Interview with circular finance expert: How to make circular business models work
Today, circular projects face hurdles due to their perceived risk and lack of financial track record, deterring investors and banks. Yet, embracing circular economy initiatives can offer competitive advantages. We sat down with Marvin Nusseck, senior strategist at Circle Economy Foundation, to learn more about attracting funding to circular economy projects in Europe.
What are some of the common challenges circular projects face today?
The fact that circular business models are new and innovative often makes them seem risky to banks, as they lack a track record. Lenders prefer to work with something that has already proven successful. In addition, circular business models often imply higher initial investment costs, for example, when a company first needs to purchase the products it wants to rent out (Product-as-a-Service (PaaS) models). This also creates another challenge for PaaS businesses. Because the company retains the ownership of the assets it leases, the balance sheet swells and banks aren’t happy with this as it seemingly has implications on their liquidity.
Why should investors invest in circular economy projects?
A lot has been said about the possibilities the circular economy offers, but I’d like to talk about risks that it can help mitigate. The first risk is compliance. In light of the upcoming Corporate Sustainability Reporting Directive (CSRD) and other European regulations, investors will soon have to think about the circularity of their investment portfolio. Starting this process now will ensure compliance in the years to come.
The circular economy can also help manage financial risks. This could be supply risks for materials that only one single country can supply. Also, as imposed taxes on carbon emissions have shown, in the coming years, virgin materials might also be taxed. This would give circular businesses a competitive edge. With all these in mind, investors need to take a fresh look at the circular business models and find innovative ways to finance them, for example, by creating new risk assessments and new valuation systems.
How could businesses, governments and financial institutions collaborate more effectively to drive circular economy investments?
Financial institutions need to be clearer about what they expect from businesses and investments. For example, what data should businesses be collecting to prove that they are circular? What long-term strategies are expected from them? There is also a need for a common understanding of a circular economy's basic terms and better communication between financial institutions across the investment chain and between early and late-stage investors who do not yet speak the same language. Once the financial institutions have done that, businesses can start collecting the right data, keeping in mind the upcoming legislation, for example, the CSRD, the EU taxonomy for sustainable activities and Sustainable Finance Disclosures Regulation (SFDR). The more data businesses collect, the easier it will be for financial institutions to provide funding.The government’s role then will be to level the policy playing field because, as we see, virgin materials are still cheaper than secondary ones. They can do this by cutting support for virgin materials like fossil fuels or even imposing taxes on them, as well as introducing subsidies for secondary materials. In other words, by including costs for society and the environment in product prices, governments can make sure prices are more accurate, creating a level playing field for circular business models.
Why is project development assistance needed for circular projects in Europe?
Project development assistance addresses the problem of not having enough bankable circular projects in the pipeline of financiers. There’s a lot of money available in the EU, especially from the public sector, but it doesn’t find its way to projects. And I think there are two reasons for this. The first one is that a lot of businesses practising circular economy principles do not yet identify as circular. The circular economy is still a niche topic and not yet recognised as a must-have for a sustainable transition.
The second problem is that businesses that do identify as circular struggle to attract investment. Usually, they're new, innovative ideas and financiers are always very cautious about novel concepts without a track record. These project development assistance mechanisms also help the projects to understand the problems financiers are facing and hence can support such circular business models to make them more attractive to investors.
What is unique about the DEFINITE-CCRI approach to PDA?
The DEFINITE-CCRI project brings together multiple partners and multiple perspectives. It combines financial, circular economy and citiy expertise, which allows for tailoring assistance to different needs. This multi-stakeholder approach is quite unique because project development assistance is usually provided by just one organisation.
What will be DEFINITE-CCRI’s greater impact?
One of the project’s deliverables is creating public methodologies, for example, for financial due diligence. These blueprints will be publicly available and could be used for all kinds of projects. Hopefully, they will create more clarity about what is expected from businesses and projects. This will benefit both circular businesses and investors, allowing them to ramp up investment into innovative projects.
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