Circular finance is on the rise
"The tide is changing for the financing of circular projects," believes Joost van Dun, ING Circular Economy Lead. "Climate change and Covid-19 are an incentive to close supply chains locally."
According to many start-ups, the financial market remains reluctant to invest in their products and business models. Why?
Joost van Dun: "Start-ups are the pioneers of the circular economy. They come up with innovative products and ideas and inspire traditional companies to step up to the mark. But it is true that the financial market is cautious. Supporting start-ups financially - whether they are circular or not - is generally challenging for several reasons.
First, you can't fall back on your experience with similar projects, because circular companies make innovative products or offer services that don't or barely exist. This makes it more difficult to estimate whether it will catch on.
That is why, as a financial institution, it is important to gain sufficient knowledge about the circular economy. We talk to our clients a lot about this subject and we have, for example, published some studies in which we have analysed the circular economy."
"Moreover, the circular model product as a service - instead of selling a product, offering a service - brings new risks. If you sell a product as an entrepreneur, you immediately receive money. In an as-a-service model, the money comes in smaller amounts over a longer period of time.
If payment is in proportion to use (pay-per-use), it is important to properly estimate how often the product will be used. We examine for entrepreneurs how robust these estimates are, which purchase contracts have already been concluded and how flexible they are."
"At the same time, the classic, linear economy also entails risks. You can be left with stranded assets, financing in operating assets or projects that may be redundant in ten to fifteen years' time. For a long time, financial institutions were blind to this, but in the meantime minds have matured."
Do banks like ING invest in circular start-ups?
"We are responsible for a lot of our customers' savings, so we cannot invest in initiatives with a very high risk profile. That is more the domain of venture capital, for example. Start-ups that we cannot finance ourselves, we introduce to our Private Banking customers, for example. These are often entrepreneurs themselves who are looking for investment targets and are willing to accept a higher risk."
"That does not mean that we turn our backs on circular start-ups. We support them in other ways. In Belgium, for example, we have supported around 40 circular projects since 2018 with our ING Fund for a more circular economy, managed by the King Baudouin Foundation."
How are circular companies supported?
"Companies that have outgrown the start-up and scale-up phase, we can support with our regular financial instruments, such as loans, leasing or supply chain finance. But increasingly we are also providing green financing to fund circular activities. For example, we offer our clients a green loan or help them issue green bonds that comply with the Green Bond Principles.
Recently, we assisted chemical company BASF in issuing its first green bonds. They used the money raised to develop new innovative technologies for (chemically) recycling plastic, among other things.
To cover the higher risk of new circular business models, we have the Sustainable Investment Fund. This is a €100 million fund to support scale-ups with risk capital, such as subordinated loans or by investing in a company or project ourselves."
Are there incentives to help traditional companies make the transition?
"In 2019, we have borrowed €200 million from the European Investment Bank. With that money we can give companies a reduced interest rate on the loan they use for sustainable investments in circular business, the sustainable buildings, the energy transition, sustainable mobility, agriculture etc."
"In addition, we offer the Sustainability Improvement Loan. Such a loan is linked to certain sustainability objectives. These can also be circular KPIs, such as zero waste. If the company achieves these objectives, it receives a discount on the interest rate. Otherwise, it has to pay a surcharge."
Are there international rules on financing the circular economy?
"In 2018, we at ING together with two other banks developed the Circular Economy Finance Guidelines. In it, we defined what exactly we mean by the circular economy and its financing. After all, it is important that we all speak the same language when financing circular initiatives.
The European Commission has built on this to launch its own categorisation for the circular economy in March 2020. That system will serve as an input to the European Taxonomy for Sustainable Finance, a tool to help classify activities as sustainable. That taxonomy comes into force this month. Circular activities will be added in December 2022."
What can accelerate the transition to a circular economy?
"The circular economy is slow to take off. The markets for used materials are still relatively small and the costs of developing circular propositions relatively high. Companies need to set up tracking systems to find out the origin of their raw materials, cooperate with partners, purchase new facilities ...
Circle Economy's Global Circularity Gap Report shows that our global economy is 8.6% circular. Two years ago, this was still 9.1 per cent. It seems like we are going in the wrong direction.
And yet traditional companies understand the need for a circular business model to combat climate change. The European Green Deal can provide that extra push. Companies that want to sell their products on the European market will have to comply with strict rules. For example, the products will have to be made partly from recycled materials, the materials will have to be recyclable, and the consumer will have a right to repair...".
Could Covid-19 throw a spanner in the works?
"The pandemic could be an extra incentive. Everyone agrees that we have become very vulnerable by moving essential production chains outside Europe. So there is a renewed awareness to produce more locally and to keep raw materials in circulation as long as possible."