Five minutes on . . . financing the circular economy

Beefing up finance for the circular economy could transform the manufacturing sector, argues a new report. Matt Packer explores its key points

Since the first Industrial Revolution, our relationship with the goods we consume has been overwhelmingly wasteful. That malaise gained strength in the 20th century, when mass production came to shape – and reflect – the arc of human experience.

As fanciful as it may seem in our current era of rife conspiracy theories, there really was a group of electronics manufacturers in the mid-1920s who joined forces in a cartel committed to limiting the useful lives of light bulbs.

That’s just one example of what we now call planned obsolescence: an industrial strategy that swirls around a host of often very resource-intensive products, from smartphones and printers to clothing and cars.

However, planned obsolescence is merely the most brazen iceberg-tip of modern consumer behaviour that, in a general sense, has always played out in an aggressively linear fashion: purchase ⇒ use ⇒ dispose.

And in this day and age, there has to be a better way, right?

Absolutely – and the relationship between corporates and financial institutions may hold the key to making it happen…

In a September development that met with surprisingly little media fanfare, the Ellen MacArthur Foundation published a compelling report called Financing the Circular Economy.

Over its 102 pages, the report explores how corporates and finance firms are currently working together – and could collaborate further still – to pull the economy of the 21st century out of that rigid, linear path that defined the course of the 20th.

Essentially, the report argues that the purchase ⇒ use ⇒ dispose model is unfit for purpose, and that a circular model – in which materials and by-products are reclaimed for reuse – will lead to an overall more resilient economy, with win-wins for all stakeholders.

Sounds exciting – and indeed surprising that coverage was low.

Yes – particularly since its introduction is from none other than His Royal Highness the Prince of Wales.

Treasurers will know that Prince Charles provided a video address on these very matters at last year’s ACT Annual Dinner, and has been working in his own organisations to draw attention to the ever-more urgent necessity for robust sustainable finance.

What does he say in the report?

The Prince sets out some explanatory groundwork, noting:

1. “The circular economy is a systems approach that combines economic opportunity with better environmental and societal outcomes.”
2. “It helps tackle the root cause of many issues, including climate change, loss of biodiversity and plastic pollution, by fundamentally rethinking business models and redesigning entire value chains of products and used materials.”
3. “Over the past 10 years, the opportunity and inspiration of a circular economy has gained enormous traction with businesses and governments alike. It is an idea that is clearly mobilised and can have a very positive economic impact as well.

He adds: “Now it is time to bring the circular economy to scale, and finance will play a crucial role in doing so… if done right, [it] will result in new forms of value creation and real ecological, societal and economical benefits from accelerating this transition.”

How is the investment picture looking right now?

Significantly better than it did just two years ago.

According to the report, in 2018 there was just one public equity fund in the world with a circular-economy angle. Last year there were six, and this year there are 10, with those funds having either a sole or partial circular economy focus.

Relevant players include BlackRock, BNP Paribas, Cornerstone Capital Group, Credit Suisse (with two funds), Goldman Sachs and NN Investment Partners.

On the multinational end, in 2018 there were no corporate bonds at all with either a sole or partial circular economy focus. However, in an uncanny echo of the public-equity figures, last year there were six bonds and this year there are 10.

Participating firms include Google holding company Alphabet, plus BASF, Henkel, PepsiCo and Philips. The value of the 10 bonds is in excess of $10bn. And, as the report points out, “The investable universe is expanding as existing publicly listed companies adopt circular economy principles and new entrants emerge.”
 

Which initiatives under way in the corporate world are helping to show other firms what they could do with the aid of circular-economy finance?

