SUPPORTING THE CIRCULAR ECONOMY TRANSITION THE ROLE OF THE FINANCIAL SECTOR IN THE NETHERLANDS ACKNOWLEDGMENTS
This report has benefited from the analysis, insights and ideas of many individuals with a keen interest in the circular economy. The team from Oliver Wyman is grateful to all who contributed their time and effort to provide guidance and support in the writing of this report. We particularly would like to thank our interview partners, survey respondents and the ABN AMRO team. The illustration was contributed by INK Strategy. EXECUTIVE SUMMARY
A growing and wealthier global population is straining economy. However, benefiting from this opportunity the biocapacity of our planet. In the densely populated will require substantial change on the part of most and prosperous Netherlands, we consume more than stakeholders and participants in the financial sector. three times what the Dutch ecosystem can produce, while globally we consume 1.7 times what the Earth can Financial sector support for circularity creates a produce. The current rate of resource consumption is virtuous circle. Financial institutions can hedge the risks unsustainable, both for society and for the businesses stemming from their portfolio of linear businesses while that now depend on natural resource consumption. capturing part of the upside potential generated by a circular economy. Better access to funding accelerates A sustainable level of resource consumption can the growth of the circular economy, and improves the be achieved by moving away from the linear, economic equation of circular businesses. This, in turn, “take‑make‑dispose” economic model and towards alleviates investment and credit risks and provides more a circular economy based on the principle of sustainable returns. “reduce‑reuse-recycle.” Underpinned by a move to renewable energy, the circular economy relies Providing access to finance, especially for innovative on products and services that minimise waste and, circular startups and SMEs, is crucial to the therefore, environmental damage and resource innovation ecosystem. Drawing on a survey of 50 depletion1. More concretely, circular businesses circular companies and interviews with 30 stakeholders are “closing the loop” in supply chains by reusing across the Dutch circular economy ecosystem, this end‑of‑lifecycle products as raw materials, sharing idle report recommends concrete measures that can be resources, using renewable resources, or extending the taken by corporates, institutional investors, banks, product lifecycle. insurers, and the government to capture value and expedite the flow of capital into the circular economy, in order to create a viable ecosystem. The Netherlands is fertile ground for circular growth. Circular innovations and business models are beginning to emerge and thrive in an urbanised and Circular startups will require an estimated environmentally conscious environment. Estimates €400–500 million in risk capital over the next five of economic contributions of the circular economy vary years. At the moment there are a few hundred circular significantly, but all point to substantial change by 2030: Dutch businesses, most of which are in the pioneering a contribution of €6 billion to €30 billion to Dutch GDP, phase. Startups in particular are hindered by a lack of and the creation of 15,000 to 80,000 new jobs2. Changes reasonably priced risk capital (such as equity). Only on this scale will create many winners and losers in a part of this demand is expected to be covered by established industries. traditional risk-capital providers.
Aside from moral arguments, there is a strategic and Circularity is a CEO agenda topic. To drive circular economic case for providing access to finance to innovation, circular startups require additional risk innovative circular startups and small and medium-size capital and business support. Corporates stand enterprises (SMEs) as a growing segment of the Dutch to benefit significantly from providing a “path to
Copyright © 2017 Oliver Wyman 1 profitability” for early-stage companies, for example by financial support) in the early stages of financing when offering venture capital. To reduce linear risks and create loans are simply the wrong funding instrument. a sustainable business model, circularity should be part of the corporate strategy. Moreover, the emerging risks of the circular economy will provide insurers with the opportunity to develop The government can facilitate access to risk capital new products both for circular businesses and funds by increasing market transparency and offering consumers (such as insurance products for individuals additional incentives to funding providers. Both using sharing platforms, or new insurance models for the EU and the Dutch Government have identified the products consumed as a service). circular economy as an important growth area with high societal impact. Significant EU grants and subsidies have Institutional investors should make circularity a been allocated to circular initiatives. New institutions priority in their impact investing agenda: Fully circular such as a Nederlandse Financieringsinstelling voor corporates have yet to emerge, but a corporate trend Economische Ontwikkeling (NFEO) should have a towards diversifying away from linear businesses is mandate to address the equity funding gap for startups beginning to appear in the Netherlands. Corporates as a relevant part of its wider mission. stand to benefit most from an early move to circularity but transition costs are complex to determine. As Banks should build expertise in circular business responsible shareholders of corporates with long-term models and develop innovative ways of mitigating liabilities, institutional investors should build expertise, their risks to make them “bankable.” As startups and help corporates further their circular strategies. become SMEs, they normally begin to access bank Circularity should not be seen as a separate effort and lending. As is the case in other innovation markets with can be built into the existing Sustainable Development a large technology component, bank funding for the Goals investment strategy of most institutional circular economy is more complex. The cost of assessing investors, in particular Goal 12. Additionally, institutional creditworthiness through established procedures is out investors can stimulate innovation by increasing the of proportion with the relatively small size and significant allocation to venture-capital funds with a sustainable risk of the loans. investment mandate.
