According to the Linear Risk report developed by WBCSD, EBRD and KPMG; The companies that continue to operate in a linear ‘take-make-waste’ approach and the financial institutions that invest in these businesses are exposed to a variety of risks that are mostly overlooked and are missing in traditional risk evaluation approaches. These missing risk factors are defined as ‘Linear Risks’ and could have a substantial effect on the financial industry and the global economy.
As stated in the Report, the risk factors are as follows;
‘Linear Risks’ account for developments and trends such as future volatility in resource supply and price, failures in the value chain, and disruptive new business models. 4 risk factors are identified as below:
1. Market - market risks involve market and trade-related factors that impact business’ assets and liabilities, such as price volatility, resource scarcity, trade bans, higher interest rates, lower investor interest, etc.
2. Operational - operational risks involve factors that threaten the internal operations of a firm, such as supply chain failures, internal process failures, worker safety issues, difficulty hiring or retaining talent, etc.
3. Business - business risks are a result of emerging societal, economic and political trends that threaten the firm’s strategic business plan objectives, such as changing consumer demands, new technologies, new business models, etc.
4. Legal - legal risk arises from the failure to comply with current as well as future regulations, standards or protocols, such as sourcing rules, new government policies, extended producer responsibility, and fines or lawsuits.
Businesses are exposed to some risks if their linear economic business practices combined with these risk factors. The Report presents a “Linear Risk Matrix” to identify these risks and therefore help companies and investors in understanding their “Linear Risks”. Identified risks may cause direct and indirect impacts on the value chain, sector, investors as well as leading the macro-economic impacts.
Companies can address and eliminate these risks by employing circular economy strategies in their operations.
Read more about the financial risks of a linear economy? Read this report by Circle Economy: