A new report published by the Green Alliance looks at the lessons learned in the financial sector, and identifies advantages circular economy models can provide in delivering risk-adjusted returns for businesses.
Managing resources for a resilient economy: lessons from the financial sector is aimed at providing fresh insight into the economic and business challenges of managing resources in a global market characterised by increasing demand and volatile supply.
The report considers the approaches taken by financial analysts and believes there are lessons that can be learnt for resource management.
Greater investments in resource efficiency and recycling, and the adoption of circular economy business models, have important benefits from a risk management perspective, the report found.
From a societal perspective, an economy less reliant on imported commodities would naturally be more resilient to gyrations in international commodity markets.
However, achieving greater resource efficiency will require investment. In some cases, resource efficient solutions may appear more costly than continuing dependence on raw commodities.
Nevertheless, the report says such investment can be justified on three grounds from a risk management perspective:
“The government should take an active role by setting up a strategic risk assessment and using industrial policy to deliver the necessary conditions for resource efficient businesses to develop”
- Reduced volatility: When comparing investments in either resource efficiency or the development of new resources, it is important to account for the inherent volatility in commodity prices. This means that a risk premium to reflect volatility should be required for alternatives based on the use of new resources.
- Diversification: Increasing the share of resource efficient activities in the economy may be justified from a portfolio diversification perspective. An economy with a broad range of approaches should be more resilient to resource price shocks.
- Mitigation of “fat tail” risk: So called “tail events” lead to large price spikes and, although rare, can have major economic impacts. Such events can be driven by geopolitical developments in resource producing countries, and resource efficiency can help to decrease reliance on foreign imports.
It says, however, risk based approaches may not be enough to deliver greater resource efficiency without action from government.
Market failures, particularly relating to externalities, public goods and imperfect information may discourage individual private investors from making the necessary investments.
It says: “The government should take an active role by setting up a strategic risk assessment and using industrial policy to deliver the necessary conditions for resource efficient businesses to develop.”