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

Author

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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)

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.

Suggested Citation

  • Amalia Rodrigo-González & Alfredo Grau-Grau & Inmaculada Bel-Oms, 2021. "Circular Economy and Value Creation: Sustainable Finance with a Real Options Approach," Sustainability, MDPI, vol. 13(14), pages 1-30, July.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:14:p:7973-:d:595758
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    References listed on IDEAS

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    2. Ciara O’Dwyer & Atiq Zaman & Jessica K. Breadsell, 2022. "The Uptake of Container Deposit Schemes: A Case Study in Perth, Western Australia," Sustainability, MDPI, vol. 14(19), pages 1-30, September.
    3. Bhavesh Kumar & Love Kumar & Avinash Kumar & Ramna Kumari & Uroosa Tagar & Claudio Sassanelli, 2024. "Green finance in circular economy: a literature review," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(7), pages 16419-16459, July.
    4. Van Hoof, Bart & De Miguel, Carlos J. & Núñez Reyes, Georgina, 2023. "Scaling up circular economy initiatives in Latin America and the Caribbean," Documentos de Proyectos 48835, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. María Mar Miralles-Quirós & José Luis Miralles-Quirós, 2021. "Sustainable Finance and the 2030 Agenda: Investing to Transform the World," Sustainability, MDPI, vol. 13(19), pages 1-6, September.

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