22 May 20 | Weekly podcast
Moving to a circular-economy model of business could be both easier and harder than many companies think
First the easy part: the concept of the circular economy is now well understood. Its basic principles have been taken onboard by many large companies thanks to the work of organisations such as the Ellen MacArthur Foundation and its Circular 100 network, which is spreading the word to senior corporate management.
Also, market forces are providing a strong following wind that is pushing companies in the direction of the circular economy. Global competition means resource scarcity, and in some key strategic areas, such as energy, there are supply security concerns.
This means that even the least sustainability-focused companies are having to consider their options. It makes sense for all companies to think about how they can get more value from the resources at their disposal, rather than allowing that value to end up in an incinerator or landfill site.
Dustin Benton, head of energy and resources at think-tank Green Alliance and co-author of a recent study on the circular economy in the context of smartphones and other devices, says that moving to a more circular approach is a “classic change problem”, and for some companies, “change is going to feel scary”.
But “the market signals are scary already,” he says. The main obstacle companies face in going circular is “simply thinking that you can continue doing business the way you did in the past”.
Help at hand
To help companies, there are established circular economy business models that they can opt for, depending on their particular circumstances and what suits them best. Moreover, there are plenty of examples, pilot projects and case studies to inspire executives. “There are lots of evolutionary, relatively easy things to do,” Benton says.
Some sectors have been doing the circular economy for years. Many businesses, from photocopier suppliers to shipping, are based on leasing, meaning that the owner of the asset has an incentive to reuse it continually. Michelin, for example, has leased tyres on a “pay per mile” basis since the 1920s, giving the company a reason to make tyres that are as durable as possible.
Jakob Rutqvist, sustainability manager at Accenture Strategy, says that “one of the key arguments in favour of the circular economy is that it’s easy to get started. Not only that, often you are doing something already.”
Rutqvist, along with Accenture Strategy’s global managing director of sustainability services, Peter Lacy, is author of a forthcoming book on the circular economy that details five business models companies can look at.
The first of these is circular supplies, or the use only of recyclable, renewable and biodegradable inputs in the production system. The second is resource recovery, under which end-of-life products are collected and returned to the value chain. This may involve cradle-to-cradle processes with, for example, old carpets being reused to make new carpets, or may imply use of waste in other processes, such as the conversion of food waste to energy through anaerobic digestion.
Third, companies could focus on product-life extension, or generating value from repair or remanufacturing of products, rather than simply their replacement. This could evolve into the fourth model of product as a service – the classic leasing model in which the company does not give up ownership of the product in the first place.
Finally, companies could investigate sharing platforms, or use of under-utilised capacity. This is being done currently with car-sharing schemes, and by new businesses such as Airbnb, which uses the underutilised capacity of people’s spare rooms to provide accommodation.
There may be sub-models and subtly different models in different sectors. For example, Dustin Benton highlights six models being used for smartphones, tablets and laptops. For these products, a variation on the product-life extension model would be “software-led longevity”, or better contracts for provision of software updates to devices to prolong their useful lives.
However, the starting point, Rutqvist says, should be to “do an overview of activities that you are currently doing and the performance of those” in the context of the possible business models. This can help companies “understand where the focus should be in terms of wasted capacity and identify what to do”. Companies might be surprised what they find.
So far, so straightforward. Most companies should be able to find starting points that at least lead to some improvements. But now comes the difficult bit.
Moving to a circular economy implies major change. Stephane Arditi, products and waste policy manager with campaigners European Environmental Bureau, says that the circular economy will be a society-wide undertaking. “In the perspective of the systemic changes required by the circular economy, we all have to cooperate,” he says.
There will need to be “education and awareness at local level to challenge consumption patterns, development of innovative and creative business models, fiscal and financial incentives to support them, regulatory and economic framework conditions to secure investment and create legal drivers [and] enforcement of those, and forward-looking research and academic development for technical and social innovations,” Arditi says.
It will be the scaling up to this new model of the broader economy that will be the really challenging part. Huge multinational companies will need to implement changes across their entire operations. “We now have a narrative that works,” says Rutqvist.
But it is yet to be seen if the circular economy will really work at scale.
There will be losers of course. Companies that rely on selling hard-to-recycle low-value products with little reuse value could be particularly vulnerable. “Much more value will be created in the market working with the installed base of products, rather than selling new products,” Rutqvist says.
And companies must also be careful that adoption of circular economy business models actually does lead them along the path of greater environmental and business sustainability. Shifting value creation from new products to servicing and managing the lifecycle of existing products does not necessarily mean a lower environmental footprint.
Companies “want to grow resource-lite or asset-lite,” Rutqvist says. They should seek “ways to grow the business that do not increase the footprint, and should do it in a way that does not just lead to another exposure to risk”.