Financial Drivers and Inhibitors of Circular Economy Business


Despite the finance industry’s growing interest towards and crucial role in pursuing sustainable development, scholars’ interest in the connection of finance and sustainability, the Circular Economy’s nature as a possible enabler of sustainable development, and the re-search presenting multiple financial barriers to Circular Economy Business, there has been significantly little interest and detailed research about how finance can affect the large-scale transition to a more Circular Economy. The main purpose of this study was to contribute to filling that gap in the literature and hereby provide researchers and practitioners answers through the following objective. The twofold objective of this study was to identify what financial factors drive and/or inhibit transitioning to and operating by CE principles and how, and what characteristics of CE business and CE companies drive and/or inhibit their attractiveness as an investment or a debtor and how.

Towards addressing the research objective, an explorative and qualitative study of the underlying issues was carried out. As a choice of analysis methodology, an iterative thematic analysis utilizing systematic combining and an extremely diverse set of both primary and secondary data was conducted. The data set consisted of Focus Group Discussions, observation data, secondary interviews and meetings, practitioner research reports and media data, originally produced between 2013 and 2020. The sources of data included experts amongst both practitioners and researchers from various relevant stakeholder groups: e.g. academics, CE company executives, regulators, legislators, financiers, NPOs and different kinds of interest groups were represented in the data.

As a result, a framework of the identified financial factors affecting both transitioning to and operating by CE principles and CE business’s attractiveness as investment was constructed. Also, a total of 44 propositions were derived on how each factor drives and/or inhibits the said subjects, indicating that there currently are more financial inhibitors than drivers to CE. The factors and the propositions were categorized into Sources of financing, Criteria for financing and Subjects of financing, of which the Criteria for financing contained the most driving and/or inhibiting factors.

The study provides also pragmatic guidance on what practitioners can do to contribute to CE becoming a better-established paradigm of operation. To address regulators and legislators, the role of the public sector in making the playing field level for CE businesses using financial incentives, public funding organizations, procurement, legislation, and taxation is highlighted. For company executives operating by or planning to operate by CE principles, the results imply that they should pay significant attention to the profitability and financial vi-ability of their Circular Business Models and to recognizing and mitigating the risks typical to CE business, such as market, technology, cash flow, supply chain, regulatory and end-client credit risk. For financiers, it is implied that the currently used financial risk and value assessment models used are in the need of renewing due to their unfitness for assessing CE business and that CE contains a potential business opportunity to be exploited. For the agenda of future research, it is recommended that the specifics behind the prevailing financial models’ unfitness to CE, the means to distribute investments, other resources and risks fairly within Circular supply chains and the relationship between Socially Responsible Investing and CE are investigated further.

Author: Arttu Saarinen, Tampere University

Published: Tampere University (pdf)

Potential beneficiaries of the results: Ministries, companies, research and development organizations

More information: 

Leena Aarikka-Stenroos

Arttu Saarinen