Outcomes-Based Financing can fight plastic pollution

By Sarah Perreard, Co-CEO and Stakeholder Engagement Lead at EA Earth Action.

This article was originally published on Comment Central on 20th March, 2024.

In January this year, the World Bank priced a seven-year $100 million bond to mobilise private capital and support the financing of projects with positive climate impacts and combat waste. Whilst this is a win in the fight against mass plastic pollution, the total investment needed to reach a point whereby only three percent of plastic leaks from a supply chain by 2040 is $5.2 trillion.

Clearly, the World Bank’s seven-year strategy is a model of investment that must be replicated at scale if we are to see real impact for plastic waste management globally.

This exciting announcement came with the backdrop of the proposed UN Global Plastic Treaty currently under negotiation; the next round in Ottawa is only a month away. The Treaty has the potential to be the most significant piece of environmental legislation since the Paris Accords of 2015 and could result in a significant upswing of investment into plastic management strategies.

However, such investment into circularity is not a new phenomenon, and as awareness of the dire consequences of plastic pollution has risen, so have instruments designed to bolster waste management systems globally. But despite the solutions being never clearer, the problem is getting worse.

Although businesses are increasingly willing to shift away from the “take-make-dispose” business model, current models in the plastic market are far from achieving circularity in practice. Out of the 460 megatons (Mt) of plastic produced each year, 110 Mt are mismanaged, and 28 Mt leak into the natural environment annually. Without global coordinated efforts, these numbers could escalate by 60 percent up to 85 percent in 2040.

"We cannot just put money down on the table and walk away"
Ultimately, investment figures only tell a fraction of the story; we cannot just put money down on the table and walk away. To ensure financing can help achieve its true circularity goals, businesses and global policymakers must move towards outcome-based financial mechanisms.

Outcomes-based financing (OBF) is an approach that ties payments to the achievement of specific measurable outcomes such as the reduction of plastic waste, rather than traditional input-based models. It is a common glue that can incentivise efficiency, effectiveness, and enhances the actual impact of interventions by shifting the focus from the quantity of services delivered to the tangible results obtained.

Significantly, the World Bank bond follows this model being contingent on the success of the project that is financed. But currently companies are not incentivised to take part in outcomes-based investments because there is no way of incorporating such investments into their environmental footprint mitigation strategy.

Overlooking the outcome has had a knock-on effect on financing the early stage of new plastic mitigation solutions. Local, small-scale waste management as well as upstream solutions often struggle to access institutional funding, as traditional financing sources rely on track records, financial return on investment, and demonstration of scalability. So, we may have the technology ready to provide plastic alternative packaging, for example, but without adequate funding it will be difficult to scale.

This especially impacts the Global South, where investment to improve post-consumer waste infrastructure is critically needed due to high plastic leakage rates. For example, in Indonesia, barriers to investment in the country’s waste management system often occur due to the perceived risks of low returns.

To move from input-based mechanisms to outcomes-based systems, financial institutions, the private and public sector must become ‘enablers’ of effective plastic management solutions. We have seen this occur with global commitments to carbon reduction, companies are now aware that they must align their emissions with the Paris Climate Accords. To date, there is no equivalent target for plastic pollution.

A private sector company becoming an enabler is a two step-process. First, we must take stock of a company’s waste, and assess its plastic footprint baseline. This measures the volumes of plastic that will leak in the environment because of the company's operation. The second step moves from assessment to action, where global bodies and companies mitigate their plastic impact through actions within and outside of their value chain.

As plastic pollution continues to rise at an ever more alarming rate, the international community must catalyse a systematic change of priorities. Whether plastic-free packaging, truly circular models of waste management and readopting systems of reuse, we have the solutions, but our hands are tied by archaic models of finance often destined to fail.

Our return on investment must be measured by the continued longevity of both our planet and its people. Above shareholders and short termism, we must place the planet and its people as the key stakeholders at the heart of our fight against plastic.

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EA Earth Action released the “Moving Towards Outcomes-Based Financial Mechanisms for Waste Prevention” report on 6th March, 2024.