How Did We Get Here?
A fourfold increase in global GDP since the 1970’s has had the effect of lifting millions of people out of poverty. Developing countries in particular have benefited from massive improvements in health and living standards.
Economic growth and increasing material consumption however do not always lead to better conditions for people. In fact, these have come at significant cost to the Earth’s natural environment. They have resulted in adverse effects on human health and the exacerbation of inequalities, both within countries and between them. Today, five of the nine ‘planetary boundaries’ that measure environmental health across land, water and air have been breached. The triple planetary crisis of climate change, pollution and biodiversity loss puts us at risk of undoing all of the gains made over the past few decades.
Over the past 50 years, the global population has doubled to 7.6bn people. This number is forecast to reach close to 10bn by 2050. The planet simply does not have enough resources to sustain the same economic model to meet the demands of this many people. The scales of global prosperity are already starting to tip in the opposite direction. The era of cheap energy and cheap credit that fuelled the economic miracle of the 20th century is over.
Too Much Rubbish and Too Few Resources
We fill our lives with items that serve us for a limited duration. The raw materials, manpower, and energy that went into creating them are used for a relatively short period and then thrown away.
But where is “away”?
Waste doesn’t cease to exist; it simply moves to another location. Consider plastic as an example. Even though it can be recycled, the amount of plastic that is produced increases year on year. In 2021 estimated production was over 390 million tons. Researchers estimate that up to 12 million tonnes of plastic ends up in our oceans every year, creating large “plastic soups”. The Great Pacific Garbage Patch, the largest of these, is estimated to be as big as 15 million square kilometres, or almost the size of Russia. By 2050, there will be more plastic in the oceans than fish if we continue down the current path.
Non-renewable resources are finite and being consumed at an increasingly rapid rate. As extraction continues, it becomes more difficult and expensive to access remaining reserves.
The demand for minerals like rare earth elements, lithium, and cobalt has surged with the growth of electric vehicles and renewable energy systems. Supply constraints lead to scarcity and price volatility.
The war in Ukraine has underscored the politically sensitive nature of resource security. We have witnessed how conflicts and pandemics can disrupt resource prices and plunge the global economy into chaos.
According to the UN Global Resources Outlook, the extraction and processing of resources contributes to over 90% of worldwide biodiversity loss and water stress, as well as more than half of the impacts related to climate change.
Productive arable land is being lost to deforestation and urbanisation, affecting food production and other resource-related activities. Climate change is altering the availability and distribution of resources. For example, changing precipitation patterns affect water availability, and rising temperatures impact agricultural productivity. As with other resources, food has become scarcer and more expensive. This isn’t sustainable.
Fortunately, though, there is an alternative.
The Circular Economy
The circular economy is the closest thing we have to a silver bullet when it comes to reducing emissions to net zero. It directly addresses the root causes of the climate crisis, which can be found in the traditional linear economic model, where natural resources are extracted, used to produce goods and services, which we then dispose of when they reach the end of their life.
In a circular economy, resources don’t have an end of life. Instead, they exist in a closed loop of repair, reuse, refurbish, remanufacture and recycle. Nothing is wasted. Inspiration is drawn from living systems. Natural ecosystems operate in cycles — plants grow in soil, animals eat plants, manure replenishes soil, etc. Waste is entirely a man-made phenomenon.
Circular economy is ultimately about profit maximisation and should therefore be considered a strategy for competitive advantage. According to Walter Stahel, who is widely recognised as the father of circular economy, “The smaller the loop, the more profitable and resource efficient it is.” The more energy and effort that needs to go into reprocessing resources, the bigger the loop becomes and the more potential profitability is lost. Keeping loops as small and profitable as possible can be achieved by following a few simple rules. Don’t repair what is not broken, don’t remanufacture what can be repaired and don’t recycle what can be remanufactured.
Indeed, there are a number of case studies that show businesses that have transformed themselves and supercharged their profits by adopting this principle. Rather than the sale of a product being the end of a process, it becomes the beginning, where businesses in effect are able to sell the same product multiple times. They develop closer relationships with their customers and gain valuable feedback about how their products are used.
Despite the size of the opportunity, these case studies represent only a small minority of businesses. According to the most recent Circularity Gap Report, the global situation is getting worse. Rising material extraction has shrunk global circularity: from 9.1% in 2018, to 8.6% 2020, and now 7.2% in 2023. This means that more than 90% of materials are either wasted, lost, or remain unavailable for reuse for years as they are locked into longlasting stock such as buildings and machinery.
Consumption vs Usage
This isn’t just semantics. Businesses can start on their journey towards greater circularity by replacing consumption with usage. In part this is about a shift from selling products to selling services.
The transition from selling products, to selling advanced services represents a complete mind shift for product- focused businesses. However, in some cases it is a necessary condition for the move to a profitable circular economy model.
The Xerox Corporation used to be known for selling photocopiers and office printers. In the age of the paperless office, this is not a growing market. Yet, Xerox has transformed itself from a product-oriented company to one focused on services and selling customer outcomes.
