Banks face circular economy funding challenge, says ING

The financial industry will need to undergo a seismic shift in culture, away from the collateral value of assets and towards a cash-flow based approach to lending, if it is to support circular economy business models.

That’s according to Dutch multinational bank ING, which undertook a comprehensive study of the business opportunities of the circular economy and its potential impact on banking activities.


The resulting report, released today, concludes that in order to deal with the shift to ‘product as a service’ business models, banks will need to focus more on the cash flow of a business rather than the creditworthiness of the client. This is because the cash flow of a circular business model often changes from the handing over of a sum of money at the point of sale to a series of frequent payments during the lifespan of a product or business.

Banks will also need to embody the principles of the circular economy in their own thinking and way of doing business, according to the report. If the circular principles to ‘reduce, reuse and recycle’ are embedded in the DNA of financers, they can be a credible and valuable strategic partner for entrepreneurs in the circular economy, it states.

“The present model of economic growth is running up against the limits of our planet’s ability to provide everything we need,” said senior economist and author of the report Gerben Hieminga. “Companies are increasingly looking at the entire lifecycle of their products, and the resources used in them, in order to decouple growth from resource use. The concept of the circular economy aims to present a solution by combining revenue with social impact.”

Key challenges

The report explores five circular business models where resources flow in closed loops between producers, users and consumers: circular supplies; resource recovery; product life extension; sharing platforms; and product as a service.

Under the current system, the financing of these circular business models poses a significant challenge to standard banking practices, according to the report. Along with the changing nature of the cash flow of the firm, challenges include increased capital needs to pre-finance clients and legal issues surrounding collateral and its value.

To combat these challenges, ING believes the financial system must begin to mobilise different forms of capital to finance the transition to a circular economy. But the report also makes clear that financiers will have to focus not only on the winning side of the circular economy but also on its disruptive side, which may adversely affect their existing loan or investment portfolios.

Leonie Schreve, Global Head Sustainable Lending at ING, concluded: “There is now evidence which shows that clients who are leading in sustainability are more innovative, show better financial performance and have better credit ratings.

“Directing more assets and capital to sustainable businesses therefore creates a healthy portfolio for the banks and helps them to facilitate the transformation to a low carbon economy. As a result, sustainability now is a business opportunity for the financial industry.”

Read the full ING report here.

Luke Nicholls

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