Sustainability vs profitability: Innovating in circular economy financing practices by European banks

Abstract

This paper explores the role of financial organizations in advancing circular economy (CE) transitions, examining the tension between profitability and sustainability values. Substantial financial resources are required to support circular economy business models (CEBM) to meet the Paris Agreement targets, as the extraction and processing of materials, fuels, and food account for nearly half of total greenhouse gas (GHG) emissions. The study finds that in CE transitions, the emphasis on financial values over sustainability values diminishes within the institutional logic of financial organizations. Notably, sustainability values take precedence at the initial stages of institutional change — a unique insight. However, at later stages, financial logic begins to dominate as CE projects are expected to yield financial returns, though sustainability values remain influential. The research also reveals that lower-level managers and employees drive institutional change through a bottom-up, collective process grounded in sustainability values. Findings suggest that financial organizations must engage in both learning and unlearning, reflecting the transformative nature of CE financial innovations and the associated institutional changes. Moreover, the exchange of insights on CE is multi-directional; banks not only receive insights from external actors but also contribute their own. The study underscores that learning about CE is a collaborative effort, requiring joint efforts and shared learning among organizations, industries, and stakeholders.