Financial solutions for promoting recycling
The demand for various good and services associated with current patterns of economic growth is increasing, but the resources available to us are finite and limited. Businesses often find that they lack the critical mass and financial support needed to start large-scale efforts to substitute scarce resources or hazardous materials with cleaner, restorative or more regenerative options. Sourcing of secondary raw materials through recovery and recycling from end-of-life products also remains a challenge.
As a result, with numerous infrastructure projects being undertaken in developing countries such as India, it implies that at least for the foreseeable future, increased demand is likely to be met from virgin resources. This calls for a need to have recovery and recycling designed-in to all product categories & applications for decoupling economic growth from resource use.
Lack of adequate finance, in particular, also makes it difficult for businesses to explore product and service innovations across supply chain and integrating circular economy characteristics of designing out waste by converting it to value added products and designing a product for reuse. This calls for a need for investors and financial institutions to rethink and have a long-term vision to support and encourage such innovations. This vision will need to be supported by efforts on promoting standardization of secondary raw material which would encourage the businesses to substitute these for virgin resources without compromising on quality.
It is also extremely important to develop the idea of a product as a service that the customer pays for usage of on a long or short-term basis, rather than owning the product permanently. In this case, the product provider will typically have ownership throughout the product's lifecycle and will manage it right from the design, usage and maintenance stages to the reuse, remanufacture and recycling stages.
This model can allow closer relations with the customer, enhanced product development from closer feedback loops, provide greater business value to both parties and improve customer satisfaction. The appropriate business models with this idea will need to focus on greater facilitation and penetration of products that are viewed as services and the financial sector can play an active role in facilitating these business models.
The financial sector can explore and develop leasing arrangement for products and services that have integrated circular economy principles. They can partner with equity providers of a circular economy based business or design new pricing tools that incentivize setting up of such businesses. The financial sector itself can also set an example and create the demand for achieving scales in production through circular sourcing and procurement of infrastructure and equipment.
If we take the example of the automobile sector in India, the country is eyeing a shift from conventional internal combustion engine (ICE) based vehicles to electric vehicles (EVs) and there is a clear need to expand the role of finance. In the ICE category, the role of the financial sector is seen more at the end of life stage through the support it can provide to set up a reverse logistic network for procuring end of life vehicles (ELVs), exploring the use of green bonds to finance the recycling infrastructure, financing the capacity development of informal sector where much of the end-of life products are managed, and helping set up Producer Responsibility Organizations (PROs) to enable exercise of Extended Producer Responsibility (EPR).
However, the aggressive transition to EVs creates a potential for the financial sector to provide innovative financing solutions at other life cycle stages- from building domestic manufacturing capacities for EVs, financing bulk procurement by private players (such as Ola and Uber fleets) and institutions, offering innovative financial instruments to support power distribution companies and municipal corporations in greater deployment of charging infrastructure, all the way to helping set up recycling facilities that can handle end of life EVs and lithium ion batteries.
We can also learn from Europe where a Circular Economy Finance Support Platform with the European Investment Bank (EIB) was set up early this year. The platform brings together investors and innovators raising awareness about circular economy investment opportunities and promoting best practices among potential promoters, analysing projects and their financial needs, and providing advice on structuring and bankability.
Such a platform, if set up in India, can also help boost the Make in India and Startup India initiatives to engage in more responsible use of scarce resources, and contribute towards building a sustainable modern India. The financial sector can also extend support through the offering of different forms of capital taking into account the varying levels of risks linked to some of the unproven circular business models with risky technologies.