Given the likely growth of circular business models, This report discusses what different stakeholders, however, banks should see this effort as a strategic including financial institutions, corporates, and the investment that can generate top-line growth and government can reasonably do within the current attractive economics. Examples could include obtaining commercial market setting; for instance changes in guarantees or insurance for cash flows and supply‑chain the tax or subsidy schemes are not covered. The main risks or reviewing collateral eligibility criteria to include report is flanked by fictional stories in the prologue circular technology. In addition, banks are ideally and epilogue to stimulate thought. positioned to introduce circular businesses to their clients and third-party investors (and government
Copyright © 2017 Oliver Wyman 2 CONTENTS
PROLOGUE: THE CIRCULAR CRISIS OF 2040 4
1 FROM LINEAR TO CIRCULAR ECONOMY 9 1.1 The danger of continuing the same path 10 1.2 Definition of the circular economy 11 1.3 Emergence of the concept 12 1.4 Economic gains from a circular economy 13
2 THE NETHERLANDS AS A LEADER IN THE CIRCULAR ECONOMY 17 2.1 The EU’s circular economy package 18 2.2 The circular ambition of the Netherlands 20 2.3 The importance of local authorities for circular ecosystems 22 2.4 New business models are being tested 22
3 FINANCING THE CIRCULAR TRANSITION 29 3.1 Types of funding required across business lifecycle 30 3.2 Startups: financing is the number one concern 31 3.3 The crucial role of the banking sector in supporting SMEs with circular ambitions 38 3.4 Corporates: the financial sector as a partner 38
4 CALL FOR ACTION: FINANCING THE CIRCULAR ECONOMY 43 4.1 A joint effort to facilitate access to finance 44 4.2 Corporates: drive circular innovation, including by supporting small innovative companies 44 4.3 Institutional investors: leverage position as responsible shareholder to make circular strategy a priority 46 4.4 Banks: engage with SMEs to overcome knowledge gap on circular business models and risks 47 4.5 Government: stimulate an innovation-friendly and transparent financing landscape for new businesses 49
EPILOGUE: CIRCULAR VICTORIOUS 52
APPENDIX A. INTERVIEWS 56
APPENDIX B. REFERENCES 58
APPENDIX C. RESULTS OF SURVEY OF CIRCULAR BUSINESSES 62
Copyright © 2017 Oliver Wyman 3 PROLOGUE: THE CIRCULAR CRISIS OF 2040
UTRECHT, 5 JULY 2040 Daan van der Linden put the bags into the back of his old Volvo as his wife Julia bundled their kids into the back seat. He emptied the last of his diesel canisters into the fuel tank and got into the driver’s seat. He could sense Julia’s anxiety. “It’s okay,” he said quietly.
“But what if we’re caught?” she said. “The fine for driving a diesel car is €20,000. We should have handed it in.”
“It doesn’t matter. We’re leaving. We’ll dump it at the airport.”
Daan drove even slower than usually. It wasn’t just that the pot holes were getting worse. The trip felt like a funeral procession, except the corpse wasn’t in the back of the car; they were driving through it.
No one spoke. Julia and the children stared out the windows at the world they were leaving. It was astonishing how quickly things had fallen apart. With so much government spending going into lifting the dykes against rising sea levels, everything else was neglected. The Netherlands was starting to look like a third-world country. And it was not only the roads and public buildings. The private homes they drove by were also dilapidated.
As the cost of oil and, hence, of international trade had begun to escalate dramatically in the late 2020s, small trading nations such as the Netherlands had been particularly hard hit. The derelict tankers, now makeshift flood defences outside Rotterdam harbour, were a stark visual reminder of the “end of trade.” The emergency 300 percent tax on electricity introduced in 2035, and never lifted, had been the final straw. Wages had fallen 50 percent in the last five years. “Better poor than dead” was the governing party’s re-election campaign slogan. Daan had once agreed. Now he wasn’t so sure.
The direct route to Schiphol airport would have taken them through Maarssenbroek. But Daan took a route around it, joining the A2 several kilometres to the north. He wanted to avoid the Maarssenbroek tent city. It had been safe enough when occupied only by “water refugees.” But since destitute Dutch natives had started moving in, ethnic conflicts had made the place dangerously violent. Road blocks and car jackings were not uncommon.
