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Wholesale Banking

New revenue streams: the circular economy in North America

As the circular economy begins to unlock value for North American companies, those in the vanguard will benefit from new revenue streams, reduced operational costs and less reliance on scarce resources and fluctuating commodity cycles.

Piles of waste in collection yard

Research from Accenture suggests the rise of the circular economy will unlock $4.5 trillion in new economic growth by 2030. But for this bounty to be released, businesses, banks and governments must collaborate to encourage and enable a change in mindset to embrace new business and finance models. Just as the first industrial revolution transformed the way we live, work and interact, the transition from a linear to a circular economy presents a similar seismic shift — with immense benefits, and challenges, along the way.

A database launched by the Circular Economy Club reveals that approximately 62% of the 3,000 circular economy initiatives highlighted were based in Europe. North America lagged far behind with just 12%, followed by 11% in Latin America, 10% in Asia and Africa with 6%.  But the circular economy and circular business models hold the promise of overcoming the dual challenges of rising and fluctuating commodity prices and resource depletion, which is as relevant to North American companies as it is to those across the pond.

As circular economy initiatives take hold in North America, it is important that companies understand the financial benefits of embracing these new business models — including the opportunity for new revenue streams, reduced costs, more efficient supply chains and improved business intelligence. And it is not just large corporations that can benefit from circular businesses practises. Companies, financiers and institutions in circular supply chains often work together in a network of collaboration and co-creation - providing benefits to all.

As an example, as a member of the World Economic Forum’s Platform for Accelerating Circular Economy (PACE), ING is leading the set-up of a “circular supply chain accelerator.” Joost van Dun, Circular Economy lead at ING Sustainable Finance, explains: “The accelerator is meant to help small to medium-sized (SME) companies in the supply chain of large multinationals to speed up their development of circular business models.”

New models

Research from Accenture identifies five distinct circular business models, each of which offers its own benefits for businesses, suppliers and end-users of products and services.

In the Circular Supplies model, using fully renewable, recyclable or biodegradable inputs not only creates sustainability throughout the supply chain, but also increases predictability and control - lessoning disruption and risk. “By reducing waste and using circular inputs, companies create supply chain efficiencies, thus reducing costs for themselves, their suppliers and customers,” notes Van Dun.

In the Resource Recovery model, recovering embedded value at the end of a product lifecycle to feed into another transforms waste into value through innovative recycling and upcycling services. Companies can either recover the end of life products to recapture and reuse valuable material, energy, and components, or recover waste and by-products from a production process. Van Dun says: “Pursuing either resource recovery route to bring products back into the manufacturing loop offers both cost savings and environmental benefits.”

Under the Product Lifecycle Extension model, companies can maximize value beyond the point of sale - generating additional revenue from assets. Goods that would otherwise be lost through wasted materials are instead maintained or even improved by repairing, upgrading, remanufacturing or remarketing products.

For example, JLG, a US manufacturer of access equipment, developed reconditioning capabilities to capitalize on multiple life cycles for its hard-wearing and expensive cherry picker machinery. The company worked with a specialized vendor finance firm to create a financing package for its new and reconditioned assets, including rental solutions, allowing the firm to increase the lifecycle of its equipment while amortizing the cost over time. In addition, in an effort to increase product lifecycle, Lockheed Martin is also creating products that can stay in use longer and then be re-purposed or re-used once they are worn out.

The Sharing Platforms model allows users to share assets - taking advantage of both overcapacity and underutilization to increase productivity and usage rate. Companies with products that have a low utilization or ownership rate could benefit substantially - increasing revenue generation from those assets. They also can benefit from improving operational efficiency as they make use of data generation for business intelligence. 

Product as a Service models benefit companies whose products’ cost of operation is high, and those companies that have a skill advantage relative to their customers in managing maintenance of products. This model offers new revenue streams for companies, as they sell services and recapture residual value at end of product life. It can include pay per service unit - where a customer pays per single use; product renting or sharing - where the customer pays to access the product for a certain period; product lease - where ownership is still retained by the provider, but the customer has continuous access to the product; and product pooling - when a product is simultaneously used by many customers. As an example, both GE and Pratt & Whitney now offer jet engines via a rental model.

Replacing traditional product sales with a Product as a Service model has implications for both the cash flow profile and balance sheet of a company. “It’s a very different business model with the introduction of a new kind of risk,” says Van Dun. “This idea whereby companies don’t have a one-off sale of a product but receive gradual income over time - it is completely flipping a business on its head.”

The circular paradigm

Global recognition of resource depletion, cultural shifts demanding greater sustainability and pressure on companies to increase operational efficiencies are key drivers behind the rise of circular economic initiatives in North America and elsewhere.

Sensing this shift, the province of Ontario, Canada, has just passed North America’s first circular economy law - producers and importers of all electrical and electronic equipment sold in Ontario will soon be obliged to divert e-waste from landfills through recycling operations. In response to the regulations, Canadian electronics firms are already designing computers and peripherals with easier disassembly in mind.

To help increase momentum in North America, the Ellen MacArthur Foundation launched a US chapter of its Circular Economy 100 (CE100) program in 2016 to assist - via research, collaboration, capacity building and networking - North America-based and NA-focused organizations looking to adopt circular businesses models for new or existing lines of business.

As a member of both the CE100 program and architect and pioneer of it’s own initiates, such as, the   ‘Orange Circle’ program, ING is positioning itself as a leading proponent of the circular economy. As finance is a key barrier to the evolution of the circular economy, it’s important that North American businesses have access to financial partners who understand their funding requirements.

Replacing obsolescence and waste with longer lasting efficiency and recurring revenue streams offers businesses throughout North Americas the chance to grow and retain their competitive edge in a world where sustainability is becoming increasingly important, and as resources become ever-more scarce.