Finding a Common Language for Financing the Circular Economy in Peru

The Peruvian financial system lacked a common language-a categorization system-that could help institutions identify, categorize, and report on the financing and impact of their circular economy projects.

The challenge, therefore, was to unlock and close the financial access gap for circular projects.

Although circular financing is still in its infancy, the Federación Peruana de Cajas Municipales de Ahorro y Crédito (Peruvian Federation of Municipal Credit Unions) and the Cajas Municipales de Ahorro y Crédito (Municipal Credit Unions) in Peru have shown particular interest in integrating the circular economy into their financial solutions and portfolios to help MSMEs transition from a linear to a circular model.

The IDB Group (IDB Invest and IDB) has forged a strategic alliance with the Federation and the Credit Unions to assess the true state of circular financing in the country.

We have developed the Circular Economy Categorization System by leveraging the key takeaways from the Colombian experience and engaging with multiple stakeholders.

Common Language

The categorization system promotes transparency through a common language, while facilitating the financing process by empowering credit advisors and commercial teams with simple tools, such as inclusion filters.

The filters capture the characteristics of the circular project through a set of simple questions, which are later categorized, evaluated, and financed.

Further reading

This initiative leverages circular development in MSMEs, by including proportionality criteria to capture and develop impact indicators, placing greater responsibility on the anchor company, and adapting the inclusion filters that gather MSME business data.

The tool, therefore, seeks to drive financing for MSMEs with circular practices or models in place.

In pursuing the circular economy integration into Municipal Credit Unions, the Federation has played a pivotal role in laying the foundations for the subsequent scaling-up of the financial system.

Connecting microfinance and commercial banks to finance all the steps along a value chain becomes critical, considering that the circular economy requires a systemic change that affects value chains and the sustainable development of MSMEs and vulnerable groups.

To do so, a proportionality criterion based on the unique nature and context of MSMEs needs to be adopted during the transition period.

Just Transition

The circular economy is gaining ground worldwide, in Latin America, and in Peru, as shown by its integration into public policy, increasing trade union adoption levels, significant business development, and international cooperation efforts.

Despite this promising backdrop, financing is still nascent in Peru, with gaps such as the lack of standardized tools (categorization, metrics, reporting, etc.), differentiated value offerings, a greater risk perception, and an often-overlooked MSME segment.

Understanding Peru's and the region´s heterogeneous nature is key to an inclusive approach, where just transition poses barriers and obstacles that differ by country and region.

A Just Transition ensures an equitable, inclusive, and socially responsible shift towards circularity, purposefully mitigating negative impacts and creating opportunities for all.

Systemic Vision

However, fragmented approaches prioritizing circular practices and models over inclusion still prevail.

This makes it difficult for the benefits and costs of a circular transition to be distributed equitably, to create a positive impact on MSMEs and vulnerable groups, and to build trust and credibility, as well as greater cooperation and collaboration.

A systemic view will go a long way toward addressing current needs, such as introducing circularity in the flow of recycled materials.

In the medium term, the chain should be strengthened with knowledge, formalization, access to financing, and innovation.

This will make way for a long-term view that focuses on transitioning to phased, value-added models (reuse activities, for example), avoiding waste generation, and creating sustainable jobs for the base of the pyramid, women, diversity groups, and others.

The IDB Group's engagement in this initiative is the first in a series of steps necessary to develop mechanisms for integrating the circular economy into the financial system.

This requires understanding and embracing a systemic change, including proportionality criteria, shifting paradigms in circular business risk management, designing business-oriented products and tools to narrow the supply-demand gap, developing an ecosystem that supports innovation, and creating enabling conditions.

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