Five kilometres from Schiphol, they drove past Trashboarding World. That was something Daan would miss. Snow skiing had ended in 2031 with the final melting of Europe’s snow caps. But the 2028 international treaty banning the export of waste meant that great mountains of it were building up in the Netherlands, mainly on what were once dairy farms. It didn’t take long for frustrated snowboarders to pounce on the opportunity and Daan was the over-40s Dutch champion.
It was dark by the time they arrived at Schiphol. Daan turned off the headlights and drove slowly down a slip road that ran behind a large windowless refugee processing centre. They parked and removed their luggage. Daan left the keys in the ignition as a gesture of goodwill to whomever had the job of destroying his car.
It was only a two hundred metre walk to the terminal but they were soaked in sweat when they arrived. Though 10:15 p.m., it was still 28 degrees Celsius.
Copyright © 2017 Oliver Wyman 6 “Where are you travelling to this evening?” asked the automated check-in kiosk.
“Stuart Island, New Zealand,” Julia replied. They had been accepted under New Zealand’s immigration points system, which favours young families with highly educated parents. They had considered the new colony on Antarctica but there were stories of lawlessness, and the economy was almost entirely agricultural, which was of no use to a pair of research scientists. At latitude 47 south, Stuart Island would be fine for a few decades at least.
As required, they had arrived eight hours before their flight. The physical examinations and security interviews went quickly, leaving them them with three hours in the departure lounge. They sat in a row of chairs near to the Green Bank bureau de change. Its shutters were down because the bank had gone into receivership in May, another victim of the widespread business loan defaults.
Daan could not help but feel some satisfaction from it. After finishing his PhD in chemical engineering in 2023, he had started a business making small power generators for homes. The technology, which linked solar and waste energy, was revolutionary. He had used a loan from his parents to get started. But when he needed funding to begin manufacturing on a commercial scale, he couldn’t find it. With energy prices still low, no one had seen the value in businesses based on efficient resource use. Green Bank had been the last to reject him, though it was then called the Commercial Bank of the Netherlands. Its recent rebranding had apparently done the bank no more good than it had done the environment.
The sun was rising, which meant it was time to board. As the family approached the gate they paused for a moment to look out the window. Huge zeppelins hovered over what was previously a runway, 200-metre-long cigar shaped balloons with 50-metre passenger cabins hanging below. Fuel costs and CO2 emission charges had bankrupted the last European airline in 2030 and two years later the Dutch electorate had voted to ban all airplane travel.
“How long will the trip take, Mummy?”
“It all depends on the winds, darling. A week or two, probably.”
They walked down the stairs from the terminal, across the tarmac and up the stairs into the cabin of their Air New Zealand zeppelin. From his seat Daan looked back at the terminal. “We missed our chance,” he muttered, as the zeppelin was untethered. When they began to float away, he started imagining how it all could have turned out so very differently.
UTRECHT, 5 JULY 2040 Daan was waiting outside when the driverless electric van arrived. He loaded a large rolled carpet into the back as a couple stepped out of the front doors. They looked bewildered.
To be continued…
Copyright © 2017 Oliver Wyman 7
1. FROM LINEAR TO CIRCULAR ECONOMY
A circular economy is an industrial system that is restorative or regenerative by intention and design. The economic benefit of transitioning to this new business model is estimated to be worth more than $1 trillion in material savings by 20303
Ellen MacArthur Foundation
Waste equals food. Products can be designed from the outset so that, after their useful lives, they will provide nourishment for something new
William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things
In a business-as-usual scenario, the ocean is expected to contain one tonne of plastic for every three tonnes of fish by 2025, and by 2050, more plastics than fish (by weight)4
Ellen MacArthur Foundation
The circular economy discussion is progressing much faster than the first dialogues around sustainability 20 years ago. It is a topic that combines sustainability, innovation and business sense and gets people excited
Head of Sustainability, Dutch bank
The circular economy can be an important export product for the Netherlands for the next ten years
Circular economy expert, Dutch bank This chapter explains 1. The background and foundation for the circular economy 2. Economic benefits of the transition from linear to circular 1.1. THE DANGER OF CONTINUING THE SAME PATH
As population grows and becomes more affluent, its consumption of scarce resources increases. This idea is not new. In 1798, the British economist Thomas Malthus contrasted population growth with the ability of the earth to sustain it. In the early 1970s, the IPAT equation was developed by a group of American scientists5 in an attempt to describe the environmental impact as a function of population, affluence and technology.
