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The banks need to prioritise the circular economy

Read the original article in Swedish

Banks that do not understand the challenges of financing the Circular Economy will lose competitiveness in the eyes of both current and future customers according to Lan-Ling Fredell, fintech and innovation expert at PA Consulting.

A very large proportion of consumers think brands have a responsibility to take care of the planet and many are also willing to pay more for products and services that are sustainable. Together with today's technology, this trend facilitates a circular economy with alternative business models that can both be profitable and contribute to a more sustainable planet.

The Ellen MacArthur Foundation estimates the Circular Economy will be worth €1.8 trillion to Europe by 2030. It also predicts that disposable income for European households will increase by 11 per cent, while carbon dioxide emissions will decrease by 48 per cent.

This means legislators, investors and consumers expect banks to incorporate sustainability into their core business. While the companies at the heart of the Circular Economy expect banks to understand their financing needs.

However, circular business models are not as easy to analyse as their traditional counterparts. The valuation of assets and materials is complex in a Circular Economy as it depends on secondary sales markets, technology changes and volatility in commodity prices. Banks must develop valuation models that, for example, can value recycled products.

The understanding, and valuation, of linear risk will also be more important when both consumers and regulatory institutions can punish companies that do not include circular thinking in deals. Meanwhile, more sustainability risks must be evaluated as companies must report ESG factors (environmental, social and governance, reds note) while providing more data for comparison and best practice.

Finally, there are unique financing needs for business models in the product-as-a-service area as loaned assets remain on the balance sheet. Assessment of credit risk requires evaluation of residual value and recycling of products that are available to customers. The maturity of the business ecosystems will be a decisive factor in the success of circular business models as risk assessments also require good understanding of what potential partners do.

Overall, banks must follow trends in sustainability and circular finances, offer the right products and services that capitalise on the opportunities and include sustainable thinking throughout their business. Banks acting proactively and understanding the challenges of financing the Circular Economy can create new business. Banks that do not understand the challenges will lose competitiveness in the eyes of both current and future customers.

How can the circular economy create value for your business?

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Contact the author

Contact the sustainability and climate response team