In the landscape of contemporary economics, the Circular Economy (CE) emerges as a pivotal concept with far-reaching implications. It embodies a paradigm shift that challenges the linear “take-make-dispose” model and fosters sustainability. The circular economy model aims to create a closed-loop system where resources are used more efficiently, waste is minimized, and products and materials are continually reused and recycled, ultimately reducing the environmental impact of economic activities.
The financial sector is increasingly viewing the financing of CE projects as both an opportunity and a demonstration of its commitment to supporting circular initiatives. This dedication is evident through the emergence of both equity and debt funds specifically targeting circular economy ventures.
For example, BlackRock launched its Circular Economy Fund in 2019. The total fund size as of August 2023 is 1.76 billion dollars. The Circular Economy Fund aims to maximize returns by investing at least 80% of its assets in global companies aligned with the CE. The fund focuses on resource efficiency, waste reduction, and increased material recycling and reuse.
Another example is the Circular Plastics Fund I, an impact fund affiliated with Infinity Recycling BV, a Dutch growth capital firm specializing in advanced plastics recycling technologies. The fund’s investments are geared toward expediting the shift to a circular plastics economy. It achieves this by scaling up innovative recycling technology companies with robust growth potential, facilitating the transformation of plastic waste streams into primary materials for the production of new plastics. The fund invests on a global scale.
While presenting tremendous opportunities for sustainable growth, the CE comes with its own hurdles and risks. Tura et al. (2019) discusses potential challenges that organizations may encounter when transitioning to a CE business model. These challenges can span various aspects of the organization’s operations. Examples of these challenges include a lack of tools and methods to measure benefits, limited social awareness, and uncertainty about consumer responsiveness. Additionally, the paper addresses intricate and overlapping regulations, a lack of market mechanisms for the recovery of used goods or materials, as well as a shortage of technologies and technical skills. de la Cuesta-González and Morales-García (2022) categorizes these challenges into three types of risk: market risk, operational risk, and innovation risk. Market risks within the CE context involve uncertainties related to market relationships across the value chain. These uncertainties encompass aspects such as client acceptance, fluctuations in price and quantity, supply chain stability, and uncertainties in secondary raw material markets. Operational risks in the CE context encompass challenges related to regulatory changes and uncertainties in profitability, particularly linked to untested CE business models across various scales. CE innovation risks pertain to the application of new technical solutions in the production or distribution of products. These risks can arise from a lack of information, knowledge, or insufficient technologies and technical skills.
Given these unique risks associated with CE, traditional finance models may not be directly applicable to CE financing. Moreover, several other factors contribute to the misalignment between traditional finance models and CE financing:
- Longer Investment Horizons: Circular economy projects often require longer investment horizons compared to traditional linear economy projects. Circular solutions may take time to mature and demonstrate returns, making them less compatible with short-term financial models.
- Non-Linear Returns: Circular economy initiatives may not follow the linear revenue and cost patterns typical in traditional finance models. The returns on circular investments can be more dynamic and nonlinear, depending on factors like resource availability and market adoption.
- Non-Market Valuation: Circular economy projects may generate non-market value, such as environmental and social benefits, that traditional financial models struggle to quantify or incorporate into their calculations.
- Diverse Revenue Streams: Circular business models often involve diverse revenue streams, such as product-as-a-service, remanufacturing, and recycling. Traditional finance models that rely on straightforward sales and revenue projections may not capture this complexity.
- Collaborative Ecosystems: Circular economy projects often thrive within collaborative ecosystems involving multiple stakeholders. Traditional finance models may not account for the network effects and partnerships that can enhance the success of circular initiatives.
- Circular Metrics: Circular economy financing may require the use of non-traditional metrics and indicators to assess performance, such as resource efficiency, waste reduction, and product longevity, which differ from the traditional financial metrics.
To be continued in Part 2
Disclaimer: The Content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.
References:
de la Cuesta-González, M., & Morales-García, M. (2022). Does finance as usual work for circular economy transition? A financiers and SMEs qualitative approach. Journal of Environmental Planning & Management, 65(13), 2468–2489.
Tura, N., Hanski, J., Ahola, T., Ståhle, M., Piiparinen, S., & Valkokari, P. (2019). Unlocking circular business: A framework of barriers and drivers. Journal of Cleaner Production, 212, 90–98. doi:10.1016/j.jclepro.2018.11.202.
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