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Circular Economy

What can financial institutions do?

In addition to facilitating solutions to the different risk and return profile of circular business models, the financial sector can contribute in many ways.

General wisdom

Financers can facilitate the transition towards a circular economy in many ways, among which are:

  • Get familiar with circular business models and their financial implications;
  • Get cash flow to be top of mind;
  • Incorporate ‘circular value’ of resources in the financial business case;
  • Develop leasing arrangements for products with circular potential
 (solution for balance sheet extension);
  • Help entrepreneurs to put 
in place the right financial incentives to manage the return flow of products in a circular economy;
  • Incorporate the characteristics of circularity in risk and pricing models;
  • Embody circularity in the financial industry and incorporate it in the DNA of employees.

ING Economics Department, 2015, p50-52.

Innovative financing possibilities

Supply Chain Finance

As the physical supply chain grows in sophistication and circularity, there are emerging demands on the financial supply chain. As parties in the supply chain cooperate to close loops financers have to take a supply chain approach as well. Currently Supply Chain Finance initiatives often focus on working capital solutions such as:

  • Factoring: the seller of a product or service sells its accounts receivables to a financial institution to mitigate the risk of non-payment;
  • Reversed Factoring: a financial institution takes care of outgoing payments from a large and creditworthy buyer to its suppliers with the possibility to advance those payments based on the buyer’s credit rating which is usually better than the suppliers rating.

ING Economics Department, 2015, p44.

Working Group Finance, 2016, p92-93.

Financial solutions for product-as-a-service models

Lease structures for low-capital assets on the consumer market, needed for cases like Bundles, are not yet in use. The challenges that arise are the relatively low collateral value of the assets and the credit risk related to the client pool. The adaptation to a circular economy has a positive influence on the residual value, and therefore collateral value of the assets.

Working Group Finance, 2016, p94.

Collaborative chain financing

In order to offer a truly circular product, all circular business models have to be aligned to capture the potential value of the circular economy: making products move through the chain in multiple (theoretically infinite) cycles.

In this situation it may be desirable to finance an entire supply chain rather than a single company. This means the borrower would become a collective of companies, gathered around a specific product (or range of products). Closely linked to this idea is to transfer ownership from a single company to the supply chain.

Working Group Finance, 2016, p95-97.

Measuring circularity

Many of these steps rely on quantifying in some degree how circular an organization, project or product is. This is relevant for anything from project finance to strategic portfolio management.

Measuring circularity is still under development. One initiative is Circle Portfolio, which enables investors to evaluate the circularity of their portfolios.

More information on the website of Circle Economy.