Environmental impact = population size x consumption/person x damage/unit of production
The environmental impact can take a variety of forms, such as resource depletion or air pollution. Currently, five trillion pieces of plastic, weighing more than 250,000 tons, are floating in the sea6, and 79 percent of plastic is discarded. By 2015, we, humans, had created a cumulative 4.9 billion tons of plastic waste7.
Exhibit 1: Yearly net resource consumption (measured in number of earths/Netherlands; 1961–2013)
ECOLOGICAL FOOTPRINT VS. BIOCAPACITY
EARTHS NETHERLANDS
3.4 Netherlands
1.7 earths
1 1
1965 2005200019951990198019751970 2010 1965 2005200019951990198019751970 2010
Copyright © 2017 Oliver Wyman 10 The increasing environmental impact of a growing population that has become more affluent can also be illustrated by the concept of Earth Overshoot Day. (See Exhibit 1.) It marks the day that annual resource consumption exceeds the Earth’s capacity to regenerate those resources. In 1970, annual consumption roughly equalled regenerated resources, meaning Earth Overshoot Day fell in the month of December. In 2013, consumption exceeded regeneration by 1.7 times8, meaning that Earth Overshoot Day fell in the month of August. As a highly developed and densely populated country with few natural resources, the balance for the Netherlands is significantly worse than the global average.
Using current predictions, the global consumption of natural resources is expected to triple by 20509. This is driven by a growing global population (expected to reach 8.5 billion by 203010) and increasing affluence levels11.
From these predictions and the IPAT equation, it follows that the only remaining factor to balance the environmental impact of a growing and more affluent population is technology, which is one of the main drivers of the environmental damage per unit of production. The circular economy can be a driver of the technological change required.
1.2. DEFINITION OF THE CIRCULAR ECONOMY
The circular economy is sometimes called the “reduce-reuse-recycle” model to contrast it with the current, linear “take-make-dispose” model. Current production and consumption processes use raw materials as inputs, produce goods, and then dispose of waste. The linear economy thus relies on a continuous supply of resources. The circular economy is instead a continuous development cycle that preserves natural resources and energy while optimising outputs and reducing the creation of irreversible waste.
Exhibit 2: From a linear economy to a circular economy
LINEAR ECONOMY CIRCULAR ECONOMY
Resource supply Resource supply
TAKE MAKE DISPOSE REDUCE REUSE RECYCLE
Materials Product Materials Product
End of life Minimal leakage
Copyright © 2017 Oliver Wyman 11 The most widely known definition of the circular economy is from the Ellen MacArthur Foundation:
“Looking beyond the current “take-make-dispose” extractive industrial model, the circular economy is restorative and regenerative by design. Relying on system-wide innovation, it aims to redefine products and services to design waste out, while minimising negative impacts. Underpinned by a transition to renewable energy sources, the circular model builds economic, natural, and social capital”12.
The Dutch government, in publishing its circularity objectives for the Netherlands, defines the concept this way:
“We are talking about an economy that provides for people’s needs without placing an unacceptable burden on the environment and without exhausting natural resources”13.
For the purpose of this report, we equate the circular economy with the five generally accepted types of circular business models14: •• Circular supplies15: Provide renewable energy, bio-based, or fully recyclable input material to replace single-lifecycle inputs into production processes •• Resource recovery: Recover useful resources or energy from disposed products or by-products •• Product life extension: Extend the working lifecycle of products and components by repairing, upgrading, and reselling •• Sharing platforms: Increase the utilisation of products by making their shared use or ownership possible •• Product as a service: Offer product access and retain ownership to optimise benefits of circular resource productivity The reduce, reuse, and recycle elements that underpin the concept of circularity are intertwined across the five circular business models defined above.
1.3. EMERGENCE OF THE CONCEPT
Following the 2014 World Economic Forum (WEF) Annual Meeting and accompanying publications16, the concept of a circular economy has gained considerable momentum.
Many elements of the circular economy concept have already been articulated over recent decades as part of broader political and societal programmes.
The 1992 Rio Declaration, which serves as the standard by which UN member countries create environmental policies, calls on member states to “reduce and eliminate unsustainable patterns of production and consumption”17. The UN’s Millennium Goals expand on this by adding the goals of reducing greenhouse gas emissions and retaining a planet whose resources are sufficient for the following generations18. More concretely, the currently articulated Sustainability Development Goals call for increased resource efficiency in consumption and production, sustainable management of natural resources, and substantially reduced waste generation through prevention, reduction, recycling, and reuse19.
Copyright © 2017 Oliver Wyman 12 Exhibit 3: Number of hits for “Circular Economy” on Google