Spread over two sessions, we give different parties the stage at the sustainability forum “Springtij” (www.springtij.nl) to talk about challenges posed by the use of circular revenue models – we have in fact experienced that the practice is often more unruly than the theory. Here you can read more about the outcomes of these workshops.
Circular models and financing
Circular models call for new forms of financing. Aside from products’ technical circularity, they are increasingly put on the market through ‘circular revenue models’. Hereby, as many positive incentives as possible are created to ensure that all stakeholders within a system (producer, supplier, user and, for example, processor) benefit as a product is made and used more ‘circularly’. There has been much experimentation already with return value models, buy-buyback, leasing and other forms in which products are offered as services.
When sold, both the product and all the risks arising from management, maintenance and processing of the product are transferred at once. In addition, a producer and/or supplier is paid once for the product that is delivered. This is different with circular revenue models. The risks should be shared with each other over a long period (for example, who is responsible for maintenance?), and depending on the model chosen, there is also a change in cash flow.
Structure of the sessions at Springtij
Spread over two sessions, we give different parties the stage at Springtij to talk about challenges that arise in applying circular revenue models – we have in fact experienced that the practice is often more unruly than the theory. The first session was primarily informative in which experts from the bank (ING), a producer (Gispen) and the auditor (KPMG) went in discussing with each other and with the audience about the challenges and solutions. In the second session three case study companies (Auping, Gispen and PostNL) were able to submit questions to the experts, and together with attendees they could work out these questions.
One of the most ‘strategic’ questions was about which party had the most responsibility, or the most capacity, to enable the application of circular revenue models.
- Is that the supplier or manufacturer (with no product there’s no question, and with no question, no funding)?
- Is it the bank (they have the money, but we demand that banks take minimal risks)?
- Or is it the accountant (if this type of financing has no negative effect on the financial statements then we can get to work immediately)?
Eventually it turned out to be a shared responsibility:
- A manufacturer must dare to develop circular products, and the expectation is that a market will emerge for these products. To play a leading role, manufacturers can show that this is not just for the future – it can actually be realized now;
- The demand begins with the development of example projects, which means banks should dare to get involved. This does require the bank to make an investment. Internal departments must work together to develop good financial products;
- In particular, accountants should check that the risks are assigned to the correct parties, and that the way in which reporting is done reflects the companies’ actual status. Many assets still remain on a manufacturer’s balance sheet when the products are delivered as a service, leading to a ‘long balance’ that puts pressure on profit and solvency margins. This lowers all the ratios that provide insight into the ‘success’ of a company. According to Berry Wammes, CEO of Nederlandse Beroepsorganisatie van Accountants (NBA) – the Dutch Institute of Chartered Accountants – this is why there is every reason for the audit profession to get more involved in the development of integrated reporting and integrated audits, and test the robustness of the accounting and auditing standards on new business models. The aim is to gain insight into the actual risks in the balance sheet. It should adhere to a new economy in which the accountant has a new opportunity to demonstrate their relevance.
Of course, a lot is happening in the meantime. Gispen is experimenting with different models and has found that the model that can be applied depends on the time horizon and specific characteristics of the project. In addition, establishing residual value in the furniture market remains difficult. “Ultimately,” says Anne Jan Stuij from Gispen, “it is also a matter of trust. You must agree to enter into a joint risk in the future. This requires cooperation.” Gerald Naber from ING confirms this. Products are much easier to finance if their residual value can be determined easily. In addition, there is the chicken and egg problem of the maturity of the market: if a sector is mature and risks can be assessed, it is not complicated to finance. With circular models, new markets are often created; places where banks do not like to act as funders.
Wim Bartels from KPMG sees both opportunities and challenges. Funding is difficult because of the uncertainty and potential risks, but also because the profit of a company deteriorates in models where a product is not sold but put on the market on a usage basis. In the brainstorm with Gispen, the idea was suggested of defining the residual value of products not as deferred profit, but as a commitment to purchase raw materials in the future. In this way, the effects of a circular model put less pressure on the bottom line. One of the challenges of this model is correctly defining the value of the raw materials. The value of products in the current economy is partially determined by the value of the raw materials, but mainly by the added value of the steps that are taken in the process to make the product. Other solutions were also put forward: for example, there was talk of a circular guarantee fund from the government that guarantees residual value, as well as other cooperative models that could accelerate the transition.
Where should we begin? The main conclusion is that no single party is responsible for the development and financing of the circular economy. The sessions revealed that the stakeholders must really come together to launch the system in cooperation: manufacturers that set up experiments to show that it’s possible, consumers who increasingly demand circular products, banks that increase their understanding through discussions about the risks and subsequently grant funding, and accountants who think about ways to make sure this is reflected on the balance sheet. But this topic could use a little push. Solutions are always customized, and no single solution solves the problem that future risks must appear on the balance sheet now. The main conclusion was endorsed by all parties: one for all, and all for one. It’s on everyone’s agenda, we want this, but we need to make sure it happens together. And to make that happen we must dare to learn from each other.