After a successful kickoff event of Worldwatch's Circular Economy initiative in April, we held our first ‘addressing the challenges of circular economy’ seminar on June 4th, dedicated to the challenge of building financial capacity for Circular Economy transformation.

The seminar saw the participation of key stakeholder representatives from finance, business, and policy makers, and was facilitated as an ongoing dialogue between the stakeholders and the audience.

The discussion revolved around the role of each of the stakeholders’ groups in the process of transforming from linear to circular based economy, the potential opportunities that can be derived from the process, the associated risks, and the possibility of joining forces across sectors in driving the change forward. All while not forgetting to keep an eye out for practical approaches and applicable solutions to the challenge of raising financial capacity.

FINANCIAL SENSE VERSUS REALITY

By now the drill is almost painfully familiar: Rising production costs, a growing middle-class, increased demand, permanent materials volatility, and a shortening life-cycle of products. It all adds pressure on companies to rethink their value-chains and business models. And accounting for the entire value-chain of a product has its own direct benefits, because it generates far more informative understanding of associated cost-benefits over that of focusing solely on one fragment of a products’ life. To that end it’s reasonable to assume that transitioning towards a circular-based economy makes financial sense and would receive support from the financial sector.

The question then becomes why is the financial sector still considered one of the main barriers on the pathway for circular economy transformation? Why are financial institutions not more supportive, or even insisting, on cradle-to-cradle accounting of the products they choose to invest or loan money to?

The simple answer is that the current economic system primarily works under the assumption of unlimited natural capital, and does not take into account social or environmental externalities associated with production, selling, using, and disposing of its products.

NO MORE BUSINESS AS USUAL

However, the free ride is coming to an end. With growing social, environmental, and economic pressures we are racing towards a tipping point from which it will be no longer be possible for businesses to discard these factors as externalities, as they are already starting to impact core business.

As this trend will only grow stronger in the coming years, it will unavoidably impact how the financial sector views loans and investments in businesses. This will require accounting for the entire life-cycle of products and services, their social-environmental impact, and understanding how this reflects on long-term profitability.

Such changes open the door for circular and sustainable business models that offer tangible alternatives to the traditional business models, both for companies to embrace transformation towards more sustainable operations, and for the financial system to reduce long-term financial risks.

However, such innovative circular business models bring a whole new set of challenges along with them. Progressive financial institutions such as Merkur Bank, that already incorporates the notion of limited resources and shortage of materials in their decision-making process and understands the long-term benefits of innovative circular business models, struggle to overcome hurdles of adjusting their investments and loan policies to the changing reality. Pioneering circular business models such as leasing and the ‘service over products’ entail slower cash flow and turnover (due to monthly payment instead of direct full-amount purchases), as well as complicating the ability to predict market demand, readiness, and profitability.

HOW TO DEAL WITH UNUSAL BUSINESS?

Accommodating the shift from traditional business models into healthier and sustainable alternatives requires development of new competences among the different stakeholders. To work effectively together we must find a common language and tools to create sound financial solutions.

The financial sector must expand its understanding of the changing reality in which they operate, to be able to integrate other factors beyond pure financial rational into their decision-making and financial solutions. Building such capacities within the financial sector must start with changing education, which entails introducing and engaging in learning and understanding the relevance of sustainability for creating resilient and stable financial systems.

The purpose of developing these competences is not to convert bankers into green activists, but rather to develop the ability to communicate and advance the understanding throughout the financial sector, such that long-term sustainability becomes an integral part of a business case.

LEARNINGS ON BOTH SIDES OF THE TABLE

However, the duty of learning is not only placed on the shoulders of one group. As we learned from the discussion at the seminar, the entrepreneurial sector has a lot to learn and additional effort to put in, in order to meet the financial sector halfway. Innovators often have great ideas for enterprises that incorporate social and environmental returns within their activity, but they often fail to put these ideas into a comprehensive business case that demonstrates potential for profitability and competitive advantage, thereby gaining the trust of financial institutions.

CREATING A COMMON LANGUAGE

We must create a common language and tools to enhance better understanding of each others’ needs, and help to develop collaboration in building environmentally and financially sustainable business models together.

Such collaboration will allow the financial system to demonstrate leadership by taking a proactive role in designing sustainable business models and solutions, and will let them contribute their knowledge and financial understanding to address pressing challenges. Furthermore, it will allow banks to learn from sustainability innovators how they best leverage social and environmental factors to create competitive advantages.


Our Circular Economy Intitiative brings together stakeholders for sustainable solutions. Read more about circular economy here!