Circular Economy and Value Creation: Sustainable Finance with a Real Options Approach

Amalia Rodrigo-González, Alfredo Grau-Grau and Inmaculada Bel-Oms
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Amalia Rodrigo-González: Department of Corporate Finance, Faculty of Economics, University of Valencia, 46022 Valencia, Spain
Alfredo Grau-Grau: Department of Corporate Finance, Faculty of Economics, University of Valencia, 46022 Valencia, Spain
Inmaculada Bel-Oms: Department of Corporate Finance, Faculty of Economics, University of Valencia, 46022 Valencia, Spain

Sustainability, 2021, vol. 13, issue 14, 1-30

Abstract: This paper presents a methodological proposal that integrates the circular economy concept and financial valuation through real options analysis. The Value Hill model of a circular economy provides a representation of the course followed by the value of an asset. Specifically, after the primary use, the life of an asset may be extended by going through four phases: the 4R phases (Reuse, Refurbish, Remanufacture and Recycle). Financial valuation allows us to quantify value creation from firms’ asset circularity under uncertainty, modelled by binomial trees. Furthermore, the 4R phases are valued as real options by applying no-arbitrage opportunity arguments. The major contribution of this paper is to provide a quantitative approach to the value of circularity in a general context that is adaptable to firms’ specific situations. This approach is also useful for translating relevant information for stakeholders and policy makers into something with economic and financial value.

Keywords: circular economy; sustainable development goals; investment strategies; asset valuation models; real options; binomial trees (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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