Banking on a Circular Economy

History has revealed again and again that living beyond our ecological means proves disastrous. The Mayans; the Norsemen; the people of Easter Island: the collapse of these civilizations is in large part attributed to their overexploitation of natural resources.

Today, humanity risks a similar fate as the world’s growing population places exponential pressure on the planet’s diminishing natural resources.

A global imperative

Our natural resource budget is in deficit, threatening the health of our global society, our planet and our economy. It’s estimated that humans are using natural resources 1.7 times faster than our planet can regenerate. In fact, by July this year, the world had already burned through its raw materials ‘budget’ for the entire year.[1]

We must find new ways to use natural resources, materials, and commodities more efficiently; and establish alternative models that create shared economic and ecological value. We must bend the curve of a take-make-dispose economy to a circular economy, where economic growth is decoupled from the consumption of raw materials.

In order to achieve this paradigm shift, we need to reconsider everything from how we design products and what we do with them when we’re done, to new business and financing models that will propel a circular economy.

But this isn’t just about reducing harm and risk to our planet—the societal and economic benefits are numerous. Resource efficiency can lower material costs and reduce pricing volatility; reduced dependency on resources extraction could reduce geopolitical tensions; and applying circular economy principles could unlock up to €1.8 trillion of value for Europe’s economy alone.[2]

Shifting to circular models

Transitioning to a circular economy will require a fundamental shift in the way assets are consumed and managed. For instance, the shift from selling products to selling services is already becoming commonplace, whether we consider household appliances, vehicles, or IT equipment. These as-a-service models help customers overcome the common barrier of high capital expenditure and enables providers to retain ownership of products to optimize use and increase longevity and durability.

At HPE, our consumption-based IT models called HPE GreenLake are already optimizing the efficiency of our customers’ data centers and infrastructure. Customers typically overprovision by 48% for computing and 59% for storage, resulting in costly financial and environmental waste from unused IT equipment. HPE GreenLake resolves this by enabling customers to use only the IT resources they need, resulting in 30% CapEx savings from avoided overprovisioning.[3] Given that HPE retains ownership of the IT assets in a service-based model, we also have the ability to take back the equipment at its end-of-use and refurbish it for a second or even potentially a third life.

Customer demand for these service-based models is booming. HPE GreenLake now has $2.5 billion under contract, with more than 600 customers, and we recently announced our plan to deliver our entire portfolio as a service by 2022. And with HPE maintaining ownership and chain of custody for these IT assets throughout their lifecycle, we have the ability to extend the useful life of our products by refurbishing returned equipment and remarketing to customers that may not need the very latest generations of IT.

Financing the circular economy

While the transition to a circular economy will disrupt traditional models of finance with new challenges for our modern economic systems, it will also create significant new opportunities to generate long-term value. Financial institutions can anticipate future disruption by considering the Earth’s resource budget in their decision making: identifying where the linear risks are hidden in their own portfolios—such as those related to resource scarcity and volatility—and creating new financing options for companies committed to sustainability.

For instance, we have seen a growing trend for corporates to use financing rates as leverage to drive progress on sustainability targets. Walmart teamed up with HSBC this year to offer its global suppliers improved financing rates tied to their sustainability performance, while Royal DSM[4] has secured a €1 billion revolving credit facility with interest dependent on the company reducing its climate impacts.

There is both a responsibility and an opportunity for financial institutions to actively assess the companies in which they invest, evaluating their societal and environmental performance and their resilience to meet these challenges. Evidence shows that clients who lead on environmental, social, and governance (ESG) management exhibit better financial performance and better credit ratings—suggesting that directing more assets and capital to these businesses will create a healthy portfolio for banks while accelerating the transition to a low-carbon and circular economy.

To capture this opportunity, circular thinking needs to be baked into the training of employees in the financial industry, learning to think in a longer time horizon and consider implications across the entire product lifecycle. Banks that don’t understand circularity will find themselves less competitive, both in meeting the needs of their existing and future clients, and in helping to build a more sustainable world.