Xerox provides software focused on print, document, and workflow management to optimise use of networked devices. This is a form of the ‘Internet of Things’, where data insights from delivering the service is analysed to feed this optimisation, ensure documents remain secure and support customers’ improvement and automation initiatives.
Shifting from an ownership model to one based on usage is a big change for customers as well as manufacturers.
What Can Businesses Do?
If the goal is net zero and we know that over half of climate change impacts come from resource extraction, then at least part of the strategy needs to target demand reduction for new resources. Achieving this is ultimately about using less, using for longer, using again and making clean. These are aims that businesses in all sectors of the economy can target. That said, the approach is likely to vary somewhat between manufacturing businesses and those in the service sector.
For manufacturers, the transformation is more fundamental, but potentially more rewarding. Circularity needs to be embedded in product design. Modular and standardised designs lend themselves far better to repair, refurbishment and reuse. Components made from recycled materials mean that products don’t need to rely on virgin resources. This provides both cost saving and revenue generating opportunities for business.
Caterpillar is the world’s largest manufacturer of construction equipment. They have been engaged in circular economy activities since 1973, which have delivered years of record profits. This is due to a manufacturing business model that makes high- quality parts, collects them after they’ve been used, cleans them up, and reincorporates them into new products at a cost 30%-60% less than making them from brand new components. Many of these parts are made once and sold three or more times.
Circular Computing take used laptops originally manufactured by Dell, HP and Lenovo and remanufacture them to a guaranteed consistent quality, which is indiscernible from brand-new. They are able to do this in large volumes and with comprehensive cosmetic detailing. Unlike Caterpillar machines, the laptops that Circular Computing remanufacture are not designed with circularity in mind. Nevertheless, the company has been able to work around the manufacurters’ linear economy designs. They have developed processes to renew used equipment, which is resold at a considerable discount to the equivalent new product with a fraction of the carbon footprint and associated environmental damage.
Arguably, all businesses in a circular economy model are service businesses. There are though sectors of the economy that don’t make or sell physical goods at all. The finance sector is one example.
Looking at the finance sector specifically, the past few years have seen a steep increase in the creation of financial products related to the circular economy. For example, by the end of June 2021 there were 13 public equity funds focused on the circular economy, with a combined USD 8 billion assets under management, and since 2019, over 35 corporate and sovereign bonds have been issued to help finance circular economy activity. According to Larry Fink, the CEO and Chairman of BlackRock, the “circular economy is a good way to invest, not just for social reasons, not just for environmental reasons, but for investment reasons, performance reasons”.
In the tech sector, Doji is a UK based trading platform for refurbished smartphones. It brings together buyers and sellers of second-hand mobile devices. All devices go through a 52-point check to grade each one based on its condition. With the UK being one of worst producers of e-waste globally, Doji help to reduce this by finding new use for mobile phones that might otherwise be languishing in a drawer, or worse, sent to landfill. Mobile devices also contain several scarce metals and minerals. Extracting these to produce a typical device generates around 85kgCO2e. Extending the life of a mobile phone through remarketing and reuse is the best way to maximise the value of the energy, labour and materials that went into making it.
Coming Full Circle
Putting the cause of the climate biodiversity and pollution crisis into their historical context show that roots of the problem can be traced back to the prevailing linear economy model. For policy makers as well as for individual businesses, the ability to deliver on net zero commitments and to make a discernible difference will be dependent on moving away from this to embrace a circular economy.
Meeting Net Zero Commitments
If sustainability and GHG reductions are your objectives, then circular economy, at least in large part is the way to achieve them. According to Deloitte, Scope 3 emissions account for more than 70 percent of most business’s carbon footprint. Yet, they can be the most challenging to measure and to reduce.
Circular economy can help to reduce upstream scope 3 emissions from purchased goods and services if companies take a more active interest not just in what they buy, but how they use it. Procurement decisions need to weigh up the durability and longevity of goods rather than just getting suppliers to report on the number of kgCO2e they contain.
Using purchases as intensively and for as long as possible will help to displace embedded product emissions over a greater number of years. It will also reduce costs.
Adopting Circular Economy is a Business Transformation
Sustainability and circular economy should be seen not as costs, but as opportunities to reduce waste, save money and tap lucrative new revenue streams. However, getting to net zero and adopting circular economy practices is possibly the most significant transformation programme that many businesses are ever likely to go through.
Like any business transformation, success depends on clear vision and support from the top. It needs to be planned, resourced, delivered and measured like a transformation programme. It involves continuous measurement, reflection and improvement.
As with any big change, particularly one that involves deeply entrenched habits, vested interests, and organisational culture, success hinges on stakeholder engagement and communication. If you can clearly explain what you are doing, why you are doing it and how it will benefit your stakeholders, then your chances of success are greatly improved.
One way to help ensure success is to get outside advice and to engage professionals that have a track record in delivering business transformation, and understand circular economy. People who how to get to net zero and have insight into which initiatives are going to have the greatest impact for the smallest investment.
To what extent do your business advisors have this combination of knowledge and expertise?