Several major brands are lighting the way – for example:

• Nestlé has committed up to CHF2bn ($2.2bn) by 2025 to shift from using virgin polymers to sourcing food-grade recycled plastics.
• Renault is offering battery-leasing arrangements for its electric vehicles and has launched ZITY – an all-electric car-sharing service – in Paris.
• Hewlett-Packard (HP) has partnered with spare-parts gurus Sintronics in Brazil to recover – and create value out of – HP end-of-use electronic equipment. As well as enabling HP clients to reduce costs by up to 30%, the tie-up results in 97% of the collected materials and components being returned to the supply chain.
• Caterpillar has established the remanufacturing programme Cat Reman, which produces same-as-new components and replacement parts for a fraction of the cost of new parts. In total, the brand offers more than 7,600 remanufactured products.
• IBM operates a number of demanufacturing and asset-recovery centres, which break up used electronics and harvest parts for reuse or resale.
• Rolls-Royce has been running its ‘Power-by-the-Hour’ approach to engine maintenance for decades. The programme uses predictive analytics for life cycle engine care, and enables up to 95% of used engine parts to be recovered or recycled.
• Jaguar Land Rover recycles aluminium from end-of-life vehicles back into high-quality materials for the manufacture of new vehicle bodies.

In the arena of cutting-edge innovation, digital firm 3YOURMIND has developed specialist additive manufacturing software to manage the 3D printing of spare parts.

This has enabled Deutsche Bahn to create a ‘digital spare parts warehouse’ for vehicle maintenance and Bosch to produce industrial plastic parts in small quantities – including 3D-printed parts for hospitals and medical centres, in response to the COVID-19 crisis.

If we turn to investors, Goldman Sachs has made the circular economy one of the key pillars of its $750bn sustainable finance target.

Meanwhile, Morgan Stanley has committed to a Plastic Waste Resolution: a ‘prevent, reduce and remove’ strategy designed to keep 50 million tonnes of used plastic from entering the environment by 2030, through a mixture of structured products, financing and plastics-innovation advisory services.

Sounds impressive. How should stakeholders build on this?

As the report notes: “While the recent growth in financing is promising, far more capital and activity will be needed to scale the circular economy and fully seize its opportunity.”

Its recommendations come in three categories:

1. FINANCIAL SERVICES SECTOR

• Scale circular economy financial products and services, building on existing proofs of concept.
• Integrate the circular economy within strategies, capabilities, targets and decision-making across business lines.
• Formalise the circular economy through financial tools and frameworks, such as credit-approval processes, a circular bond framework and circularity measurement
• Innovate to overcome barriers and close financing gaps through – for example – circularity-linked loans and bank lending for harder-to-finance circular business models.

2. GOVERNMENTS, FINANCIAL REGULATORS AND CENTRAL BANKS

• Set direction and provide economic incentives through, for example, pricing externalities or favourable fiscal treatment – such as tax breaks on product repairs, as introduced in Sweden.
• Improve transparency through standardisation and reporting requirements – following the lead of China’s supervisory scheme for green bond verifiers, plus the EU’s Green Bond Taxonomy and Non-Financial Reporting Directive.
• Invest in circular activities, infrastructure and innovation – for example, the EU’s commitment to dedicate €3.5bn to circular economy innovation between 2016 and this year.
• Integrate circularity into financial regulation, risk assessments and modelling, and explore unconventional methods – such as hardwiring circularity into green quantitative easing.

3. BLENDED FINANCE MARKET

• Use blended finance mechanisms to de-risk investments and draw private-sector capital into the circular economy, by structuring and backing harder-to-finance infrastructure and riskier, long-term innovation.
• Provide technical assistance, expert structuring and advisory services to enable financing of challenging projects, such as the recurring operational expenditures of collection infrastructure.
• Use philanthropic capital to nurture and fund nascent circular economy projects and innovation, stimulating the market and providing proof-of-concept.

All of those measures, the report notes, must be underpinned by more comprehensive metrics, data and evidence.

We’ve come a long way since the days of the light bulb cartel. We can go further still.

Further reading

Find the full report here

About the author

Matt Packer is a freelance business, finance and leadership journalist