Rethinking Finance in a Circular Economy
A report by ING
Rethinking Finance from Linear
Since the start of the Industrial Revolution more than 250 years ago, the global economy has been on a steep growth trajectory initiated by a series of advances in technology. From steam engines that replaced water mills to electricity, telephones, automobiles, airplanes, transistors, computers, and the internet, each new wave of technology has brought about surges in productivity and economic growth. As a result consumption increased tremendously and technology created new possibilities for many people in the developed world. Technological advances appeared within a context of seemingly unlimited natural recourses. This resulted in a linear ‘take, make and dispose’ model of production. An economic model where the majority of feedstock ends in waste. A model also with many unsustainable side effects such as a loss of biodiversity, deforestation, air and water pollution as well as material depletion.
Rethinking Finance to Circular
Businesses across the world face new challenges. On the one hand they have to deal with increasingly constrained resources – be it energy, land or materials – adding to price volatility of raw materials. On the other hand they are faced with increasingly demanding customers and markets when it comes to sustainability. This poses the challenge to decouple growth from resource use. A challenge that requires a new economic paradigm of ‘reduce, reuse and recycle’.
The concept of a circular economy aims to present a solution to this challenge by combining revenue with social impact. It enables businesses to grow and prosper while keeping the environment and society intact, ensuring growth for themselves as well as future generations. Fresh insights and inspiration empowers us all to stay a step ahead in business. This study will give readers insights into the opportunities of the circular economy and the business models enabling it. It will also provide a better understanding of how the circular economy changes the financial landscape.
ING, as a large financial institution, plays a pivotal role in financing sustainable transitions. From past experience we already know that sustainability often goes hand in hand with increased business performance. Companies that are leading in sustainability are more innovative and show, on average, higher risk adjusted returns. If these clients further develop their circular business models we want to know whether our current product offering and services are suited to finance these business models. And if not, what changes are needed or which alternatives are at hand?
Rethinking Finance as an Enabler for a Circular Economy
Finance can be a major enabler of the transition towards a circular economy Recently, the circular economy has attracted a lot of attention from a broad audience ranging from policy makers, scientist, NGO’s and – often large – companies. It’s impact on finance however, has attracted less attention. We hope to correct this as finance can be a major enabler of the transition towards a circular economy. The circular economy provides opportunities for financial institutions. First, it is a growing market which is estimated to generate 1% to 4% economic growth over a ten year period. This is net growth and accounts for the disruptive aspects which forces some (linear) business to reduce or stop production. In today’s low growth environment this is quite an achievement. Secondly, it is a market that fits into the sustainability targets of many banks as these companies make the transition happen.
The sustainability approach in the financial sector has evolved over time. Starting from mitigating environmental and social risks (do no harm policies) to supporting sustainable business and integrating it into the core business and strategy (doing good policies). Banks are recognising the opportunities of sustainability more and more. There is now evidence which shows that clients who are leading in sustainability are more innovative, show better financial performance and have better credit ratings. Directing more assets and capital to sustainable businesses therefore creates a healthy portfolio for the banks and helps them to facilitate the transformation to a low carbon economy. As a result, sustainability now is a business opportunity for the financial industry.