The world's current patterns of consumption are globally acknowledged to be unsustainable, leading to calls for this linear economic model to be replaced with a 'circular' economy.
If you have never heard of the circular economy, you can be excused. Only a few people are aware of the term. Even fewer know exactly what it entails and what problems it aims to solve. Some might suspect it concerns corporate social responsibility – but it involves much more, and banks and business leaders should pay attention.
Since the 1970s, the world has been running an environmental deficit. In 2018, we took out of the earth what it will need it 1.7 years to regenerate, according to estimates by think tank Global Footprint Network, which uses data by the UN and other sources. This is unsustainable.
Geopolitics is exacerbating the problem. China dominates the list of producers of the 27 raw materials that the EU has identified as critical because of their supply-shortage risk and the high impact they have on the economy. Unresolved trade tensions between the Asian giant and the US pose a risk to supply chains the world over.
With increasing consumption comes the increasing problem of waste disposal. The value of waste of the North American healthcare market alone is equal to the entire gross domestic product of the Netherlands, according to technology and healthcare group Royal Philips.
This group, along with others, has began looking at alternatives to the ‘take, make, waste’ system of the so-called linear economy. The solution, a circular economy, includes not only taking responsibility for recycling products at the end of their lives, but also ensuring those products are more durable and environmentally friendly to begin with.
It also entails changing business models to incentivise research into more expensive but easily recyclable products. Rather than selling them, manufacturers would provide them as a service, giving access to a certain asset and remaining in charge of repair, reuse and recycling. This shift is significant for banks too, as the value of those assets is less important. What matters are the contracts on which that service agreement is based on, defining the relationship with the user, all the other parties involved in providing the service and, crucially, indicating future cash flows.
ABN Amro, ING and Rabobank are among the handful of banks looking at this shift and at the linear risks their clients might currently be exposed to.
The problems the circular economy aims to solve are real and critical, in both environmental and economic terms. The risks associated with the linear economy and the shift to the new model may still be little understood – but that is no excuse to ignore them.
