Four innovative approaches to de-risking financing in Asia’s plastics circular economy

Up to US$995 billion needs to be mobilized between 2022-2040 to ensure circular supply chains can meet the global demand for plastics. This immense financing need has been a persistent point of discussion as negotiations continue on the legally binding instrument to prevent plastic pollution.

We know that investment into interventions along the whole plastics value chain is needed to create system change. But uncertainty and perceived risks of investing in circular economy innovations – particularly in emerging markets – has kept many investors on the sidelines.

Here are four ways to bridge the current financing gap and catalyze private capital for public good.

Enabling policies to grow the market for circular plastic solutions

Governments can drive much-needed demand for circular products and influence how investors perceive the profitability of the sector through supportive regulations. In India, for instance, the implementation of an Extended Producer Responsibility (EPR) framework created a timely market opportunity for Recykal, a circular economy marketplace.

Its cloud-based solution brought operating efficiencies, transparency and traceability to India’s highly fragmented plastic recycling supply chain. Brands and manufacturers are better equipped to track the journey of their plastic waste and ensure compliance with the new framework. With its growth propelled by the introduction of the EPR scheme, Recykal successfully raised US$26 million from domestic and international investors in three years.

Tapping capital markets through innovative financial instruments

Beyond the wide range of tools at their disposal, governments also play a central role in scaling financing through the development of capital markets. A country that demonstrates an acute awareness of the urgency of the plastics problem is Indonesia, with its innovative approach to address the funding gap between the country’s resources and its climate-change-related investment needs.

It launched the world’s first green sukuk bond (bond structures compliant with Sharia, or Islamic religious law) in 2018 to raise capital for infrastructure – including waste management solutions – and to provide a model for further development of capital markets domestically and beyond. Indonesia has since conducted annual issuances globally, making it the world’s most prolific green sukuk issuer.

The country has also made strides in developing its domestic capital market by conducting rupiah-denominated retail offerings of green sukuk in 2019, 2020, and 2021, totaling approximately US$814 million. While such innovative financial instruments are still in their nascent stages, the government is fostering market familiarity and acceptance with each issuance, leveraging the momentum to bring more investors on board and advance their sustainability ambitions.

Early-stage blended financing can prepare a pipeline for investment

Start-ups and small and medium-sized enterprises are key to fostering innovation in plastics circularity. Impact-focused investors, alongside pioneering companies and governments, can lend a hand in scaling these promising enterprises to attract greater capital.

To provide an example, Singapore-based investment management firm Circulate Capital extended its first loan to Indonesian recycling start-up Tridi Oasis in early 2020, partially guaranteed by the US International Development Finance Corporation (DFC), in collaboration with the United States Agency for International Development (USAID). Through the blended finance vehicle and additional technical assistance, Circulate Capital helped Tridi Oasis grow and weather economic challenges. Their efforts culminated in a joint venture between the start-up and ALBA Asia Plastics Recycling Limited, a major global player in recycling and environmental services.

Development of world-first tool to improve transparency of plastics circularity financing

Investors often do not have access to tools that allow them to determine where the most significant opportunities lie for investments that create impact. They are seeking ways to gain reliable information that enables them to make informed asset allocation decisions.

The Circulate Initiative’s Plastics Circularity Investment Tracker addresses this knowledge gap by providing access to critical data. With a focus on private investments channeled to developing a circular economy for plastics across emerging markets, this world-first tool will help to improve transparency and de-risk decisions as investors now have a more complete picture of the investment landscape.

Among the key findings from the Investment Tracker was the significant allocation of capital to recycling and recovery, while upstream innovations such as alternative materials and refill/reuse models received lower amounts. As the world increasingly focuses on the avoidance of plastics, there is a huge untapped opportunity for investors to direct more capital to these emerging business models and innovations.

This article was originally published in AVPN.