks. At the heart of the business case for circularity sits the opportunity for companies to create more value by being smarter about how they use resources. While a circular economy is an economic model that provides opportunities for companies across industries, the transition to a circular economy is not straightforward. 

As such, businesses require a system of metrics that can guide their decision-making when adopting circularity in their corporate strategy. For starters, we can kick-off value chain conversations with key stakeholders on shared circular priorities and align with the organization’s overall ESG vision and strategy.

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