Circular economy is an economic system which contrasts with the linear economy. In the linear economy, companies extract natural resources, make something out of them, pass the product on to consumers for use, only for the product eventually to be discarded. In the circular economy, producers and consumers avoid waste and extracting new natural resources. Instead, they reuse/repair products.
Circular economy takes the “line” in the linear economy, shortens it, and bends it into a circle. That’s how Liesbet Goovaerts, an engineer in advanced materials at the European Investment Bank (yes, we do have engineers working at the bank, and, yes, we do have an advanced materials division), elegantly explains it.
Liesbet is joined on this episode of ‘A Dictionary of Finance’ podcast by Arnold Verbeek, a senior advisor in the Innovation Finance Advisory division of the European Investment Bank.
The process they describe can also be called a closed loop.
Together they explain how virgin raw materials (these are materials, or natural capital) are extracted for the very first time, and why it’s better to reuse secondary raw materials, which are salvaged from an existing product. We also learn what cradle to cradle thinking is (bringing the product or its parts back to the cradle of its initial production). This is also sometimes called eco-design.
Turns out there is also a strong business case in the circular economy. Hedging yourself against price fluctuations of raw materials, for example.
When circular economy companies go to banks to seek financing, banks often overlook these aspects, and instead concentrate on the more novel features of the circular economy businesses. The fact that, for example, they may be producing more durable goods and thus have a lower turnover but a more devout client base. Or that instead of selling equipment they lease it, meaning revenue streams trickle in over time.
So what do you think circular economy experts would say when asked if they support the continuous re-use of economic textbooks from the 1970s in college classrooms today? They prefer them to be upgraded, instead. Find out why in the program!
If you do like a new podcast every now and then, however (we really do our best not to extract much of virgin raw materials into their production!), subscribe to A Dictionary of Finance! You can do so on Acast, Spotify, iTunes and everywhere else you get your podcasts.