Financing the Circular Economy (Research Proposal Sample)

Financing the Circular Economy
Student’s Name
Institutional Affiliation
Financing the Circular Economy
Executive Summary
The concept of the circular economy has been promoted by various business leaders and policymakers across the globe as an approach to sustainable economic growth. In the current industrial and information age characterized by rising global population, increased resource consumption, and growing environmental damage, there is a fundamental need for an alternative to the conventional linear growth model of “take, make, and dispose” to the circular economy with closed material loops and focused on “reduce, reuse, and recycle.” The circular economy provides multiple economic, environmental, and social benefits. Financing for the circular economy plays a crucial role in facilitating and accelerating the transition from the traditional business models. Applying investments to finance or re-finance the circular economy is crucial for organizations that wish to establish a sound circular business model. Previous studies on the resource-based economy framework have analyzed the financing of eco-innovation activities within the sphere of global business, but there is no definitive research on the resources required, the extent of financing, and financing mechanisms applicable to the circular economy. The primary objective of this paper is to determine the different financial resources applied to the circular economy by firms. It goes beyond previous research approaches to the study of financing the resource-based economy with the aim of extending knowledge in the field of financial resource provision for the circular economy.
Introduction
The linear model of production and consumption in which goods are produced from raw materials, sold, used, and then disposed as waste has dominated the industrial economy for the last two hundred years (Crocker, Saint, Chen, & Tong, 2018). Industrial activities have destabilized the natural ecosystem. Additionally, a growing global population and rising consumption of resources have posed a challenge to sustainable economic growth. The world population consumes 1.7 times what the earth is capable of producing (Mähönen, 2018). Environmental changes in the past were slow and localized, but current changes are occurring dramatically within a global context. The result of the current pattern of production and consumption coupled with technological advances and the idea of seemingly unlimited resources is an economic model where most of the goods consumed end up as waste. The model has many unsustainable side effects including the deforestation, water and air pollution, loss of biodiversity, ozone depletion, global poverty and financial and most importantly, material depletion (Larsson, 2018).
The environmental, social, and environmental problems are inter-related and in order to create a sustainable future, they would have to be resolved simultaneously. Unstainable and wasteful use of resources, prompted by the globalization of production and consumption have significant effects on the natural ecosystem. With the exponential growth in population, it is estimated that there will be 9.6 billion people on earth by 2050, and this will put increased pressure on the earth’s natural resource base. In the current linear economic system, business enterprises are not required to compensate for the environmental and social costs in their production, impliedly or explicitly. Negative externalities are not accounted for in the determination of the market price. A linear economic system with the tendency to encourage waste of natural resources and accumulate waste undermines sustainable development. As Boulding (1966, p.8) argues, such an economic system is “built around a flawed understanding of the physical possibility in the long run.”
33909003752850Circular economy 0Circular economy 190503752850Linear Economy 0Linear Economy To achieve a sustainable future, there is a need to shift from the linear economic system to one where the society and the economy would have to be supported by the earth’s limited resources (Larsson, 2018). The alternative system that reduces the rate of resource use and eliminates wastage is a circular economy. The circular economy is built around the principle of capital regeneration, be it financial, human, or social capital. The circular economy considers the earth as a closed system, with no exchanges of materials with the outside environment. There is a circular relationship between the economy and the environment where each product is designed such that its inputs can easily be re-circulated in the system in an effective, rather than efficient manner (Larsson, 2018). The circular economy also focusses on performance by advocating for the sale of service instead of products to reduce resource use. This resource-based economy aims at generating economic, social, and ecological value.
Business organizations across the world are faced with new challenges including price volatility and demanding customers and markets in terms of sustainability. They also have to deal with increasingly constrained physical, human, and financial resources (Schempp, Smits, & Piechocki, 2018). They, therefore, to separate growth and use of resources, and this calls for a new system of production based on the idea of “reduce, re-use and recycle.” The concept of the circular economy combines revenue with social impact enabling businesses to grow while being socially and environmental responsible.
According to Webster (2017), there is a need for sustainable business models that adopt the triple bottom line approach and put stakeholders at the core of business activities. The triple bottom line approach entails an assessment of business organizations on three aspects; financial, social, and environmental. Renowned American economist Milton Friedman argued that the owners or shareholders of the company were the only group of persons with the moral right to make claims on the corporation (Schempp, Smits, & Piechocki, 2018). However, the stakeholder theory, developed by Edward Freeman and which has become a widely accepted model, asserts that shareholders are not the only group of persons who can make demands on the corporation; other groups also have a moral right to make claims from the corporation. These groups are called “stakeholders” and they include customers, employees, debtors and creditors, and the community from which the business operates (Schempp, Smits, & Piechocki, 2018). Therefore, businesses have a moral responsibility to create shared value through the use of strategies that provide economic gains for the shareholders while enhancing the wellbeing of stakeholders.
Organizations should also adopt new business models that redefine how the organization creates, captures, and delivers value to all stakeholders. They need to consider the rationale for their existence and what constitutes value creation. This is the means to sustainable production and it has a direct impact on the financing of the business. Sustainable business activities imply producing goods and services in a way that meets the current societal and economic needs without robbing future generations of their ability to meet their needs. It implies using resources efficiently, sustainability in consumption and production, and working with local and international organizations to promote sustainable development. Ellen MacArthur and McKinsey Company in their report, Towards a Circular Economy (2013), indicated that the full implementation of the circular economy can yield 21.9% cost savings of the total raw materials used in production today. These annual savings in material use amount to $706 billion per annum. Businesses, therefore, have to look for opportunities for implementing new business models within the circular economy or partnering with organizations that have moved towards the circular economy.
Financial institutions have a crucial role to play in financing the circular economy. The transition from linear business models to the circular economy requires a vast amount of financial resources. Financial institutions could provide these resources, needed in creating, capturing, and delivering value to the stakeholders through business activities (Mähönen, 2018). Although the financial sector is not directly involved in the circular economy, it does, however, play a key role in the development of the circular economy through the provision of funds. Financial institutions have to mobilize different forms of capital to enable business transform their linear models to circular business models. The various forms of financing include equity finance, debt finance (green bonds), leases, factoring and supply chain finance, and crowdfunding.
Problem Description
The circular economy has enormous potential benefits and opportunities including promoting sustainable growth, environmental conservation, and social development mainly in terms of job creation. The circular business model creates opportunities for value creation by taking into account not only the financial gains but also the ecological and social impacts of business activities. The transition from the linear to the circular economic system entails corporation among supply chains as opposed to the traditional business models centered on exclusion of the seller and the buyer. Businesses interact with other businesses, consumers interact with other consumers, while business and consumers also interact with one another. As such, the output of one process is input to another. Eventually, the circular economy uses fully renewable, biodegradable, or recyclable resource ...