‘Money makes the world go round’, the new report on financing the circular economy, provides directions for overcoming financial barriers that circular businesses encounter. Answers lie in collaboration throughout the value chain and creating financial instruments to invest in a chain or network of businesses rather than in a single business. This way, risks and rewards can be shared and incentives to collaborate arise with the aim of creating a circular chain in which all participants earn a piece of the pie.PGGM took the lead in organizing the working group FinanCE, consisting of PGGM, Intesa SanPaolo, Rabobank, ING, ABN AMRO, EIB, EBRD, Circularity Capital, RSM Erasmus University, Ellen MacArthur Foundation, KPMG Luxembourg, Banking Environment Initiative of Cambridge, Circle Economy and Sustainable Finance Lab.The FinanCE working group was founded in order to understand the implications of the circular economy on business models and corresponding financing of circular business. The motivation behind this is the need for funding of circular business in order to take off and accelerate the transition. The report identifies opportunities for financial institutions to learn how to recognize and to invest in the winners of the future. The most important opportunities are
As part of Nederland Circulair! the researchers from Sustainable Finance Lab and Circle Economy conducted various case studies in order to understand the financial barriers that various circular businesses face. The circular economy consists of a number of new business models, which they found to be easily categorized into three categories:
All business model categories have their own financial consequences. The report specifically addresses financing issues in Circular Use Models, in which the earning model consists of retaining ownership of the products and selling the service of using them. The issues that were found concern the need for increased working capital (i.e. buying machines with a longer pay back period), which challenges cash flow-based financing. Additionally, contract-based financing becomes very important with these shifts in ownership and responsibility. What makes these business models different from already existing product-service-systems is the shift in underlying products (for example low capital (non-) consumables) and B2C markets. Consequently, there exists a need for financial solutions and ready to use product-as-a-service contracts for low capital products and B2C markets. Moreover, predicting the success of this new product-market combination is difficult, meaning the risks for investors are unclear and therefore perceived as high.Circle Economy and Sustainable Finance Lab believe this report is just the beginning. Now that the challenges are clear, the aim is to make those first circular deals by creating the necessary conditions and financial- and legal structures to invest in circular business and chain collaboration. Support by a more diverse financial landscape is crucial and can be increased reinventing equity- and debt instruments and by including innovative financial technologies (blockchain, peer-to-peer lending, crowdfunding platforms etc.). We believe it is time to pave the way by designing financial structures that elevate long-term thinking and chain cooperation.