Stress testing with system dynamics for enterprises: Proposing a new risk approach for the transition to circular economy and sustainable development

Abstract

The goal of this paper is to examine the current state of research on optimal approaches to making effective models that simulate the behaviour of the enterprise as a whole, for the risk assessment purposes with an emphasis on stress testing. Stress testing can potently aid in the development of highly uncertain policies like the shift to the circular economy, or other policies that have a high impact in the areas of sustainable development. The paper will examine this problem through the scope of system dynamics modelling, however, the goal of the paper is to examine the right heuristics where this kind of modelling can be done with different approaches. When proposing a novel concept like the shift to a more circular economy, a variety of economic and other benefits could be anticipated in the long run, but the potential for large losses in the short term should not be neglected. The paper explores novelty on two levels, in proposing the model for this use, as well as advocating for stress testing approach that has been neglected in use and research outside of the financial industry.

Keywords

• enterprise modelling
• system dynamic
• risk
• stress testing
• circular economy