Green Alliance was among the first organisations to recognise the potential of the financial sector to drive sustainability. In 1992, alongside the Rio environment summit, UNEP brokered a Statement by Banks on Environment and Sustainable Development, and Green Alliance encouraged UK institutions to get involved.
Four years later, Green Alliance assessed progress against the pledges: it was discernible, but slow. Twenty-odd years on, we see the seeds sown at Rio yielding results, as financial institutions start to act on the risks and opportunities presented by environmental challenges.
ING is the latest bank to air its thinking, and probably the first to take circular economy as its theme. A recent ING report identifies the new business opportunities as using renewable, recyclable or biodegradable resources; extending product life; offering a product on a service basis; promoting collaborative consumption; and recovering resources. The technologies that will enable these new models are renewable energy, the internet of things, mobile internet and nanotechnology.
Adapting financial models for a circular economy
So far, so familiar to those in the circular economy space, but where ING adds value to those already considering these possibilities for their business is to tease out where financial models might need to adapt.
For instance, in business models where the physical assets are minimised (such as service based models) there may be less collateral to offer as security, so ‘contractual comfort’ about repayment of loans becomes more important.
Similarly, ‘Pay per use’ models spread cash earned over a longer period than straightforward sales, making the provision of capital a bit riskier, and so also needing stronger contractual comfort.
The view of depreciation will also have to change. Rather than quickly writing down the value of assets to zero, their continuing value to second-hand markets needs to be recognised in balance sheets, with design for disassembly a key way to preserve value as it lowers recovery costs. Partnering with crowd-funding platforms (often seen as an alternative to traditional banks) might the way to ensure community involvement in circular business models, helping them to expand.
Banks should be lending their expertise to ‘new pricing models’ that incorporate environmental and social costs and benefits, so as to give a clearer view of the business case for circular approaches. And banks themselves should be ‘launching platforms’ by leading on the procurement of refurbished IT, office fittings and buildings.
The opportunity to manage risk better
The ING proposals are timely, as the world struggles to cope with the volatility of traditional commodity markets:even the IMF has failed to predict the major price movements of recent years. But where ING has started from the question of how finance can enable the circular economy, Green Alliance’s work has looked at what circular economy practitioners can learn from the finance industry.
Its report this summer concluded that greater investment in resource efficiency and recycling, and the adoption of circular economy business models, have important benefits for managing the risks posed by volatility and unpredictability in commodity markets.
Circular models focus on national or regional economies, innovating to ensure that resources can be recovered and fed back in within those areas. This could reduce exposure to imports and global supply chains, which is where the supply risks leading to volatility are generated and amplified.
If the companies providing physical resources took lessons in risk management from the finance sector, they would give lower ratings to volatile stocks and companies, imposing in effect a ‘risk premium’ and driving greater acceptance and financeability of circular business models. Which is where ING can help.
I’m hoping that the ING report is the beginning of even more innovative and influential thinking on financing a circular future. Certainly, the language of risk used in ING’s report, and the suggested role for the circular economy in mitigating risk, echoes Green Alliance’s view.
Julie is writing in her capacity as a Green Alliance associate