Finance
Assess linear risk
Linear risk is the risk a company faces when depending on the conventional "take-make-dispose" economic model. According to Circle Economy, there are five types of linear risk that companies face:
- Market: raw material price volatility, criticality, and scarcity
- Operational: employee health, stranded assets, sustainable sourcing
- Business: changing consumer demands, disruptive technologies, commoditization
- Legal: changing legislative priorities, consumer lawsuits, product bans
- Reputational: brand image, license to operate
A company’s linear risk will depend on its industry, geographic scope of operations, procurement decisions, end-of-life product handling and other factors. Linear risk should be integrated into your company’s regular risk management process.
Resources
Example
PGGM: Linear risk
Situation
- PGGM, a Dutch Pension service provider with €205.8 billion in assets under management, has a mission to help people to realize a valuable future.
- The linear model will lead to resource depletion, volatile resource prices and stranded assets.
- Business neither prices nor accounts for linear risk, despite the potential impact on investor portfolios.
Challenges
- Governments subsidize linear, fossil-fuel and landfill business models.
- Linear risk includes many types of risk (e.g. commodity price volatility, intangible asset devaluation, etc.), making it difficult to assess comprehensively.
Solution
- PGGM looks for circular opportunities across climate change, water scarcity, healthcare and food security issues.
- PGGM requested circular assessments from several companies in their equities portfolio to evaluate exposure to linear risks.
Key benefits
- Mitigate linear risk through investments in future-proofing business models.
- Identify circular opportunities by analyzing linear risks in specific industries or geographies.
- Alignment with investor mandates for economic and environmental performance.