There's a chart on page 13 of the World Economic Forum's "circular economy" report that explains why companies are becoming more interested in the concept. It shows how the price of key commodities consistently fell throughout the 20th century, only to take a sharp reverse in the first few years of the 21st. By 2013, the real price decreases of the last century had been completely erased. In other words, companies had to start to thinking more deeply about their material costs if they wanted to keep growing.
A circular economy is one where goods are restored and regenerated more widely, moving from a system of virgin inputs and piles of waste to one that returns used products to a useful state. It is also an economy that minimizes resource use by moving away from individual ownership towards more leasing, renting, and sharing. The aim is to cut environmental damage and allow companies to keep control of the value in their products.
Of course, people have been doing elements of this for years—many of us share homes or cars, many of us recycle. What's changing is that large corporations are starting to come onboard. "The concept of the circular economy is rapidly capturing attention as a way of decoupling growth from resource constraints," the report says. "It opens up ways to reconcile the outlook for growth and economic participation with that of environmental prudence and equity."
The latest study, which was written by the Ellen MacArthur Foundation and McKinsey, gives a few good examples of firms that are taking the plunge and tackles the complexity of actually putting a circular economy into action. It follows two previous reports (here and here which looked at the broad economic benefits and opportunities.
Here are a few examples of companies taking circular approaches:
- Renault takes back many of its water pumps and engines, "remanufactures" them, and re-sells them for 50% to 70% of the original price. It's now making $270 million a year from the business.
- Philips sells long-term lighting leases, retaining ownership of equipment and reclaiming it at end-of-life. "It’s a new way for customers to achieve their sustainability goals: high lighting performance, high energy efficiency, and a low materials footprint," the report says.
- H&M, a retailer, gives customers a voucher if they return goods when they're finished with them. It then either re-sells the garments, or recycles textile fibers for use in the auto industry.
The report then offers a lot of practical advice about how companies can adopt circularity. Here are a few ideas:
Getting customers on-board with a circular concept may be the easy bit. If you're H&M, you just give away vouchers. The hard part is the supply chain, which is dispersed across dozens of countries and suppliers. The report recommends focusing on single products, mapping precisely where they come from, and seeing what opportunities might be available. It looks in detail at an 80-component power drill, as you can see in this slide show:
Because circularity hasn't been on the agenda, products haven't been designed to be reused or reconstituted, and starter materials have become more complex. There are now dozens of polymer plastics, for instance, making recycling more difficult. Companies can create opportunities by keeping things simple. "Reorganizing and streamlining flows of pure materials will create arbitrage opportunities that generate economic benefits and make investments in reverse cycle setups profitable," the report says.
"Business models are needed that allow better access to products, components, and materials during and within the post-usage loops," the report says. That means adopting ideas from the startup based sharing economy—for example, in using up "idle capacity" (like when you rent your home on Airbnb). "New models will also be key to tapping the growing trend towards collaborative use of physical assets."
Read more of the report here.
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