Insight - Realising the circular economy for Malaysia

Governments have a crucial role to play in lowering the hurdles for a circular economy and creating a playing field that favours solutions, products, and business models that are more sustainable. This is particularly important to secure participation from small and medium enterprises (SMEs), which makes up 98.5% of Malaysia’s business establishments.

WHILE many corporations have taken positive strides to meet sustainability targets, the circular economy does not yet exist.

At best, what we have is a “reuse economy” that incorporates recycling but still absorbs additional raw materials.

In a world of finite resources coupled with a growing climate crisis that will impact all stages of the global supply chain, the existing “take-make-waste” approach – what we term the linear economy – is exposing companies to risks that can wipe out profits and negatively impact the organisation’s ability to continue as a going concern.

Economic disruptions during this ongoing Covid-19 pandemic have brought to light the urgency to transition towards a more sustainable consumption and production life cycle. Linear business practices are vulnerable at every stage.

We’ve seen how companies are pushed to the limits of operational viability when they continue to utilise scarce and non-renewable resources, prioritise sales of virgin products, and fail to collaborate, innovate or adapt.

By contrast, a company with a circular mindset will be well protected from value chain disruptions because it will have engineered a way to extract limitless value from its resources.

The circular economy is more than just recycling; it presents a more holistic solution whereby economic growth and benefit is decoupled from the consumption of finite resources and the production of waste in the first place.

The case for the transition towards a circular economy is anchored in enhanced economic value – that is, gross domestic product (GDP) and employment.

In Australia, a study conducted by KPMG estimated that the benefit of a circular economy will likely rise to US$210bil (RM867bil) in GDP and an additional 17,000 full-time equivalent jobs by 2048.

The European Commission’s Circular Economy Action Plan aspires to increase the European Union’s GDP by an additional 0.5% by 2030 and create around 700,000 new jobs.

Malaysia has every potential to realise similar value and benefits by transitioning to a circular economy, but this is an ambition where our government and financial institutions play pivotal roles.

Governments have a crucial role to play in lowering the hurdles for a circular economy and creating a playing field that favours solutions, products, and business models that are more sustainable.

This is particularly important to secure participation from small and medium enterprises (SMEs), which makes up 98.5% of Malaysia’s business establishments.

Hurdles faced by SMEs will limit the speed at which our economy will transition towards a circular economy.

The Netherlands is one of the leading countries when in 2016 its government committed to become a country 100% based on circular economy by 2050.

Within two years, the Netherlands rolled out 85,000 circular economy initiatives including 420,000 jobs.

It also introduced the green deal circular procurement, an initiative that fosters collaboration between organisations and encourages the purchase of circular goods and services.

This generated over €100mil (RM504.68mil) in procurement done circular, with the program since copied by Belgium, Finland and Paris.

Beyond that, our government should look at evaluating the viability of developing frameworks to accelerate financing for a circular economy.

Providing resources

This will enable financial institutions to contribute their part – for example, provide resources for circular investments, offer insurance products suitable for circular practices (such as leasing and sharing) and develop rating systems and information disclosure requirements that can help improve transparency around sustainability-related business risks.

An example to emulate can be seen in the Dutch ABN AMRO Bank whose initiative on the circular economy included financing €1bil (RM5.05bil) in circular projects and thereby save one million tonnes of CO2 in five years.

To realise this ambition, the bank earmarked relevant clients and provided them with initial circular assessments and are helped in the identification of circular opportunities.

In 2018, Banca Intesa Sanpaolo, the largest Italian banking group, introduced a credit facility named “Circular Economy Plafond” consisting of €5bil (RM25bil) dedicated to innovative companies or projects in the circular economy field across Italian and foreign markets. In 2019, Intesa Sanpaolo became the first bank in the world to issue a circular economy focused sustainability bond as the intensifying focus on environmental, social, and governance (ESG) from investors and policymakers gathered momentum.The €750mil (RM3.8bil) five-year senior preferred bond gathered a book of more than €3.5bil (RM17.66bil) Where previously investing in green or ESG areas was niche and too risky, it has now become mainstream and presents a huge opportunity for investors to diversify and support long term value creation.

Green debt

Global green and sustainable debt issuance hit a new record in 2020 at US$732.1bil (RM3 trillion), a 29% increase from 2019’s total. This unrelenting demand for ESG-themed finance looks set to continue.The transition to a circular economy requires the participation from all groups in society. Business innovation, regulatory reforms, and lifestyle changes need to go hand-in-hand.

Considerable barriers still exist preventing widespread adoption of more circular practices in Malaysia, including economic incentives, accounting rules, and regulation that often favour conventional linear solutions and business models. But real examples have proven that economic and social enterprise benefits exist. At the very least, a circular economy enables chief executive officers to secure profits and still sleep well at night.

Kasturi Nathan is head of governance and sustainability while Phang Oy Cheng is executive director of governance and sustainability, KPMG Malaysia. The views expressed here are the writers’ own.

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