Circular economy, green financing the way forward
We can close the loop by bringing together ecology and economy, says Roland Berger’s Hani Tohme
THE fairly new concept of a circular economy – supported by green financing – is fast gaining importance given the current worldwide situation, including the many global warming events being witnessed particularly in the last few months in many places around the world.
“In our fight against climate change, we tend to ignore circularity and focus on carbon-dioxide emissions,” Hani Tohme, senior partner, head of Sustainability Mena (Middle East and North Africa) and head of Waste Management Global, Roland Berger, United Arab Emirates, tells The Business Times (BT) in an interview.
“However, the impact of circularity is estimated at 45 per cent on climate impact. Safeguarding resources is our first step to ensure that all national commitments towards climate change are met. A good example is the delay in manufacturing of windmills due to the scarcity of rare earth material. This tells us that circular economy is a prerequisite that we can’t ignore,” he adds.
“Moreover, circular economy is a concept that brings together ecology and economy – as such, businesses would take it more seriously as they would still meet their traditional key performance indicators (KPIs) of profitability and achieving the desired internal rates of return (IRRs) while meeting the planet’s KPIs.”
The circular economy model is based on giving organic material back to the earth and the non-organic material back to the industry. It is about closing the loop and avoiding creating true “waste”. In order to do that, people have to think of industries as a whole and not as silos. There is a need to create the link between the manufacturer, the seller, the transporter and the recycler.
According to Hani Tohme, there are 3 fundamentals that need to be achieved for circularity:
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- Change the design taking the end of life of products into consideration,
- Change the concept of ownership, allowing manufacturers and original owners of products to stay close to their material,
- Change the concept of material flow, allowing products to be looped back into the industry or earth.
A circular economy can be an instrument to tackle issues such as resource scarcity, climate change, and the problem of pollution. And there are some key building blocks of a circular economy.
“To achieve circularity, you would need to rethink the current status quo to enable economic and ecological savings,” says Hani Tohme. For this to happen, we would have to:
“Rethink the design” to better assess what product to use to limit waste at the end of the life-cycle; what technology to use, making sure the most efficient and the least energy-consuming one is selected; what source of energy to use, ensuring it has the least impact on the environment; and, in many cases, the best financial impact on the business, and so on,
“Rethink the ownership”, understanding who is responsible for the product consumption and disposal, how to raise awareness to limit the unnecessary consumption and improve reuse levers, and who will take care of it, etc,
“Rethink the transportation”, or to make the wise decision on collection and transportation, leveraging latest clean fuel sources (from waste, from agri-sources, from hydrogen and carbon), and maximising digitalisation to streamline routes and itineraries, thereby reducing redundancy,
“Rethink the material flow”, instating the correct waste management fundamentals to assess how to treat each waste stream; which technology is best to use based on the existing market characteristics; and what regulations need to be in place to enable appropriate treatment, reduce resources scarcity, and eliminate pollution.
For measuring the progress towards the building of a circular economy, different metrics can be set to track the progress such as the share of recycled materials in the raw material sourcing, share of clean energy used in production, share of clean fuel for transportation, recovered and recycled material rate, landfill diversion on a country level. All these factors need to be considered in the product life-cycle assessment.
Fundamental shifts
“Having said that, a circular economy is based on creating fundamental shifts in the behaviour and the way industries operate and therefore can’t be seen as the short-term impact. An analogy that is often used is when you place your kids in school, you don’t expect that they start generating a return the next year,” Hani Tohme tells BT.
“Instead, you would hope that after 18-20 years, your kids would be well positioned to become effective in society and, among other activities, they would be having a good and impactful job. Businesses have always been short-sighted, driven by monthly stock price or yearly budgets,” he adds.
“We have to break that thinking and focus on the long-term sustainability of businesses.”
As for the new field of green financing, he says that it can be defined simply as financial instruments where proceeds are used for green projects only. The main purpose of green debt is to address climate-change mitigation, natural resources depletion, loss of biodiversity and air, water and soil pollution.
Several standard financial instruments are currently used to finance green projects. This includes bonds, loans, sukuks (an Islamic financial certificate similar to a bond), and carbon market instruments.
“Industries have been built with the industrial era in mind. The more you produce, the better; the higher the profit, the better. Industries are not taking into account the indirect impact of their work on the environment,” he tells BT.
“When green financing is introduced, new KPIs that matter become a priority to the chief executive officers and the C-suite in general. Green financing would therefore shift behaviours to help economy in meeting ecology, as they are complementary rather than opposite.”
The possibility of green financing paying for waste management and recycling efforts is being looked into. However, many of the waste management activities and recycling efforts are not financially sustainable when compared to raw material production and subsidised sectors.
“When the financial viability in its current definition is not met, businesses and investors are not excited to push for best practices and would instead consider sustainable investments as corporate social responsibility, killing the true purpose of circularity,” he adds.
The ultimate objective of sustainable financing is to lower the bar to make the right and responsible decisions and to raise the bar for other polluting activities.
The firm that Hani Tohme works for, Roland Berger, acknowledges that sustainability is a prerequisite for any sector to thrive and to exist in the coming years. As such, it has created a dedicated competence centre for sustainability but, more importantly, ensured that every sector it addresses embeds the fundamentals of sustainability, climate change and circularity.
“Through our work, we impact decisions made at national levels, in board rooms and on the shop floors. We therefore recognise the responsibility we have in shaping the mindset of the decision-makers. Our projects cover defining new sustainable strategies, rethinking the portfolio and operating model, developing countries’ Nationally Determined Contributions (NDCs), developing environmental, social and governance (ESG) strategies, conducting mergers and acquisitions to expand the sustainable offering – and the list goes on,” he tells BT.
Hani Tohme says focusing on sustainability gives him the satisfaction of supporting businesses as well as contributing to the future planet which his children and grandchildren will inherit.
“Being exposed to topics such as waste management, where 50 per cent of the world’s resources are still being landfilled, or water management, where our most precious resource is being polluted and wasted, gives me the urge to be fully invested in making a change,” he tells BT.
Founded in Germany in 1967, Roland Berger now operates in more than 50 countries around the globe. The model it follows revolves around the people being its biggest asset. Employees join at different stage of their careers, each providing valuable knowledge and industry expertise.
The company invests in knowledge, building its internal capabilities via different trainings, conferences attendance, and obtaining certifications, and conducting necessary market understanding through its large network of subject matter officers (many of whom are alumni of the firm). However, the main source of expertise remains the field work it does with its clients, listening to their concerns and problems to actively provide the most tailored and sustainable solution in light of the ecosystem they belong to.
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