Circular Economy: Material Flows and Sustainable Materials – Practical Applications

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5.6

Financing Circularity: Taxation, Loans and Investments

In this step we’ll explore the financial levers that have the potential to drive circular transitions. While regulation sets the boundaries, financing provides the necessary fuel for businesses to shift from linear models toward sustainable, regenerative practices.

To scale the circular economy, capital must be redirected toward innovation and support for new business initiatives as well as creating better conditions for already established companies. This involves a combination of shifting tax burdens and creating specialized financial products.

Shifting Taxation: A key strategy is lowering taxes on labor (to encourage repair and refurbishment services) while increasing taxes on resource extraction and carbon emissions. This makes circular activities more economically competitive compared to using virgin materials.
Green Loans and Credit Facilities: Leading financial institutions are now offering circular economy credit facilities. These provide businesses with preferential interest rates if they meet specific circularity criteria, effectively lowering the cost of capital for sustainable transitions.
The De-risking Effect: Central banks and investors increasingly view circular businesses as less risky and more resilient in the long term. By decoupling growth from finite resource consumption, these companies are better protected against supply chain shocks and resource scarcity.

In the following video, experts discuss financing circularity by treating natural resources as a loan that must be restored and replenished.

The EU Green Claims Directive: Establishing Criteria for Financing Circular Bussiness

To ensure that financing reaches truly impactful projects, we need clear standards. The EU Green Claims Directive requires companies to substantiate voluntary environmental claims with scientific evidence and independent verification to work against greenwashing. Under the Directive any claim must meet specific criteria to ensure it is reliable and comparable across the market:

Scientific Substantiation: Claims must be based on recognized scientific evidence and state-of-the-art technical knowledge, typically using life cycle assessments (LCA) to account for all significant environmental impacts.
Life Cycle Perspective: Companies must prove that an environmental benefit in one area—such as recyclability does not cause a hidden negative impact elsewhere, like increased carbon emissions during production.
Third-Party Verification: To ensure accountability, claims must be independently checked and certified by an accredited verifier before they can be used in public-facing communications.
Clear and Specific Communication: Vague terms like green, eco-friendly, or sustainable are restricted. Labels must specify exactly what part of the product or process the claim refers to.
Aggregated Scoring Restrictions: Environmental labels that provide a single overall score on environmental impact are not permitted unless they are based on a specific EU-wide methodology.

Although the Directive doesn’t directly focus on criteria for financing circular initiatives, it could serve as an example and inspiration for making sure businesses are not just branding themselves as circular and sustainable, but actually making positive impacts on key areas.

Part 1 | Part 2 | Part 3 | Part 4 | Part 5

Financing Circularity: Taxation, Loans and Investments

The EU Green Claims Directive: Establishing Criteria for Financing Circular Bussiness

Further reading, learning and references