Three trends that will power the circular economy in 2017
Last October witnessed a major milestone for the green economy. The adoption of the Paris Agreement was a huge achievement, with such a decisive, unified response underlining how far sustainability has moved up the agenda.
As we return to business-as-usual following a festive period spent reflecting on considerable political and socio-economic developments, there is cause for optimism. We’re seeing increased activity in green financing through green bonds, investments made in renewable energy are growing, solar power is cheaper and more competitive, electric cars are on the verge of becoming mainstream and many financial institutions have stopped financing coal-fired power plants.
Above all, I’m excited by the possibility of shifting from a linear economy to a circular one. And I believe that there are three key trends that will accelerate further adoption of these principles.
1) Technological innovation empowers consumers
Technological developments are focused on giving the user more control. The internet of things, as an example, enables insight into performance of equipment and fuels predictive maintenance. Smart-charging stations, combined with solar panels on your roof and a battery, whether the one in your electric car or on your wall, make you independent from energy providers and you can go off grid.
Technology is also driving the transition from selling products to selling services. Clients are demanding personalised access anytime, anywhere. And when using smart devices, the data about this usage should result in the producer making the client a better offer.
2) National protectionism fuels system re-thinking
The political trend is towards protectionism and safeguarding national interests against outside forces. Abundant and accessible supplies of energy and raw materials are crucial for competing industries. Harnessing goods and harvesting raw materials from that which are used in a national economy will become an increasingly prominent practice.
Following the Brexit vote, European governments will combat uncertainty by focusing more on themselves as they seek to protect what they have. This is a boost for the prospects of a circular economy as governments think more about the resources circulating in their economic system.
This is also the case in the US, where I think President-elect Trump’s imminent ascendency into the White House will see the country keeping a much tighter hold on its natural resources and monitoring use more diligently, fuelling a closed-loop approach.
3) Battle for the client
In contrast to my previous point, the business world, not hindered by national borders and sentiment, is best positioned to lead the way to a sustainable global economy.
Business continuity is what every corporate strives for. In a world that’s connected and ever changing, companies continuously have to rethink their actions and business. The need for innovation is driven by pressure from critical consumers, eager start-ups and competing peers. Getting, and holding on to, market share and revenues is dependent on the ability to attract customers. The battle for the customer will be more and more critical for success.
The circular economy supports exactly that; building a stronger relationship with your customers to deliver exactly what they want, when they want it. Changing your product to suit their process helps to relieve their worries.
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In line with this, finance professionals must innovate and collaborate to unlock investment, fund these new business models, and help grow the circular economy.
We need to adopt longer term horizons and realise the potential of concepts such as product life extension and performance-based business models. We must also reassess risk and redistribute it along the value chain.
There is also a pressing need for new financing models to match the new business models. The usual set up of, say, 30% equity and 70% debt is a big issue for “product as a service” businesses, where customers make payments across the life span of the product. Equity is an expensive form of financing and such a set up would render a product as a service model uncompetitive. So the banks must challenge themselves with finding a way to deal with this, lowering the equity threshold and discovering a suitable way to fund the balance.
By working closely with clients and other stakeholders, we can release the full potential of the circular economy. This is an opportunity too good to miss.
Gerald Naber is vice president of sustainable finance at INGING Group