Why the Circular Economy Is a Source of Growth for Any Firm

gigcmo
17/08/2021

The circular economy is the new way of making businesses sustainable - not only in terms of their eco-credentials but also in making money. 

What is the circular economy?

When we think of being environmentally friendly in a business, we gravitate towards recycling. However, the circular economy is about loop thinking; looking for ways to stop generating waste and using recycling is a last resort. It also extends far beyond headliners like single-use plastics. It looks at everything from waste and pollution to the provenance of raw materials, the quality of working conditions, manufacturing, land use and transportation.

The Ellen MacArthur Foundation is one central authority that industry leaders like Nele Van Campfort, an expert on circular and sharing economy, reference frequently.

They define the circular economy as: 

"A framework for an economy that is restorative and regenerative by design Looking beyond the current take-make-waste extractive industrial model, a circular economy aims to redefine growth, focusing on positive society-wide benefits. It entails gradually decoupling economic activity from the consumption of finite resources, and designing waste out of the system. Underpinned by a transition to renewable energy sources, the circular model builds economic, natural, and social capital." 

The foundation bases its agenda on three principles:

  • Design out waste and pollution

  • Keep products and materials in use
  • 
Regenerate natural systems


What's the business case for the circular economy?

Many businesses place environmental policy under a banner marked 'when we're successful' - as though sustainability is something you can only think about once you are profitable enough to indulge it. However, Nele says: 

"Instead of dealing with it as a regulatory framework, you need to comply with it and use it for innovation in your company. Embrace it as something positive, a framework for value creation rather than something you need to deal with."

She highlights that sustainability is an essential aspect in a capitalist system, key to attracting assets from investors. She comments: 

"Investment funds are asking hard questions because they're looking to the long-term. Larry Fink, CEO of BlackRock, said: 'climate risk is investment risk', and we see this reflected in companies taking a long-term view. Investors are thinking ahead to the next decade and need to decide now what they're going to do. They are rapidly taking their money away from companies that are running today but are unsustainable because of a lack of resource or the levels of pollution they generate because they risk major losses in future."

There are signs of change at board level in companies like BP, influenced by the business case for sustainability. They have actively started voting in new, climate-friendly board members because of the risk of going out of business fast without the right leadership. That investment perspective regarding the circular economy is essential.

Government action is also another key indicator for businesses. Many people will have heard of the EU Green Deal, which was voted for in 2019 and is now being rolled out. There is still a lot of controversy around it in the USA, but the Biden administration is throwing money at green transition. In short, the stimulus of government and legislation presents a challenge, and an indicator, for businesses. Major companies already have road maps designed for this transition because they know the move towards renewable energy, the circular economy and the green economy is coming. It's just that the speed depends on governments, and they are accelerating rapidly.

Can businesses be profitable within the circular economy?

In a company, there's a continuous need to innovate. Using the circular economy as a framework, regardless of environmental policy, is better for the long term. It will produce better products, make better use of materials, and solve more problems for customers. 

For example, Philips lighting services has stopped selling light bulbs to airports because they realised that they don't need the bulb; they need light. In the old economy, you would want to sell as many lightbulbs as possible, so in a way, you don't want them to last that long. However, if you're paid to make sure there's light, you are interested in making sure that the bulbs last as long as possible. Shifting from a product mindset to a service mindset results in greater profitability and is also more environmentally friendly.

We see this shift from product to service, especially with manufacturers. If you usually provide jet engines and instead shift to making sure that the plane can fly, you create more value for your customer. You will likely generate more revenue as well because people will pay for that reliability.

On a different note, Tesla now looks at the residual value of an electric car. The battery is almost pure metal, which you can endlessly recycle, and which has great value. So they have developed a leasing model, where they don't want customers to own the car because they want the battery back at the end of its life; they want to keep it in the loop as long as possible. This is circular reasoning; it's a clear and straightforward driver to increase revenue. 

