Exploring the Role of Finance in Driving Circular Economy and Sustainable Business Practices

Abstract

The existing economic system is mainly founded on a linear approach to gaining capital, including mining natural resources, manufacturing, consumption, and disposal. Despite the increasing attention given to the Circular Economy (CE), currently, scholarly analysis is absent into the function of finance and the prospective utility of financial developments in expediting the adoption of CE principles. Through a systematic literature review (SLR), this research aims to present a comprehensive understanding of the nexus between finance and the CE, emphasising how financial innovations can accelerate the transition towards CE. Considering 150 articles, it was found that financial innovation is a powerful driver for the transition towards a CE. Indeed, financial innovation enables organisations to integrate CE principles and environmental, social, and governance (ESG) elements into their strategic decision-making. This research unveils the need for more research and innovation in the financial sector to develop advanced financial instruments and mechanisms that can support CE acceleration. The acceleration of the global transition towards a sustainable, resource-efficient, and resilient economic model that benefits enterprises and society can be facilitated by promoting financial innovations. The analysis is grounded on the idea of CE as based on the tenets of designing out waste and pollution, keeping materials and resources in use, and regenerating natural systems. It turns out that CE is affected by a variety of factors with a final result of positive impact on the environment and society: green bonds, green loans, and finance; pay-for-performance and results-based financing mechanisms; specialised financing solution/CE-focused funds and investment strategies; and fintech in driving the CE. Finally, this study further provides new insights into the role of fintech, AI, and ML in advancing circular finance and scrutinising the hurdles and barriers to implementing circular finance practices.