The Circular Economy, What it is and What it Needs to Thrive
It’s been long since society started to realize that it needed alternative models to traditional capitalism. The current pattern of production and consumption established since industrialization supposed indefinite resources and raw materials. This lineal way of producing, consuming, and disposing, has showed that clearly resources are not unlimited and this has increased the price of commodities over time.
Since the last century, we have been exploiting this lineal way of consumption, boosting short term profits by selling bigger volumes of disposable goods. However, the resources and land fill space needed to sustain this model is not realistic with its long-term availability.
Breakthrough movements have explored alternative models, looking to change paradigms in the way we consume. Among them, Sustainability supporters, urged governments and industries to change the way they produce and do business, however this movement is seen down by many marketers and business people. The trend has overall provided invaluable inputs and has remained as a groundbreaking element in the way we think of businesses and its use of limited resources, but it is also true that it has remained relevant to a smaller part of society, lacking the force to change the way we consume.
Lately, Circular Economy has become a marking stone in this effort to rethink our consuming patterns, and its supporters are innovating the way we produce and consume goods and services. However, as opposed to other movements this approach has the potential to appeal and benefit consumers, as well as the public, and private sectors. Part of this is due to the fact that it is a business and consumer driven movement that allows increased savings for both, creation of stronger communities, more efficient ways of production, better waste management, and a more sustainable use of resources.
A report by the New York based think tank JWT Intelligence defines the Circular Economy as: “a system where manufacturers squeeze out as much value as possible from their resources, with the end goal of having a closed-loop supply chain where waste disappears altogether.” This means re-using, repairing, refurbishing and recycling existing materials and products. In this sense, Circular Economy breaks the trend of producing, consuming and disposing, turning negative issues like waste, into positive, value-creating resources.
Business Models for the Circular Economy
To better understand how it works and its advantages for existing or new companies, one may look into the different business models that make a Circular Economy possible. A study done by the consulting agency Accenture, recognized five different models - Circular Supplies, Resource Recovery: Product Life Extension, Sharing Platforms, Product as a Service - however spin offs of these models have been identified by different analysts, yet all of them can be enclosed in two general categories: Full Circle models and Life Extending models. The most common business models hence will fall into these two categories.
• Designing for circular use. This model, contemplates the company’s participation in the Circular Economy since the design and manufacturing of the product. Manufacturers are required to design for repair, durability and ultimately disassembly. This case is exemplified by Google’s Ara project. This is a modular phone made with replaceable parts that can be swapped according to the user’s needs. This allows for customization, and gives the customer what it needs leaving behind costly functions that are used by it. This model also extends the usability of the core phone incentivizing customer retention through servicing the core phone and replacing parts.
• Resource recovery. It is well known that the waste of one person can be a treasure for another one and this business model exploits this concept. By linking the disposing and producing processes, it adds a link to close the loop of the traditional lineal system. Collecting the company’s own waste or disposed products will allow it to remanufacture them for upscaling or reusing. A couple of examples of this business model are Desso, a carpet manufacturer, who developed a separation technique called Refinity®, which enables separation of yarn and other fibers from carpet backing. After a purification stage, this allows the yarn to be returned for the production of new yarn. In a different way, Kroger reuses its collected waste of food to convert it into energy, which uses to power its offices and distribution centre. This translates in large savings, avoidance of disposal fees and lost revenue. Within this business model, these are the most common spin offs:
– Corporate partnerships: Working with different companies or sectors can be a way to close the loop, meaning that the waste of one company is a valuable resource for another. A good example of this is the partnership developed between the US companies Heinz and Ford, were they are looking for ways to use tomato fibers in car components. Furthermore, P&G created “Worth From Waste”, a program that works with external partners to identify potential uses for waste and which has generated for the company more than $1 billion in value since 2009. An example outside the consuming goods industry is the British-Australian metals and mining corporation Rio Tinto, which sources, grades, processes and repurposes the world’s used metals, plastics and minerals – largely through an established business in landfill mining.
– Remanufacturing goods and materials: This model can be applied within companies producing both consumable goods and industrial products as well. By remanufacturing its own byproducts, companies can expand the product line or refit disposed goods for different purposes. An example within the consumer goods market is Argos – a British retail company of household goods- which is preparing itself to lease products, and receive them back ready to remanufacture and place them back in the market.
– Recycling and downsizing: This is the last link to be considered in the circular chain. After reusing, and refitting products, materials can still be recycled in a traditional way, or downsized to fill different market gaps. Lately schemes such as the one put in place by H&M and IKEA allows customers to get new products and dispose the old ones which can be donated for further charitable causes, used in new items or reprocessed in something different.
Life Extending Models:
These models monetize product longevity by providing service, upgrading and repairing the products.
• Product repair: This concept implies that some companies extend their customer services to offer repair of their goods, and it is an innovation taken from traditional repair shops (i.e. tailors, shoe repair shops, etc.). The large sporting goods brand Patagonia and a small British start-up Fara Workshop alike are allowing customers to repair their clothing within the services they offer contributing to new models of this old scheme. Additionally, all over the world, bike repair shops have popped up allowing bikers to extend the life of their bicycles, learn new skills, and create small communities around them.
• Second hand: Traditional second hand shops have been contributing to this model even before the coinage of the term Circular Economy but also more complex services like refurbished buildings have managed to extend the life of otherwise costly disposable goods.
• Leasing and sharing: Customers are rightly tired of low quality goods that need to be replaced often. However they enjoy getting the latest technologies, refurbishing their households, and wearing the latest trends. For that reason, companies that temporarily lease their products are thriving; the Dutch company Mud Jeans that leases jeans for a temporary period of time.
• Product as service: When a company transitions its offer from products to services, the lineal consumption pattern vanishes. It shifts the company’s offer from volume to performance. An example of this is seen with the brands Gillette and Michelin. The former has an initiative to provide modular homes with personal care services by 2030; while the latter sells “tires as a service” where customers pay per miles driven. In this case, Michelin is incentivized to develop longer lasting tires and to make design and material selection fit to be reprocessed into new tires or something else.
The Business Case for Circular Economy
The business case for shifting to Circular Economy models makes the movement more likely to be embraced and pushed forward by the private sector. The advantages that shifting to a circular business model represents, can be reflected in both its tangible and intangible assets.
• Monetizing the new trend: Studies about the advantages for companies who transition to a Circular Economy model report significant savings. Globally, opportunities arise for a combined $1 trillion USD savings in net material costs for companies switching to circular business models. Furthermore, closing the loop of lineal consumption, helps to reduce costs related to waste management fees, inefficient use of resources, limited sources of raw materials, and high energy consumption, among others. In the European Union these cost reductions have been estimated to bring net savings of up to 600 billion EUR for businesses. In the United States, General Motors has reported to realize $1 billion annually in recycling and reusing revenue from its waste.
• Intangible assets: As previously mentioned, some of the business models of the Circular Economy imply an extended service for customers, which increases its customer retention and loyalty. Additionally, Branding and Good Will are immensely improved when consolidated companies transition and incorporate these models into their operations. Because consumers are ever more aware and supportive of socially responsible brands, sustainable products and extended customer service, the pay off of investing in these practices can translate in significant increase of customers and profits.
While the advantages of switching to a circular business model are clear, the costs attached to them are considerable. Investing with time is the best way to manage these costs and companies such as Phillips, Cisco and Kingfisher are already looking into how they will participate within this new model.
In order for businesses to successfully implement circular business models, specific teams need to be set for this task. These teams should evaluate the best times and methods to switch, and make a realistic assessment of the company’s financial resources for it. Their analysis will help allocate through time the expenses associated to this investment and manage its risk. Furthermore, implementing change management programs will enable a smooth transition and a permeability of the new cultural change into all the company’s operations. Businesses transitioning or implementing these new models should ensure that employees and managers at all levels fully understand the new model in order to leverage from it.
Circular Economy movement and its supporters need to keep innovating traditional consumption systems as part of the bigger challenge of making capitalism work for all. In order to achieve this, financial and human resources are needed, along with spaces for innovation, experimentation and education. However, most importantly is that businesses are aware of the whole idea’s benefits and implications in order to produce, sell, and dispose with the model.
As Erwan Mouazan, Founder of Ecovala – a sustainability and systems innovation lab in Finland-points out, the advantage that the Circular Economy has over the sustainability movement of fifteen years is that it is being pushed forward by different actors. In this sense each sector has increasingly been involved in doing its part and even grassroots movements have been supporting it through communities initiatives such as bike shop repairs and use of empty spaces.
This multisectorial involvement is key to tackle the challenges that the movement has to overcome before it becomes a mainstream practice in our current consumption model. Nonetheless, a shift in this consumption paradigm implies costs for the companies, more education of consumers and an increased support from the government. Local and national governments, also have to transition and redesign the way they work, to set an example by consuming within a Circular Economy model and to provide the environment needed for it to develop. Furthermore, Mouazan stresses the importance of redesigning the current tender system under which many governments purchase operate, in order to enable smaller players or non-traditional businesses such as sharing companies.