Staying in the loop

The concept of keeping materials in the 'loop' for as long as possible is an interesting part of the circular economy on several levels. Businesses are typically subject to a combination of risk factors, but the circular economy presents an opportunity to mitigate certain linear risks. 

For example, typically, the price of commodities can fluctuate. They might come from a conflict zone (cobalt), or in fashion, you might get materials from areas where you have no control over working conditions. 

Alternatively, your shipping might get disrupted. Only this year, a container ship got stuck in the Suez Canal, trapping one of the world's busiest shipping lanes in a marine traffic jam for six trying (and expensive) days and disrupting supply chains in the process. Covid has also disrupted the supply chain, and the cost of shipping is now around 15 times what it was 18 months ago. 

Suppose we start talking about waste, however, and see it as a secondary raw material. In that case, you can begin to see the city as a gold mine - or an 'urban mine', instead of always seeking resources in a far-flung geological mine. After the Second World War, we started piling up waste, and now it's at unmanageable levels. However, if we begin to use it as a resource, we can envisage enormous untapped potential on several levels, including reducing linear risk.

Taking that idea and morphing it into a circular business model, where companies stop purchasing new products and pay recurrently for services, creates far more stability regarding cash flow. As companies pay for what they use, we move from a capital expenditure economy to operational expenditure. Those service-oriented business models make it easier for companies to manage cash. In turn, that's good for consumers, businesses, investors and the environment. 

Sharing is caring

The sharing economy contributes to this way of thinking as well. We know about this in regards to the likes of Airbnb or Uber. For the consumer, it's now a well-known practice, but for B2B uses, there's significant potential. There is a rise in B2B sharing platforms for high technology equipment, enabling expensive machinery to be used optimally and being more cost-effective for individual organisations. 

Many companies cannot accelerate because they don't have money to purchase highly specialist pieces of equipment. Meanwhile, a lot of this equipment is idling. With the sharing economy, companies can compensate for the high cost of equipment by leasing it out. Suppose you scale that principle to a space where we collectively think on a more circular level, and companies start sharing equipment better because innovation has got faster, cheaper, greener. In that case, we can achieve more results with less machinery. 

Greenwashing doesn't wash

One of the crucial elements of embracing the circular economy is that businesses must do it with authenticity. In industry, people are constantly worried about public perception. Consumers are more demanding about the impact of products and services on the environment, and transparency is essential. Environmentally friendly products are becoming more mainstream, which is central to the business benefits of being proactive, especially amongst younger consumers. 

However, if a company takes a typical corporate social responsibility approach, there is a risk of being accused of greenwashing, and that's very damaging for brand reputation. For this reason, Nele recommends that companies use facts and figures to show not only their achievements but also their challenges. 

She says:

"be honest with the consumer about challenges and the things you have not yet achieved as well as the things that you have so you cannot be accused of greenwash. CSR is not enough anymore."

We have seen multiple companies fall foul of this in the past. Recently, SC Johnson, whose Windex window cleaner was marketed as being in a bottle made from 100% recycled ocean plastic. The implication was that the plastic had been retrieved from the ocean. It was actually from plastic banks in Haiti, the Philippines and Indonesia; plastic collected on land that would otherwise have leaked into the sea. 

Another example is IKEA, which was linked with illegal logging in Ukraine this year. The retailer uses the Forest Stewardship Council as part of its wood certification scheme. However, the council was called out by an investigative report by NGO Earthsight as "an organisation that greenwashes the timber industry." The moral of the story being - do your research because ignorance is no longer considered an excuse.

Overall, sustainability was once a check box exercise for marketing purposes; today, it's a meaningful part of business success. It can provide more, and more reliable, revenue streams for companies today, make consumers more engaged and loyal to your brand, and it can support long-term profitability as well.

If you want to ensure your business is maximising the opportunities from the circular economy, contact gigCMO for a conversation with one of our Fractional CMOs.

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