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.