A report from Dutch bank ING has suggested that banks will need to better understand the value of materials in the circular economy when financing businesses.
Currently, assets will be written down to zero or a small scrap value over their economic lifecycle when assessing the financial requirements of a business.
But in a circular economy, banks will need to capture higher values in supply chains through upscaling or second hand markets and understand this added value in a business.
Banks will also need to accept ‘contractual comfort’ instead of the right of legal ownership over assets in case things go wrong.
While a cash flow based approach to finance, rather than an approach based on collateral values will be needed when assessing clients.
Although the circular economy will bring changes to the banking sector in terms of its business models, the report suggested that there are opportunities from the circular economy that will make it worthwhile.
The circular economy market is expected to generate 1% to 4% economic growth over a ten year period.
ING also said that banks are increasingly recognising the opportunities of sustainability, as clients that lead in sustainability are more innovative, show better financial performance and have better credit ratings.
By directing more assets and capital to sustainable businesses creates a healthy portfolio for the banks and helps them to facilitate a transition to a low carbon economy.
ING Bank vice-chairman Koos Timmermans in the introduction to the report wrote: “Recently, the international discussion about sustainability has taken a new course through the development of the concept of the circular economy. The circular economy goes beyond the intention of not harming the environment as the circular economy is restorative and regenerative by intention and design.
“It shifts the focus from a ‘take, make and waste’ way of production to a ‘reduce, reuse and recycle’ mentality. This shift spins off several commercial opportunities and business innovation.
“In that respect the circular economy is a very compelling business case of sustainability. Compelling because it materialises the financial, economic and environmental benefits and costs in an integrated way. And compelling because it is an appealing concept and easy to understand how all stakeholders, society and the environment can benefit from it.
“Despite the opportunities the transition towards a circular economy won’t be an easy one. It poses many questions and challenges for our clients and ourselves. To name just a few: What is the circular economy precisely and is it a trend to stay or a well intended hype? Does it require different business models in order to be successful? And if so, can the financial system finance these models?
“The purpose of the report is therefore threefold. First we want to identify the business opportunities of the circular economy. Secondly we want to explore differences in business models between traditional and circular businesses. If there are, the circular economy most likely also has an impact on finance. So the third goal is to explore its impact on banking activities.
“After all, as a forward thinking company we want to help and guide our clients to stay a step ahead in business.”