Embracing the Economics of Circularity

September 30, 2020
CircularEconomyRevised

By Tze Ni Yeoh

Sustainable, regenerative, and circular business models are not simply an ethical choice, it is the next frontier of innovation and growth. What is the circular economy and how can businesses benefit from it?

We live in a ‘throw-away’ society. Our linear, ‘take-make-waste’ economy is optimized to meet (and create) our wants at the highest level of convenience and affordability. The Industrial Revolution, which marked the beginning of the linear economy, was engineered for increased material throughput for mass production. Extract more to sell more, sell cheaply, sell quickly, and sell to more distant markets.

This is no longer viable, ecologically nor economically. The rate of human consumption is currently 1.7x more than what Earth can support. Scientists call this era the Anthropocene: there is nothing ‘natural’ about natural disasters, and climate change is advertently driven by man-made actions.

The good news is that there is hardly anyone left that needs convincing that the climate and waste crisis is a real problem. But we can do more to build an economic case for businesses to radically change their production and business models to align with planetary boundaries.

The Circular Economy Opportunity

A circular economy is defined by three basic principles: designing out waste and pollution, keeping products and materials in use, and regenerating natural systems. Products and services based on circular business models (e.g. products-as-service, sharing platforms, recovery and recycling) aim to decouple resource consumption with performance needs.

For example, service-oriented models, such as Philip’s Circular Lighting, sells lighting as opposed to bulbs, as a service. The company offers clients a contract which covers maintenance and service, as opposed to selling them ownership of a product. This guarantees customers reliable, high-quality lighting and saves them the hassle of replacing and disposing of broken bulbs themselves. The manufacturer gains by recovering the broken devices, which are designed with recoverability and disassembly in mind. This maximizes the potential for recovery and reuse, as opposed to salvaging broken bulbs in general e-waste bins or worse, municipal streams, which could result in hazardous pollution.

Resource-efficient and zero-waste models can create massive economic gains for companies and reduce dependence on finite natural resources. Walmart, for example, saved $200 million in cost by reducing packaging and rerouting trucks, while simultaneously selling more products. Innovative methods of plastics disposal also saved the company millions in disposal costs to landfills.

The adoption of circular business models is estimated to be a business opportunity worth $4.5 trillion (4-5% of projected global GDP) by 2030. In addition, emerging research on environmental, social and governance (ESG) data provides evidence suggesting that companies with stronger ESG performance are more resilient against shocks. According to Serafeim (2020), during the COVID-19 crisis, most ESG funds outperformed their benchmarks and firms which the public perceived as behaving more responsibly had fewer-negative stock returns compared to their competitors. Ioannou, Serafeim (2019) also established that targeted ESG practices, including the adoption of circular business models, can create competitive advantages for firms. Targeted sustainable practices with the goal to overcome a company’s pressing challenges, especially those that are material to financial performance (e.g. dependence on rare metals) could act as a long-term corporate strategy that could yield positive financial returns.

Strategic Positioning in a Circular Economy

The circular economy opportunity requires a rethinking and reimagining of the status quo. Business-as-usual, linear thinking puts people and the planet into further peril. The building blocks below could pave the way for companies to align their models with circular economy principles:

Think long term: The pressure to deliver short term financial results could impair a firm’s ability to create long-term value. Studies have shown that managers who feel compelled to meet current revenue and profit targets may neglect investments in difficult to measure but critical capabilities. Thus, if we consider reimagining business models, e.g. creating a reverse logistics system, these investments may require high initial investment but may take some years to perfect, fine tune to achieve net positive returns. However, companies which are willing to take long-term investments could reduce cost significantly in the long run or even pre-empt more stringent environmental regulation ahead of its competitors.

Enhance logistics: Logistics are a major enabler of circular systems, which relates to a set of supply chain management practices and strategies concerning various stages of production (e.g. collection, storage, transport). Logistics are key to monitoring the flow of goods, measurement of economic and ecological footprints of a product or raw material and helps facilitate reuse and recycle pillars of a circular model. Establishing an effective reverse logistics system, either at a firm, sector or country level, is essential to ensure products at their end-of-life are safely repurposed, recycled or disposed. Companies that have effective logistics are better able to recover resources, measure impact and communicate results to investors and consumers.

Synergize and collaborate: A systems approach is necessary to achieve a circular economy. Take plastic packaging for example. A common approach is to set up Producer Responsibility Organizations comprising manufacturers, recyclers, governments, and consumer associations to encourage higher recycling rates. These organizations allow strategic implementations across the value chain to be communicated, funded and implemented effectively. To illustrate, extended producer responsibility schemes incentivize manufacturers to implement upstream interventions such as eco-designs (e.g. mono-material packaging, design for disassembly) that widen the scope of possibility of recyclable products. But this process does not ensure a product is recycled. The consumer still needs to sort their waste (e.g. separate organic with non-organic waste) and send it to the (correct) recycling facility. This is where government or civil society organizations step in. Meanwhile, funds collected through this process allows investments to scale circular businesses e.g. recyclers, reusable packaging startups.

Making the shift toward a circular economy will not be easy. But businesses that are willing to invest to create know-how in building circular business models can surpass their competitors. These are businesses that will win the hearts of consumers, investors and be ahead of regulation. Those that do not adapt will become another casualty in the climate and waste crisis.

 

About the Author:

TNYeoh

Tze Ni Yeoh is an economist-turned-sustainability professional. She is an MPP’20 alum from Harvard Kennedy School and co-founded Harvard’s inaugural Circular Economy Symposium. She is now working in international development, and leverages her background in economics and public policy to spur private sector development in line with a circular economy.

 

 

 

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