We have explored how circular business models can potentially transform our economy and reduce waste, and we learned how a multimodal approach to mobility might be the future of our cities. But what are the implications of these important shifts for the banking sector? Following this year’s Movin’ On world summit on sustainable mobility in Montreal, participants from HSBC shared their thoughts on the way financial institutions can help pave the way to a more sustainable and prosperous economic future.
Better financing for circular businesses
As the concept of the circular economy is entering the mainstream, there’s still some misunderstanding about the risks and opportunities associated with this disruptive model, as well as how to finance it. Dana Krechowicz, Senior Sustainable Finance Manager of HSBC Bank Canada believes that a cash flow-based approach to financing might be better suited for the circular model, since clients may no longer own assets that can serve as collateral. Backed by the borrower’s expected revenues, credit rating and enterprise value, cash flow-based lending will need optimization to make circular businesses more financeable.
Redefining contracts will become pivotal in financing this new circular economy. Instead of a right of legal ownership over assets, it might require the acceptance of a “contractual comfort” through supplier and consumer agreements specifying the terms of their business model despite the loss of legal ownership, Krechowicz believes. “And this isn’t just about banks. We need the support of accountants and lawyers to better understand how our clients make money, the value of what they do, and the very nature of things such as ownership and depreciation, which are all changing with the circular model.”
According to Krechowicz, creditworthiness needs more attention. In pay-per-use circular business, the supplier takes on a credit risk towards customers, and these products and services may also attract less creditworthy users. “We might need to differentiate risk premium in pay-per-use contracts depending on whether highly or less creditworthy consumers are using the product or service. By building a portfolio of different pay-per-use contracts, the risk of bankruptcy on portfolio level is minimized and it becomes less likely that all contracts lose value at the same time.”
We might need to redefine the very terms of business operations as well. Leasing arrangements can be explored for products with circular potential, while higher values can be captured in circular supply chains through upscaling or second-hand markets. “Manufacturers can also increase the residual value in their circular business case by designing their products for easy disassembly so that their costs are low and most of the valuable resources can be retrieved,” Krechowicz explains.
Banks will also have a larger role to play in terms of incentivizing businesses to adopt sustainable practices – whether it’s advising clients on the financial incentives required for end users to choose circular products and services over standard ones, directing more capital towards circular businesses either through lending or by creating new products to encourage investment in these models, or incorporating environmental and social costs and benefits into the development of financial business cases.
In the mobility sector, many industry leaders are now partnering with tech companies and service-oriented businesses to transform the way we move, especially in cities. According to Philippe Barbe, Global Head of Customer Experience, Global Banking and Markets for HSBC, the future of mobility will offer extraordinary possibilities for entrepreneurs, with large companies allowing small and medium-sized enterprises (SMEs) to enter their ecosystem – through infrastructure sharing, for example – and help them access larger markets and audiences, all the while benefiting from the agility and the innovative capacity of these SMEs. “One of our main roles is to serve as an intermediary between them. A core element of the multimodal approach is the ability to successfully bring together different public and private actors, partly through technology, and use data to create solutions that work for everyone. We want to be an integral part of the shared ecosystem of our clients, and we want to do so by offering financing options that respond to their needs and by finding the right investors to help them succeed.”
Encouraging best sustainable practices
The banking sector must also consider the greater awareness towards an urgent need for climate action. If such awareness is relatively new for both citizens and businesses alike, it’s an accelerating trend, explains Virginie Grand, Managing Director at HSBC France. “It’s the result of two strong impulses. First, regulators now impose a duty of vigilance on businesses with respect to climate change. Second, external stakeholders want increased consideration of sustainable practices in their investments. And finally, there’s social pressure: consumers don’t want models that respond to old ways of thinking and doing things.” This will inevitably mean increased pressure on banks, too, whether due to risks associated with the inability to repay loans because of the consequences of climate change, or the shifting business models of clients – like those provided by the circular economy – which require banks to adapt quickly in a fast-paced environment. “The issue of sustainability and how we respond to the challenges ahead are crucial for the health and prosperity of the business community, including for us as bankers. And they are a growing concern for the younger generations who want to live and consume in a different and smarter way.”
In the end, it’s a matter of sharing common values in order to turn principles into action. “We must all work together towards a larger, broader goal that isn’t just about scaling up or making things bigger. It’s about having a shared vision, something that people can dream about and strive for,” concludes Barbe.