Support from the financial services industry for the circular economy creates two mutually reinforcing benefits.33
As a result, financing the circular economy is becoming a strategic interest for many financial institutions. HSBC released Waste Less, Grow More, an in-depth research report, in September 2019 highlighting why the circular economy matters and how this can help drive significant economic activity. It states that “the transition to the circular economy could unlock $4.5tn of global GDP by 2030 as a result of resources being better utilized and more jobs being created in higher-skilled industries away from resource extraction and waste disposal.”35
As a report by the FinanCE working group of financial institutions highlights, the benefits for the sector are clear. Understanding the circular economy enables financial institutions to:
understand the economic impact of a circular economy;
accelerate value creation through innovation;
anticipate linear risks in the economy;
contribute to economic growth opportunities and other positive macroeconomic impacts;
mitigate economic instability; and
be responsible entrepreneurs and contribute to sustainability goals.36
According to a recent report from the Club of Rome, it is estimated that an additional 3 percent of GDP per annum needs to be invested from now until 2030 to deliver a circular economy. According to the report, this would primarily be required in the following sectors.
Installation services and construction/renovation to promote energy efficiency and the use of renewable energy sources.
Sustainable energy and transport infrastructure, for example mass transit systems and electric vehicles and charging stations.
Maintenance and repair, recycling and development to promote the efficient use of materials.
Agriculture, forestry, timber, pulp and paper to promote biofuels and to develop new bio-based products.37
Delivering this level of investment in circular initiatives will not be straightforward for many financial institutions. This is largely because circular business models are different to traditional ones as they don’t seek to maximize the sale of goods but instead seek to deliver alternative revenue models focusing on sharing, leasing and extending the life of products. In a recent report on the topic, ING draws the following conclusions.
The circular economy will lead to a rethink of business models, which will require multiple forms of capital from different providers, including non-traditional ones such as crowdfunding.
Cash flow optimization increases the financeability of circular business models by delivering varied revenue streams.
The underlying legal contracts become pivotal in financing circular business cases to compensate for the fact that the user often doesn’t own the product.
Creditworthiness deserves more attention as “pay-per-use” models run the risk of attracting less creditworthy users.
Value creation in second-hand markets can increase financeability.
Design for disassembly can increase the residual value of products.
Supply chain finance unlocks untapped financial resources. One such example is the partnership between Walmart and HSBC to peg a supplier’s financing rate to its sustainability standards.38
Financial implications can be manifold, ranging from increased working capital demand to balance sheet extension. There is no one-size-fits-all solution and circular business models require an integral financial approach as a result.39
To address some of these challenges and promote the financing of circular solutions, Dutch banks ABN AMRO, ING and Rabobank published the Circular Economy Finance Guidelines (CEFGs) in 2018. They are designed to create and stimulate a common understanding of circular economy finance in the European market, and in turn accelerate financing and investing in circular business models. The CEFGs, which apply to all equity and debt products, have four core components.
1 A framework for assessing the circularity of investment opportunities. Only those that have a circular business model and generate long-term positive impacts should be considered circular propositions.
2 A process for project evaluation and selection, to support financiers in communicating how financial products are eligible under the use of investment criteria.
3 Management of investments to ensure that the investments from circular economy financing are tracked to verify that they continue to contribute to the shift toward a circular economy during the lending/investment period.
4 Reporting – financiers that want to prepare their finance administration for traceability and auditability should make, and keep, readily available up-to-date information on their debt and equity activities to support the transition toward a circular economy.
One example of the application of these is the Green Innovation Bond, which Philips issued in 2019.
Focusing investments toward circular initiatives will not only deliver circular benefits and returns to investors but will also drive economic activity. For example, Closed Loop Partners – a dedicated investor in the circular economy, which has $86m of assets under management, has deployed $50m to date and its co-investors, which include Goldman Sachs, have invested more than $200m – estimates that every dollar invested will have a 1:1 economic benefit to the communities in which the business operates by 2030. To date its activities have delivered $9m in economic benefit and wages to communities, as well as 400 jobs.
In October 2019 BlackRock, the world’s largest asset manager, set up the BlackRock Global Funds Circular Economy fund to invest in companies dedicated to the circular economy and capitalize on the opportunities created for companies that are seeking to develop circular solutions.40
Closed Loop Partners – investment in the Emerald Coast Utilities Authority
When the Infinitus materials recycling facility (MRF) in Montgomery, Alabama, closed suddenly, the Emerald Coast Utilities Authority (ECUA) and its neighbors were left without a replacement facility within a five-hour drive. Rather than wait for another privately owned MRF to enter the market, ECUA decided to build its own single-stream facility. A loan from Closed Loop Partners provided about 30 percent of the required capital, and the site opened in September 2016.
Since then, the ECUA MRF has become a regional asset for an area that had not previously had a long-term or reliable solution for processing recyclables. Escambia County has continued to expand its own collections and has entered into collection contracts with 11 municipalities in Florida and Alabama as well as three private hauliers. The facility is processing close to 39,000 tons of materials a year and, in doing so, generating three primary economic benefits:
1 savings to ECUA in the form of avoided tipping fees;
2 tipping fees collected from other municipalities and hauliers; and
3 revenues from commodity sales.
As of September 2018 ECUA has avoided $2.3m in tipping fees and generated $1.9m in revenue, for an average total economic benefit of $96 per ton. An additional 30 jobs were created as part of this process.41
33
Oliver Wyman, Supporting the Circular Economy Transition: The role of the financial sector in the Netherlands (August 2017). Available online via: https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2017/sep/CircularEconomy_web.pdf
34
ING, Rethinking Finance in a Circular Economy (2015). Available online via: https://www.ingwb.com/media/1383724/rethinking-finance-in-a-circular-economy-report.pdf
35
HSBC, Waste Less, Grow More: Why the circular economy matters (2019). Available online via: https://www.research.hsbc.com/C/1/1/339/cL9KMvW
36
FinanCE, Money Makes the World Go Round (2016). Available online via: https://www.ellenmacarthurfoundation.org/assets/downloads/ce100/FinanCE.pdf
37
Wijkman, A., and Skånberg, K., The Circular Economy and Benefits for Society, Club of Rome
39
ING, Rethinking Finance in a Circular Economy (2015). Available online via: https://www.ingwb.com/media/1383724/rethinking-finance-in-a-circular-economy-report.pdf
40
Sanderson, H., “BlackRock launches fund to cash in on recycling push,” Financial Times (October 8, 2019)
