Economic growth is often associated with a higher quality of life. Yet, we are at a point in history where this very economic growth – namely the boom and bust of Fortune 1000 corporations, global industry, and innovation – may, in fact, have a negative impact on our collective well-being due to increases in human activity that are accelerating the effects of climate change.
Many of the tolls of increased human activity can be traced back to a linear economic model of “take-make-waste,” which has dominated most corporate value chains since the Industrial Revolution. A linear approach to business prioritizes financial returns as a sole marker of success, while externalizing the environmental and social impacts that increasingly compromise our quality of life.
The true costs and material business risks of the linear “take-make-waste” model have gained attention from consumers, investors, and regulators – who are demanding greater corporate accountability for externalities and expecting sustainability to drive business continuity and performance.
Planning for a post-pandemic, economically uncertain new world order of tomorrow is forcing corporate leaders to rethink and reimagine new business models – with circularity becoming increasingly more attractive than its linear predecessor.
What is “Circularity?”
In contrast to a conventional linear model, a circular economic model, also known as circularity, is a systematic approach that is regenerative by design. The model aims to maximize the utility of our finite resources by continuously using, reusing, and repurposing materials throughout various stages of the value chain to eliminate waste.
The idea behind a circular economy stems from three fundamental principles:
1. Design out waste and pollution – from products to business practices – by:
The consumer goods company Splosh designs its products with the circular economy in mind, adopting the motto that “refilling is better than recycling.” Splosh creates cleaning product bottles can be used repeatedly with the assistance of refill packets sent by mail – finding that if a bottle is reused 20 times it results in 95% less packaging waste.
2. Keep products and materials in use by revamping processes to reduce components and materials waste, and then striving to use these resources multiple times within the economy.
Modeling the “keep” principle, aluminum manufacturer Novelis incorporated an average of 53% of recycled raw materials across its product portfolio in 2016 (up from 30% in 2009). The company’s aluminum recycling center in Germany, the largest and most advanced in the world, has the capacity to recycle up to 400,000 metric tons of aluminum scrap annually – potentially saving 3.7 million metric tons in CO2 emissions.
Because of the high-energy intensity of aluminum production, Novelis views this vertical integration as a strategy to decouple its economic productivity and energy consumption, while also creating a new value chain relationship that saves money and reduces greenhouse gas emissions.
3. Regenerate natural systems to create long-term value that preserves and enhances natural capital, rather than being extractive.
Related to the “regenerate” principle, due to declining energy demand ENEL was forced to close 23 of its older power plants. By understanding the industry trend toward renewable energy and recognizing that these technologies are increasingly affordable with more rapid capital payback periods, ENEL launched a public-private program named Futur-E – seeking to fully shift the company’s energy source to regenerative renewables by 2050.
How will Circularity Improve Business Performance?
Beyond the imperatives to reduce waste, be a more responsible steward of our planet’s finite resources, and improve quality of life, a transition from a linear to a circular economic model could unlock an estimated $4.5 trillion (USD) in additional economic growth by 2030. Other business trends not just fueling – but accelerating – the shift to circularity include the following.
Proactively Addressing Supply-Chain Risks
The disruption of global supply chains due to geopolitical, climate, and economic crises is creating seismic supply chain risks for corporations. These already volatile effects are exacerbated by the COVID-19 crisis, which has made global trade more difficult and required businesses to build flexible supply chains to mitigate this risk. In the near-term, for example, the global cost of materials is expected to continue increasing due to overtime labor requirements and expedited freight costs.
Circular models encourage companies to pivot their supply chain to become more local, and, by extension, more flexible and capable of mitigating risks and more accurately forecasting supply. With resilient supply chains, companies also have more control over their business activities and therefore realize efficiencies such as lowering operating expenses by 1-2%, lowering transportation costs by 10-20%, and improving plant output by 15-25%, Blackrock reports. Gains in customer satisfaction also result due to optimized inventory and order rates, while product development cycles often shorten to equip companies to release and deliver new product lines more efficiently.
Responding to Shifts in the Global Regulatory Landscape
The push toward circularity is increasingly enforced through regulatory requirements, as countries are implementing policies and frameworks that mandate businesses maximize resource use and reduce waste.
A recent circular economy framework was released by the European Union, which focuses on implementing 2030 benchmarks such as recycling 65% of municipal waste, recycling 75% of packaging waste, and reducing landfills to a maximum of 10% of municipal waste. Corporate engagement is required to achieve these targets, and as such financial incentives are used to motivate companies to re-imagine their business model with an eye toward the “reduce-reuse-regenerate” circular model.
While the EU is focused on establishing corporate recycling incentives to reduce waste and increase reuse, in the United States the Environmental Protection Agency (EPA) adopted the Sustainable Materials Management (SMM) framework to provide guidance on how to design new business practices that improve resource utility and incorporate related management metrics.
Though the US does not currently have wholesale industry requirements and environmental incentives in place, the shift to follow Europe’s regulatory example in advancing the climate change agenda is likely inevitable – suggesting US businesses that embrace circularity today will be more flexible and resilient to meet future stakeholder demands.
Meeting the Mounting Sustainability Demands of Consumers and Institutional Investors
How companies choose to engage in the circular economy will have reputational effects on their brand. Formally entering the resale space, for example, can deepen customer engagement and loyalty, while also reducing reputational risks associated with poor waste management and the use of excessive packaging. Data from a 2020 ING study reiterates these consumer trends, finding that 83% of consumers believe their purchasing choices can have a positive impact on addressing global environmental challenges, while 59% cite that their purchasing behavior is influenced by a product’s environmental impact.
Circularity principles are also becoming more mainstream among the institutional investor audience, who are creating circularity funds expected to yield positive, risk-adjusted returns. For instance, BlackRock, BNP Paribas, RobecoSAM, and Decalia recently created funds with circularity serving as a primary screening lens and impact measurement metric – carrying a total asset value of approximately $285 million (USD).
Expanding Product Life Cycles while Encouraging Innovation
The circular economy is rapidly evolving as the focus on extending product lifecycles moves from recycling and upcycling, to reducing barriers for repairing and reusing products. New entrants will push the market toward more modular designs of consumer products, and established companies will need to invest in product redesign to keep up. Beyond redesigning products, by having a systems-view of a company’s value chain through circularity, leaders are better equipped to identify additional revenue streams within their current range of products and services.
Embracing Circularity as a Business Resilience Strategy
To capitalize on these trends, business leaders may seek to embrace the circular economic model as central to how their organization’s products are made and business is conducted.
To evaluate the viability of this shift to circularity, we suggest companies start by: