Knowledge

A Circular Way Forward: How the Circular Economy Is Affecting Business as Usual

The world is on the move towards circularity. IKEA, Timberland and countless other brands started to move away from a linear towards a circular economy which is less reliant on natural resources.

The environmental benefits are pretty clear: less waste is produced, less resources are used and greenhouse gas emissions are lowered. But there is more: the circular economy can significantly drive economic growth at the same time.

How is that possible and how can your business get there? We will walk you through the why, what and how of the circular economy and share best practices from circular innovators across industries. Let’s dive right in.

A Sense of Urgency Across the World

The Circularity Gap Report 2021 highlights that current climate pledges will not be sufficient to meet the 2030 climate goals of the Paris Agreement. The handling and use of materials, accounting for 70% of global emissions, are in need of substantial rethinking. Enter: the circular economy.

The circular economy is viewed as a key enabler for achieving global net-zero emissions and shifting towards circular systems therefore gained high priority on the policy agenda of governments and institutions around the globe. Public accelerator programs and tightening regulations are becoming the norm.

The European Commission, for example, introduced the Circular Economy Action Plan (CEAP) as an important element in the Green New Deal. By fostering sustainability standards, transforming resource-intense industry sectors and reducing waste streams, the EU is planning to become the global leader in the field of circularity.

Outside Europe, other economic clusters are also moving fast: With its Circular Economy and Plastic Pollution Reduction Act, California aims to drastically reduce the sales of products which are not reusable, recyclable or compostable. China has been promoting the shift nationally since 2009 with its Circular Economy Promotion Law that focuses on increasing the utilisation and recovery of resources.

This transformation will pick up in pace, bringing about even more legislation. Experts see setting circular economy standards, establishing tax reliefs for sustainable products and liberalising the trade of waste to be in the legislative spotlight in the coming years.

What Is a Circular Economy?

The circular economy is a production and consumption system based on sharing, reusing, repairing, recycling and refurbishing with the aim of extending product life cycles, reducing waste to a minimum and closing the loop of supply chains.

Going circular means moving away from the take-make-consume-waste approach of the traditional, linear economy that consumes many fossil resources and generates a lot of waste, which can only be converted back into usable materials by using large amounts of energy.

To close this loop, the circular economy is based on three main principles:

  • Design out waste and pollution,
  • Keep products and materials in use,
  • Regenerate natural systems.

While many businesses believe a circular economy model can be restricting and costly, there are actually multiple approaches to achieve a sustainable and circular economy without necessarily sacrificing profits.

  • Circular Supply: using fully renewable, recyclable, or biodegradable inputs reducing inefficiencies in the supply chain.
  • Resource Recovery: recovering value at the end of the product life cycle by transforming waste into value through innovative recycling and upcycling services. This has the effect of lowering costs while providing environmental benefits.
  • Product Life Cycle Extension: maximise value beyond the point of sale, i.e. generating additional revenue from assets by maintaining or improving materials from goods that would otherwise be lost.
  • Sharing Platforms: allows users to share assets, taking advantage of both overcapacities and underuse.
  • Product-as-a-Service: offers new revenue streams for companies with high product operation cost as they sell services and recapture residual value at the end of product life

So far, so good. Now what’s in it for your business?

The Benefits of Going in Circles

Even if the optimal how of the transformation is still subject to debate, the question of why can be answered rather straightforward – the upsides of a circular economy are plentiful.

From an environmental perspective, experts estimate that a circular system has the potential to halve industrial carbon dioxide emissions in the EU until 2050. This can be achieved through less resource extraction, processing as well as energy- and emission-intense disposal.

Another carbon reduction driver will be the decrease in demand for importing primary raw materials as cross-industrial material and waste flows are becoming more and more integrated. By extending product lifespans and establishing closed-loop systems, our economy can potentially save up to one third in primary material consumption by 2030, compared to current levels.

A circular economy also helps to maintain balanced ecosystems. Regenerative and resource-saving practices of circularity can foster natural productivity that leads to fertile lands, clean water and improved air quality. Keeping our natural systems intact does not only benefit ecological diversity but also the economic sectors dependent on them, agriculture being one example.

Unlocking New Revenue Streams

Incentives to move towards a circular economy are not limited to environmental sustainability. A McKinsey study demonstrates how a circular economy could boost Europe’s resource productivity by 3% until 2030, allowing companies to save €600 billion in cost per year and generating an additional €1.8 trillion in other economic benefits. Accenture also indicates that a circular economy can unlock $4.5 trillion in new economic growth by 2030.

On top of that, the European Parliament (EP) underlines that global recognition of resource depletion may place pressure on companies to increase their efficiency, eventually driving us into a circular economy. Circular systems also require innovative design, business model adaption, research, recycling, remanufacturing, and product development – all of which could create 700,000 new jobs, according to an EP estimate.

Circular economic growth, however, will only be possible if businesses, banks, and governments collaborate to encourage a change in mindset which embraces new business models.

Is Everyone up for the Challenge?

Transformation requires effort and creativity to redesign business as usual. Rethinking traditional take-make-dispose cycles in design, sourcing, manufacturing and distribution today rather than tomorrow is a corporate necessity that is not limited to corner offices. Exploring new approaches will be vital in the shift since some obstacles are yet to be overcome.

Setting up Circular Supply Chains

Enabling and limiting at the same time, suitable supply chain set-ups are key in realising circularity. Before manufacturing a good, companies will need to have reliable access to circular inputs such as recycled materials with high grade purity.

