Helping businesses to draw the perfect circle

With the concept of the circular economy entering the mainstream, there are new opportunities on the table for the business community and for those who fund them.

Helping businesses to draw the perfect circle

The Industrial Revolution was fuelled by the mindset that our seemingly huge planet’s resources were effectively infinite. Of course this is simply no longer tenable in a world heading for a population of 9 billon people.

The economy has shifted from the “take, make and waste” processes that governed growth for more than two centuries, to one which embraces the ideas of “reduce, reuse and recycle.”

Companies are looking at the entire lifecycle of their products, and the resources used in them, in order to decouple growth from resource use. They’re applying strategies of reusing, refurbishing, remanufacturing and recycling to unlock further value.

Whilst this circular economy is seen as the ultimate answer to solving depletion of resources, this isn’t the only driver – for example, it also increases customer intimacy and presents opportunities to innovate.

Second life 

Some companies are focusing on recycling their waste materials – carpet tile maker Interface is using discarded fishing nets in its products as well as its own old tiles, whilst tomato growers in the UK use CO2 and heat from nearby power stations to increase their yields.

Others are focusing on extending the life of products – giving them a ‘second life’. Medical equipment is a good example, with the likes of Philips and Siemens taking back MRI scanners, refurbishing them, and then selling them in a thriving second-hand market.

There is also a transition from selling products to selling services. Where lighting manufacturers used to sell lightbulbs, they now sell lighting, while carmakers sell mobility rather than cars.

According to the Ellen MacArthur Foundation and TNO (the Netherlands Organisation for Applied Scientific Research), these changes could add €500 billion to the EU economy in the next decade. So the circular economy is very much here to stay – and will disrupt loan and investment portfolios as it has business models.

The financial sector can accelerate this refreshed economy. But first it also needs to adopt the principles of circularity. That means adopting longer time horizons and being aware of the potential of concepts such as product life extension, design for disassembly, and performance-based business models. It could also mean getting involved in supply chain finance to help companies “close the loop” for their products.

And the sector needs to adapt to changing banking practices. For example, banks must deal with the shift to “product as a service” business models, where customers no longer make one lump sum payment for a product at the point of sale – rather they continue to make payments for the life of the product. Cash flows become more important than the underlying value of an asset – and contracts become a much more important part of doing business. As does the creditworthiness of customers.

Opportunity knocks 

These are new issues for the financial sector to grapple with, but it’s important that it does so. Not just because clients are looking for capital to fund their transition to the circular economy, but also because it’s a dynamic market expected to generate 1%-4% growth over the next 10 years. And, enticingly, that’s net growth, already taking into account the disruption that it will cause to existing businesses. An opportunity too good to miss.

Evidence also suggests that clients who align themselves to the sustainability agenda are more innovative, show better financial performance, and have better credit ratings. So directing more assets and capital to sustainable businesses creates a much healthier portfolio for banks.

So the financial sector has a key role to play in, quite literally, reshaping the business world – facilitating a smooth transition from linear to circular.

Gerben Hieminga is a senior economist at ING

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