When companies transition to circular business models, it creates challenges for financiers, who are accustomed to assessing traditional business models. With the help of AI, RISE is finding ways that the business models of banks can be changed and offering them tools that they can use to support companies that would like to transition to a sustainable and circular way of doing business.
– “In traditional models, the value of everything a company owns is typically depreciated down to zero. Most of the time, it happens at a fairly rapid pace as well. But the value of a piece of machinery or a truck is not zero. If it can be sold, it has resale value. And, it has value-in-use, through what it can help produce,” says Jakob Hansson, Senior Transaction Manager at SEB.
Those are his conclusions from working on a project with RISE to change the business models used within the finance industry so that companies can more easily transition to a circular economy.
– “When transitioning to circularity, a company can retain ownership of a product and start selling a service to use the product instead. But that ties up capital and the revenue is earned over a long period of time. Initially, it could require a major investment, long-term loans and using different types of collateral than what we are accustomed to. It makes financing and scaling up more difficult than it is today. It also creates a greater need to value the actual assets,” explains Ann-Charlotte Mellquist, Senior Researcher on Sustainability and Circular Economy at RISE.
Using AI to value products
Together with the banking sector, RISE is now working in a variety of ways to identify safe ways of valuing assets and business ideas. In a groundbreaking project, AI is being used to process large quantities of data in order to value used products.
– “We have used the data from one of the major online buying and selling sites. What makes it so interesting is the enormous quantity of data, which is also rather low in quality. People who post items that they want to sell secondhand publish photos and descriptions in very different ways. Nevertheless, using AI, we can still estimate the end price fairly accurately,” explains Ann-Charlotte Mellquist.
– “This is extremely interesting to us,” says Jakob Hansson. We know today how we can value a newly purchased product. It has a purchase price and there are rules on how to depreciate it. However, if we want to become better at estimating the value of a product that a company still owns and uses, or items in inventory for example, we need methods for objective valuation. Sure, the one using a product knows best what it is worth. But that same person can’t be responsible for the valuation. Valuation cannot be affected by anyone’s specific interest or bias. Neither can we create fictitious values. It should though, be possible to measure actual values. That’s what we are trying to achieve here,” he says.
Banks are also taking on a new role. They need to be able to objectively value new business models and provide the safety, security and objective information that will be required
Less profitable to maintain assets in linear business models
Jakob Hansson uses a truck to illustrate this. With current depreciation rules, the asset is nearly worthless after five to seven years. It is a purely linear business model, which also makes it less profitable for a company to perform maintenance and repairs on their assets. But when used in the right way, replacing components as needed, the truck can have a resale value and definitely still have value many years after it has been fully depreciated for bookkeeping purposes and is still being used. With the help of AI technology, RISE hopes to find ways of continuously monitoring and valuing inventory holdings and machinery.
– “A truck also still has value even when it can no longer be used. The battery and other parts contain components that can be recycled. Parts of the truck are in one circular flow, while the truck itself is in another. And, when the battery is replaced, the value of the truck should be written up, and not, as we do now, further depreciated,” explains Jakob Hansson.
– “Today, we can see how more and more companies are popping up to manage items that have value, such as the minerals in a battery. In industry, they are called Residual Value Providers. They are part of a new business ecosystem. Banks are also taking on a new role. They need to be able to objectively value new business models and provide the safety, security and objective information that will be required when industries not previously accustomed to collaborating with each other will need to start doing so,” explains Ann-Charlotte Mellquist.
– “All companies today want to become circular. Consumers demand it. Owners demand it. Regulations are being introduced that demand it. Banks must therefore find ways to adapt. We frequently speak with our customers in order to support them in their efforts to become more sustainable. We need to adapt our services too, so that they do not become obstacles in the transition to circularity. Our economy is undergoing a major transformation and smaller companies don’t have many to turn to. If you want to transition, you must talk to your bank. We must then be able to offer the support that the company requires for making that transition. Because, everyone knows that companies who go green in time are worth more. They also pose a smaller risk financially,” concludes Jakob Hansson.
