Circular thinking: revolutionizing business in the Americas
The circular economy has the potential to reshape business as we know it and enable a more-sustainable economic growth model. Although still in early stages in markets of the Americas, it is of growing significance to businesses here, as more companies embrace circular business models to build new revenue streams, reduce costs and make operations more efficient. Financing the development of this market presents both a challenge and an opportunity for financiers.
Ecology is circular: from the water cycle to the carbon cycle, nature ensures that nothing is wasted. The same is not true for the economy — yet. But the growth of the circular economy may change that, creating a business ecosystem in which one firm’s output becomes another company’s input.
The circular economy proposes nothing less than the end of the linear economic model — create, consume, demolish, waste repeat — that has been the mainstay of corporate growth for generations.
Waste is inherent in the linear system, resulting in a legacy of landfill and the depletion of finite resources. It is fundamentally unsustainable over the long term.
The circular economy remedies this — not by rejecting consumption and capitalism, but by embracing it in a new way. With the help of technology and free markets, economic growth can not only be sustained, but enhanced by embracing circular economic models.
The new industrial revolution
The industrial revolution unleashed an era of energy- and commodity-intensive growth spurred by new technologies. The circular economy will bring similar advances, without the adverse effects of inefficient resource consumption and degradation.
Several crucial factors will drive this process, including:
- network technologies that enable effective rental and sharing markets to minimize product redundancy and monetize otherwise underused assets;
- energy efficiency and renewable power, which reduces the resource intensity of economic activity and cuts costs for businesses; and
- cultural shifts that are boosting demand for more sustainable products and services.
As the infographic shows, new business models, inspired by circular economic thinking, are already taking hold and helping companies to create new revenue streams, increase efficiency and prevent the waste of resources. Five models, in particular, provide the backbone of current circular economic thinking.
1. Circular supplies
In this model, businesses look to use renewable energy and source their raw material inputs from bio-based or fully recyclable input materials to avoid waste and replace toxic or single-lifecycle inputs. Creating a link from consumption to production.
Example: US Bioplastics is a US company that creates bio-based plastics from readily available bio-waste materials, which is designed to meet manufacturers’ performance standards and degrade rapidly. It is made from paper waste and farm waste products — such as corn stalks and sugarcane fiber.
2. Resource recovery
In this model, businesses identify and recover the embedded value in products that would otherwise be disposed — upcycling, as well as recycling.
Example: Triciclos is a Chilean company that tries to recycle as many materials as possible, selling some for a profit where those markets already exist while seeking to create new markets for materials that cannot currently be recycled profitably. Triciclos also works to increase recycling and reduce consumption by educating consumers, and offers other firms certification to demonstrate that they are responsibly managing their waste.
3. Product life extension
Under this model, companies repair, upgrade, or remarket products that would normally be thrown away at the end of their conventional life cycle.
Example: Caterpillar designs heavy-use, easy-to-repair equipment which is also remanufactured at the end of its traditional lifecycle to further extend its life. Caterpillar Sustainable Solutions, Solar Turbines and Progress Rail Services are remanufacturing programs to offer customers lower-cost products with shorter downtime; and rebuild programs increase equipment lifespan.
4. Sharing platforms
In these platforms, firms promote collaboration, between either individuals or corporations, to alleviate overcapacity or underutilization — and thereby boost productivity.
Example: In Mexico, Apli connects employers — primarily restaurants — with employees, allowing the former to manage their staffing levels efficiently and the latter to accept the optimal balance of shifts for their unique situation; and Tem Açúcar (Got Sugar?) in Brazil is a neighbor-to-neighbor sharing platform where individuals can loan or donate things for use by others on the platform.
5. Product as a service
Organizations offer customers an alternative to buying and owning assets, maximizing efficient use of assets, adding demand from those who could not afford the product outright and prolonging a product’s longevity.
Example: RentFrockRepeat.com of Toronto provides designer dress and accessory rentals online, with private fittings and consultations — either in its showroom or via Skype or by phone; and Frogbox rents moving boxes, wardrobes and moving supplies.
Financing the circular economy
There are a number of reasons why it makes sense for businesses —and financiers — to engage with the circular economy. First, it is a growing market that is expected to generate net economic growth — that is, even after accounting for the disruption to linear businesses — of between 1% and 4% over a 10-year period. In a low-growth environment, that cannot be ignored.
Second, the circular economy matches the sustainability targets of many firms, which in turn will help them win and keep customers who demand to work with sustainable partners.
Finally, as more companies push, and are being pushed by customers, to move towards sustainable business models and reducing resource consumption, firms that are in the vanguard of this shift to new business models have the opportunity to lead their respective category and gain dominant market share as a result.
In order for this virtual circle of economic growth to be supported, increased financing opportunities are critical. But there are a number of challenges that banks and financiers must manage in order to effectively finance this growth, including:
- the need to develop valuation and risk models to support circular economy financing instruments that suit the characteristics of circular businesses — for example by recognizing the recycling and upcycling value of assets that would otherwise be written down through their economic life;
- having a sound knowledge-base and understanding of the circular economy, in order to advise clients effectively on the financial incentives that make end users choose circular products and services over standard alternatives;
- partnering with equity providers if the risk/return profile of a circular business does not match the criteria for debt financing, or with crowd-funding platforms if the circular business involves the community;
- embracing circular procurement within their own operations, for instance in sourcing IT hardware, office supplies, and energy.
ING has been a pioneer in helping to drive the evolution of the circular economy. As part of its goal to support growth in this space, the firm launched its ‘Orange Circle’ program, which covers five areas:
- Knowledge: ING’s economics department studies the financial benefits of moving to circular business models and publishes this research. ING also shares this knowledge via client events and roundtables.
- Operations: ING uses its purchasing power to institute demand for circular products and services; and ING applies circularity in the running of its own buildings and workspaces.
- Deals: ING participates in circular deals and builds relationships with circular clients.
- Ecosystem: ING works with other financial partners on the funding of circular business models.
- Innovation: ING collaborates with clients to develop circular propositions.
ING has seen tangible results from its commitment to the circular economy. As an example, the bank acted as an advisor in the merger of Shanks and Van Gansewinkel Groep to create Renewi, one of Europe’s leading circular-economy companies, and was a lead arranger onthe IPO of sustainable bio-plastics company Avantium.
ING is also part of a number of education and information initiatives to increase awareness of, and standardization in, the circular economy. The bank is developing an in-house e-learning program for its front office staff to learn more about the circular economy, and ING is part of the CE100 program, an circular-economy initiative of the Ellen MacArthur Foundation. The Foundation is a global thought leader on the circular economy, and through its work with the Foundation, ING has expanded its knowledge and network within the circular economy. It is also now testing a circular economy action-learning program from the Foundation.
The development of the circular economy will clearly have a positive impact on the environment and sustainability goals of companies and governments. Less obvious, but equally real, are the positive impacts it is having on corporate balance sheets — from inspiring new business models and revenue streams to promoting efficiency and reducing costs.