How the Future is Being Shaped
Specific initiatives have been developed around the world and are starting to shape ecosystems in which Circular Economy can grow faster:
1. Cradle to Cradle system
2. Zero Waste Institute and Initiative
3. European Union Circular Economy Package
4. French Institute of Circular Economy
Nonetheless, the future of the Circular Economy lays in a multisector collaboration that brings together resources from each of them. The following are practical examples of the shape and resources that each sector is bringing to the Circular Economy’s future:
Private Sector: Whether it is start-ups using an online platform to share cars or houses such as United States companies Zip Car and Airbnb or big pioneers like the carpet company Interface or the Danish brewery Carlsberg, initiatives need to keep coming and innovating business models to reduce waste and complete consumption circles. Additionally, the private sector has to work on changing their customer relations’ models, in order to engage customers and keep them motivated. By continuously and smartly communicating motivators such as the advantages in price, value, health, or sustainability, companies can keep customers coming back and supporting a circular system.
Community: Through grassroots movements, communities have started to take an active role in changing the way traditional economies works for them. As income inequality is a big detractor for gaining access to the latest technologies and tools, communities have benefited from the sharing and leasing models. In Spain, for example, the number of people buying and supporting community shops grew as a result of the last economic crisis. This has not only given access to fresh food to lower income families but also has contributed to solve the problem of food waste of farmers and supermarkets.
Public Sector: Some regional governments, especially in Belgium, Scotland, Netherlands, and Denmark, and cities like San Francisco in the United States, are exploiting the potential in job creation by supporting the establishment of companies only dedicated to repurposing, recycling or upsizing and downsizing.
Ecovala’s founder also mentions the need to increase the application of design thinking into public policy. This will lead to more spaces for innovation, experimentation, co-creation, and establishment of partnerships among the three sectors. As an example, the MIT project “Living Labs” that now operates in different parts of the world, shows how these spaces work and what is their potential to innovate consumption chains. Overall, collaboration among the three sectors will help integrate supply chains and limited resources barriers that prevent the Circular Economy from fully taking shape.
Some elements of the Circular Economy are not new concepts; however shifting from a traditional linear model to a zero waste Circular Economy has the potential to redefine and improve the relationships livelihood of consumers, companies and our natural resources. Moreover, some of these practices have been around for many years, and to the extent that we are aware of those practices we will value and innovate them. Additionally, to the extent that more sectors are involved, the advantages and permeability of a Circular Economy will be more likely to evolve with future generations.
The European Union Movement Towards the Circular Economy
Moving towards a circular economy is at the heart of the resource efficiency agenda established under the Europe 2020 Strategy for smart, sustainable and inclusive growth. The main ideas on how to do more with less are being taken further in the EU’s Environment Action Program to 2020.
The European Commission adopted the Communication “Towards a circular economy: a zero waste programme for Europe” and annex to establish a common and coherent EU framework to promote the circular economy. Turning Europe into a more circular economy means:
• boosting recycling and preventing the loss of valuable materials;
• creating jobs and economic growth;
• showing how new business models, eco-design and industrial symbiosis can move us towards zero-waste;
• reducing greenhouse emissions and environmental impacts.
As part of the circular economy package, the Commission also adopted a legislative proposal to review recycling and other waste-related targets in the EU and annex. Achieving the new waste targets would create 180 000 new jobs, while making Europe more competitive and reducing demand for costly scarce resources. The proposal aims to:
• Increase recycling/re-use of municipal waste to 70% in 2030;
• Increase packaging waste recycling/re-use to 80% in 2030 with material-specific targets set to gradually increase
between 2020 and 2030 (to reach 90% for paper by 2025 and 60% for plastics, 80% for wood, 90% of ferrous metal,
aluminium and glass by the end of 2030);
• Phase out landfilling by 2025 for recyclable (including plastics, paper, metals, glass and bio-waste) waste in non
hazardous waste landfills – corresponding to a maximum landfilling rate of 25%;
• Reduce food waste generation by 30% by 2025;
• Introduce an early warning system to anticipate and avoid possible compliance difficulties;
• Ensure full traceability of hazardous waste;
• Increase the cost-effectiveness of Extended Producer Responsibility schemes by defining minimum conditions;
• Simplify the reporting obligations and lighten obligations affecting SMEs;
• Harmonise and streamline the calculation of the targets and improve the reliability of key statistics;
• Improve the overall coherence by aligning definitions and removing obsolete legal requirements.
Source: Responsible Business Magazine