The “circular economy” is now a must. For finance, too.

Moving forward, The circular economy is the only way to safeguard the environment. There is a cultural change that is increasingly involving families and businesses. And which ultimately pays off, both for the savers and for the credit world.

I am a boomer. In the sense that I was born in the early 1960s, at the height of the economic boom. However, at the same time, it does not mean that I should be taken to the scrap heap. At least, I think so. On the contrary, I may have been lucky enough to observe many changes (negative, of course, but also positive) in the way we go about our daily lives. For example, when I was growing up, we did not pay any attention to the sorting of rubbish. In my block of flats, on each floor, there was a flap from where you could throw glass, plastic, wood, leftover food, anything, down into the waste bin in the yard.

It is different now. Although there is still a long way to go in terms of awareness and attention, the circular economy is now the way everyone wants to build a better future. Above all, to leave a better, more well-preserved planet to future generations. So what is it exactly? According to the European Union’s definition, ‘the circular economy is a production and consumption model that involves sharing, lending, reusing, repairing, reconditioning and recycling existing materials and products for as long as possible‘.

In other words, the life cycle of products is extended. This is the opposite of the traditional linear economic model, which is based on the pattern ‘extract, produce, use and throw away’. The traditional economic model depends on the availability of large quantities of readily available and cheap materials and energy. For some years now, the European Parliament has been calling for “measures also to be taken against the planned obsolescence of products, a strategy characteristic of the linear economic model”. Think, for example, in particular of mobile phones and household appliances.

Let us try to get a little help from some quick and essential impact videos to give us a clearer idea. In this clip from the McArthur Foundation – a non-profit organisation from Chicago that supports those who are seriously committed to the environment – you can see an insightful distinction between the circular economy and the linear economy.

The Culture to Grow

Nevertheless, we are still far from an ideal scenario. For example, as revealed by Cop28 (the 28th United Nations Climate Change Conference) last December in Dubai, national planning to adapt to climate change and projects subsidised by multilateral climate funds are increasing. However, in developing countries, the financial needs for adaptation exceed current financial flows by more than 10 to 18 times. So there is a need for increased international commitment and cooperation.

Just think: in the EU, more than 2.2 billion tonnes of waste are produced every year. The EU is updating its waste management legislation to promote the transition to a circular economy. In March 2020, Brussels had already presented, under the European Green deal and in line with the proposal for the new industrial strategy, the Action Plan for a New Circular Economy which includes “proposals on designing more sustainable products, reducing waste and empowering citizens, such as through the ‘right to repair'”.

Finance

There are also competitive advantages in finance, both for operators and savers. “The circular economy offers the financial sector an important opportunity to meet its climate commitments and other environmental and social goals,” explains the McArthur Foundation, “while tapping into new and improved sources of growth and long-term value creation. The numbers also help to understand: “Almost half of the emissions that cause climate change come from the way we produce and use products and food. A circular economy,” the McArthur experts go on to say, “gives us the tools to tackle climate change and biodiversity loss together. It can scale rapidly across sectors to create value and jobs while increasing the resilience of supply chains and offering huge potential for economic growth, estimated at EUR 1.8 trillion per year in Europe alone”.

“Finally,” they say from Chicago, “circular economy strategies can reduce investment risk and achieve higher risk-adjusted returns.
An analysis conducted by Bocconi University on over 200 European listed companies in 14 sectors showed that the more circular a company is, the lower the risk of debt default and the higher the risk-adjusted returns on its shares.”

In this teaser video for the #CircularEconomyShow on the circular economy and finance, curated by the Foundation you can hear some interesting thoughts from Paul Bodnar, Global Head of Sustainable Investment at BlackRock, one of the world’s largest asset management firms, and Davinah Milenge, Principal Program Coordinator for the African Development Bank’s Climate Change and Green Growth Department, who shares further insights on the circular economy investment opportunity in developing markets.

The example of “tyres”

A very practical case can give us an idea of the importance of the circular economy. It comes from AIRP, the Italian Tyre Retreaders Association. Around Christmas, it issued a note explaining that “the European tyre industry is going through a particularly worrying moment of crisis: in recent weeks there has been a series of reports about some of the world’s largest premium tyre manufacturers, which have announced production reductions, plant closures with related staff cuts, downsizing of management structures, lay-offs, and the selling off of brands. A total of ten production sites in Europe are to be closed, and forced to lay off workers.”

AIRP – the Italian Tyre Retreaders Association, expresses great disappointment and apprehension for the future of the European industry in the light of this situation. Why? “Without a doubt,” they explain in a note, “competition from low-cost products, as the manufacturers involved themselves have stated, has had a decisive influence, at least as far as the production of truck and bus tyres is concerned, combined with the situation of energy inflation that has affected European and Asian plants in a highly asymmetrical manner”.

The issue, according to AIRP, is clear: “The problem for the European industry is that it has to operate in a context of fairness, within the framework of stringent rules first and foremost regarding reuse, generating for each product a scientific index of recyclability and the circular economy in general.” The importation of dumped and cheap products has led to enormous damage from an environmental point of view, with the market adopting a disposable approach to tyres not only for trucks but also for cars, light transport and earthmoving equipment.

At a time of such crisis, according to Guido Gambassi, secretary general of AIRP, “it is of fundamental importance that the European institutions intervene to implement an appropriate regulation of the market with a focus on the circular economy, which is the only solution to achieve three strategic objectives: protecting the premium tyre industry and its competitiveness based on product durability and sustainability, preserving and enhancing the strategic asset made up of the know-how of tens of thousands of highly specialised workers, and defending the environment as a whole through the promotion of highly efficient and reusable products”.