With increases in product quality and life cycles, new usage models such as sharing require systems that allow for an efficient transfer of physical products between customers. At end-of-life, used or consumed goods will need to be reintroduced into value-creating cycles.

Within product design, companies do not only have to adapt to using sustainable raw materials. In order to create new value from old goods, product design must be oriented around an ability for circularity, meaning that products are made to be easily disassembled, repaired or reused.

To identify promising approaches here, many companies already engage in collaborations or establish corporate accelerator programmes.

The Risk of Industries Falling Behind

The extent to which the circular economy will change the status quo of business depends on the industry and the materials in use. Whereas manufacturing generally holds high potentials for circularity, to be noticed by more and more companies committing to respective targets (for example within automotive), other sectors will face inherent barriers. For instance, materials such as paper can only go through a distinct number of cycles and hazardous waste also faces its circularity limitations.

For some companies, the cost of recovery as of today would also be higher than the value of the materials recovered. Unless regulatory frameworks tighten and financially viable approaches are identified in the near future, there are not only technical barriers but also a lack of incentives for some industries.

Despite the complexity and challenges, pioneering circular economy adaptations emerge across a wide range of industries and inspire sustainable innovation. Where some companies start to experiment with circular solutions, others have already committed themselves publicly to bold circular economy targets.

Paving the Way: Circularity Innovators

IKEA: Closed-Loop Home Furnishing

As a prominent case, IKEA made the pledge to become a fully circular business by 2030, while still growing substantially. The company announced a partnership with the Ellen MacArthur Foundation that will focus on closed-loop home furnishing designs and methods.

Their ambitious goals include designing 100% of their products according to the circular design principles, use only renewable or recycled materials in their products by 2030 and develop new ways for customers to acquire, care for and pass on their products. This already pays off: IKEA reduced its carbon footprint across all scopes by 4.3% in 2019 while growing operations by 6.5%.

Timberland: Recycling Tires for Shoes

Another bold mover is the US-American footwear and apparel manufacturer Timberland. The company also pledged to design all of their products to be circular by 2030 and to source their entire demand for natural materials from regenerative agriculture. To ensure sourcing of sustainable material, Timberland is substantially funding research regarding ranching practices and is engaging in knowledge partnerships with relevant institutions.

One innovative step in their journey towards circularity has been a cooperation with the tire manufacturer Omni United. To reduce the use of virgin rubber, Timberland sources end-of-life tires from Omni to be used for the outsoles of outdoor shoes.

Schneider Electric: Extending Product Life Cycles

The electrical equipment specialist Schneider Electric has also realised the necessity of a circular economy, using recycled input materials and working on extending the life of their products.

The French-based manufacturer iterated some go-to-market approaches including product leasing, pay-per-use options as well as repair and take-back schemes to ensure discarded apparatus do not end up in landfills. In 2018, the company’s efforts led to reduction of 40,000 tonnes in the use of primary resources and of 30 million tonnes in customers’ carbon emissions.

How to Take Circular Action – Today

A circular normality will bring many more similar product innovations, organisational collaborations and strategic pivots. Whereas many firms will come up with new, profitable business models aligned with circularity principles, others will be struck by the realisation that essential parts of their established activities today may be tomorrow’s business at risk.

To get your company ready for the circular future, follow some of these effective action areas for setting up a circular business:

#1: Challenge Operations for Circularity Potential

You can directly contribute to a circular economy by reviewing your practices, analysing your resource consumption at each step of your value chain and by identifying reduction opportunities. Where can resources be saved or recovered? Can products be made more durable? How can waste material reenter the production cycle? Identifying value-creating opportunities for products at end-of-life is vital and will be a key differentiator, especially in industries where regulations are tightening the most and customer demands are increasing.

#2: Analyse Supplier Standards and Agreements

A critical view on the supply chain is essential. Do your suppliers make an effort to move towards circular operations and do you have access to sustainable raw materials? Consider setting up more sustainable terms or even switching suppliers that do not comply with new standards. One important thing to keep in mind: regenerative material might classify as sustainable but they might not necessarily count as circular input. Palm oil is a prominent example of an input that is regenerative but often has devastating environmental impact.

#3: Explore New and Less Resource-Intensive Business Models

To seize further profit potentials of the circular economy, you can not only modify existing operations but also strategically explore how your core competencies and resources can provide value to customers from new angles. Approaches such as product leasing, product-as-a-service or sharing, for example, become increasingly popular, especially since customers get more and more accommodated with using products instead of owning them.

#4: Foster Sustainable Innovation Within Your Organisation

Foster the innovative brain power within your organisation by bringing everyone on board with the principles of circularity. Educate your employees on circularity to eventually set up internal cross-functional accelerator programs that stimulate circular project development. Chemical company BASF, for example, established a co-funding programme where project teams from every division can apply with ideas regarding circular products or services.

#5: Collaborate With Circular Players Outside the Value Chain

Many companies on the move towards circularity join relevant networks and associations to gain credibility for their own efforts, find new industry partners for collaborations and benefit from a knowledge exchange. The Alliance to End Plastic Waste, for example, focuses on sharing best practices and insights into plastic waste reduction. The European Circular Economy Stakeholder Platform provides an extensive overview of similar networks.

A Circular Future

Moving forward, companies should be aware of the shift ahead. As circularity affects the entire organisation, leaders are advised to sharpen the awareness of their employees and to install the channels necessary to promote sustainable change. While a circular economy offers countless opportunities for economic growth, it exposes linear business to substantial threats – is your organisation ready to go circular?

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