Buildings Will Drive Transition to Circular Economy: New Methods of Valuation and Financing Are Key
Aglaia Fischer, Project Manager Circular Finance at Circle Economy & Sustainable Finance Lab, Lucas Geusebroek, Project Lead Circular Economy, Royal NBA | January 28, 2019
A new report, Building Value, A Pathway to Circular Construction Finance, highlights the radical potential for valuing and financing circular buildings to accelerate the circular economy. The report includes tools to help industry re-think methods of valuation and financing to stimulate circular construction. It also includes a case study of the Fridtjof Nansenhof social housing project in Amsterdam, due for redevelopment in 2020.
The construction sector is one of the biggest sinks of raw materials, and therefore critical in the wider transition to a circular economy. Circular construction is about optimizing the lifespan and value of building elements, products and materials to increase the likelihood of their continued use post dismantling. Interest in, and enthusiasm for, the topic is growing, but today there are still few fully realized examples of circular construction. Challenges lie in the fragmentation and lack of collaboration within the construction chain, short-term revenue models, and perceived high costs of failure. Practical and scalable solutions for circular construction require a holistic perspective which can take account of the construction process, value chain and revenue models.
The initiative is a collaboration between Circle Economy, Sustainable Finance Lab, ING, Allen & Overy, Eigen Haard, The Royal Netherlands Institute of Chartered Accountants (NBA), Alfa Accountants and Advisors, Madaster, Arcadis, Arup, and DOOR architecten, co-funded by Nederland Circulair! The participants formed a Community of Practice (CoP), to develop relevant, transferable tools to guide the development of circular economies. An earlier article (February 2018), Breakthrough in Financing Circular Business Models Shows Need for Accountants, highlights the CoP’s innovative thinking and practical toolkit for a circular mobile phone.
The initiative also coincides with The Circularity Gap Report 2019 presented at the World Economic Forum in Davos highlighting that circular strategies to reduce waste are particularly important in the built environment, which accounts for a fifth of global emissions. Circle Economy calculates that nearly half of all materials going into the economy – 42.4 billion tonnes a year — are used in the construction and maintenance of houses, offices, roads and infrastructure. In emerging economies, where high population growth and rapid urbanization is driving a massive building boom, the challenge is to adopt building practices which minimize the use of raw materials and consequent emissions.
The CoP’s new initiative focuses on innovative business and financing models to support circular construction and buildings. The six key themes and learning points from the in-depth study are
Rethinking Construction: one building, six layers
Each building should be conceived as six individual layers, each with their own different function, subset of elements, products and materials, and lifespan. Applying circular principles, strategies can be developed to maintain the value of each layer.
The EPM hierarchy
Value can be maintained within each of the six layers by prioritizing reuse in this order: elements, products, materials (EPM). New business models, such as Product-as-a-Service, and applying modularity in design enable effective reuse of EPMs.
Market for reusable elements
Prioritizing reuse will require a developed and transparent market for building elements. Technology enables key actors within the built environment to increasingly collect, store and exchange data which provides the information needed on buildings. Reliable governance of EPM data is essential to respect privacy, security and transparency.
The business case
Accurate valuation of individual layers and EPMs is key. The CoP conducted a scenario building exercise to compare the long term (financial) performance of circular features for two building layers. The business case is shown to be highly dependent on assumptions for factors including depreciation, discount rates, lifespan and market development.
Valuing circular construction
Distinguishing between building layers, when realizing the value on the balance sheet, is necessary to explicitly show the value of layers and EPMs as part of the overall value. The traditional emphasis on location value as part of the total value has eclipsed the importance of building layers and EPMs. These factors should be reported separately on the balance sheet to guide investment decisions.
Bringing future value into present financing
Financiers play a crucial role in identifying and mitigating risks in the transition to a circular economy. Circular business models capture value over a longer time horizon, reflected in higher future values. Investment decisions should take into account this future value, and the possibilities to reduce demand for natural resources.
Several of the CoP partners have already committed to continue to build on the knowledge and support the implementation of a circular built environment. The thinking and recommendations arising from their work provides a platform to bring about circular products and services into the mainstream thereby enabling more sustainable business models and outcomes.