As the world grapples with mounting environmental challenges, the shift towards a circular economy — where resources are reused, repurposed, and kept in play for as long as possible — has become a global imperative. But realising this transition requires more than ambition; it demands unprecedented financial support and institutional innovation. For European banks, this has meant finding a delicate balance between sustainability goals and the ever-looming demand for profitability.
A new study from UNU-MERIT [50.85°N, 5.68, 5.69°E] reveals that this tension — once thought to be insurmountable — is not only being managed but actively reshaping how financial organisations operate. European banks are at the forefront of financing circular economy business models (CEBM), driving institutional change through innovative tools, grassroots action, and collaborative learning.
Sustainability First, Profitability Later: A Surprising Institutional Shift
Perhaps the most striking discovery is how institutional change in banks begins. Sustainability values — often dismissed as secondary to profits — are actually the initial driving force for adopting circular economy financing practices.
At the start of this journey, bank employees and managers at lower levels emerge as unexpected changemakers. Through collective, bottom-up processes, these “thought collectives” initiate projects, challenge traditional linear models, and bring sustainability considerations to the forefront. Importantly, this movement is often informal at first, driven by passionate teams who see circular economy financing not merely as a business strategy, but as a necessity for a resilient future.
It is only later in the process that financial logic — profit targets, risk metrics, and returns — reasserts itself. However, the authors note that sustainability values do not vanish; they remain an influential part of decision-making, reshaping banks’ long-term strategies and operations.
This finding challenges conventional wisdom: banks do not abandon sustainability for profitability; instead, they learn to integrate both values, creating a hybrid approach that aligns financial stability with environmental imperatives.
Learning and Unlearning: A Cultural Transformation
Another critical insight is the dual role of learning and unlearning within financial institutions. Supporting circular economy businesses — many of which feature novel, riskier revenue models — requires banks to abandon outdated assumptions.
Traditional linear business models prioritise single-use consumption and upfront profits. In contrast, CEBMs often involve “product-as-a-service” strategies, where revenues come from recurring fees. For banks accustomed to rigid credit risk assessments and financial tools, this shift demands both technical knowledge and a willingness to experiment.
European banks have tackled this challenge through two key strategies:
- Special Envelopes for Circular Projects: Banks like ABN AMRO and Intesa Sanpaolo have created dedicated funds to finance circular businesses. These funds tolerate higher risks, offering a safe space for innovation while enabling banks to build a “track record” for financing circular models.
- Internal Training and Cultural Shifts: Beyond developing new tools, banks have actively trained employees and cultivated flexibility, ensuring internal teams can adapt to circular opportunities.
This process of “unlearning” old norms and “relearning” new frameworks reflects a broader cultural transformation within financial institutions — a departure from business-as-usual to a more adaptive, forward-thinking approach.
The Power of Collaboration: Multi-Sided Learning
Financing the circular economy is not a solo endeavour. The study highlights reciprocal learning between banks, clients, and external actors such as policymakers, NGOs, and think tanks.
European banks actively engage in:
- Co-designing Guidelines: Collaborating with organisations like the Ellen MacArthur Foundation, banks use—and refine—frameworks for evaluating circular projects.
- Supporting Clients’ Circular Transitions: Through workshops and advisory services, banks help businesses adopt circular practices while gaining valuable insights themselves.
- Peer-to-Peer Learning: Banks participate in pre-competitive alliances, such as joint roadmaps, to accelerate the mainstreaming of circular finance.
This “learning by doing” approach ensures that banks are not just financiers but active participants in building the circular economy ecosystem.
Profitability Is Still Key, But the Rules Are Changing
While sustainability values initiate the shift, profitability remains critical. Circular economy financing must deliver returns—eventually. However, banks are increasingly viewing circular investments as long-term opportunities rather than short-term trade-offs.
For instance, circular projects reduce risks associated with resource scarcity and regulatory shifts, making them more attractive over time. Banks are learning to see linear economy risks — such as supply chain disruptions and environmental liabilities — as far greater threats than the challenges posed by circular transitions.
This perspective reframes circular economy financing as a strategic investment in resilience and future-proofing, aligning environmental priorities with long-term profitability.
Towards a Circular Future
The study underscores that European banks are not merely reacting to global sustainability goals; they are leading institutional change. By putting sustainability values at the centre of their strategies, they are proving that profitability and purpose can coexist — if approached with innovation, flexibility, and collaboration.
For individuals, businesses, and policymakers, the message is clear: banks are critical enablers of the circular economy, but their success relies on a shared commitment to rethinking “business as usual”. Financial innovation must be matched by policy support, client engagement, and societal momentum.
As we face the climate crisis and resource scarcity, these findings offer a powerful insight: transforming our financial systems is not just possible — it is already happening. European banks are showing the world that sustainability can drive innovation, and innovation can drive profitability. The future of finance — and our planet — depends on this balance.
Source
Sustainability vs profitability: Innovating in circular economy financing practices by European banks, Sustainable Production and Consumption, 2025-01
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