Circular financing is a new and exciting research area that covers how financing, financial markets and financial actors are affected by a transition from a linear to a circular economy in theory and practice, at all levels of the economy.
At the micro level, the individual companies and the financiers are affected. As companies increasingly switch to circular business models, and especially those that involve retained ownership of the product, so-called product-as-service or functional models, the conditions and need for financing will change. Maintaining ownership of products for rental or functional sales in multiple use cycles over a long period of time instead of selling directly after manufacture or possibly after a shorter period in stock, means that the manufacturing company's balance sheet becomes larger (more capital is tied up on the asset side) and that cash flow changes. It decreases in the short term, but increases in the long term. The company's financiers - both internal (owners) and external (banks and other financial institutions) - must understand the changing needs and how processes, routines, risk assessments, evaluation criteria, etc. are affected by it.
At the meso level, this in turn affects how manufacturing companies and financiers collaborate, how they share information and data, and the need for transparency to be able to assess risk and opportunities across a business ecosystem, which also includes customers' customers.
Financial markets, financial actors and financial instruments at macro level will also be affected. If the real economy becomes more and more circular and is based on principles of closed material loops, slow material flows and long product lifetimes, then these principles need to be reflected also on the financial and monetary side, so that these flows become more long-term and value-creating
There are many new exciting angles to explore regarding the role of finance in a circular economy. Please contact us if you want to know more.