As countries prepare to meet at COP26 in Glasgow in November to agree further steps to address climate change, one idea that could help solve the crisis — the “circular economy” model — is being adopted by companies as diverse as vehicle manufacturer Renault and furniture retailer IKEA.
A thought leader in this space is the UK-based Ellen MacArthur Foundation. It said: “Relying solely on energy efficiency and switching to renewable energy will only address 55% of global greenhouse gas emissions.” What can contribute to cutting the remaining 45%, the foundation suggested, is adopting the circular economy’s three design-driven principles: Eliminate waste and pollution, circulate products and materials, and regenerate nature.
The model is not limited to specific sectors, but it is easier to implement in businesses that deal with large amounts of product and material, said Rémy Le Moigne, a former Deloitte partner and now managing director at Gate C, a specialist circular economy consultancy based in the Paris area.
In an interview with FM, Le Moigne said the circular economy offers businesses opportunities in three areas: purchasing, production, and sales.
Le Moigne said the opportunity in purchasing that adopting circular economy principles provides is twofold. Firstly, companies can secure their supply of raw material or product. This was the reason auto manufacturer Renault explored the circular economy, he said. It was also the impetus behind the move into this area by Belgium-headquartered chemical company Solvay. “[The company] implemented a few years ago factories to recycle rare earth metal from … electronic products,” he said.
In many cases there is also a cost advantage. “If your company buys refurbished equipment as opposed to new … it will be cheaper. … It’s not always true for plastic, but for other material it’s usually cheaper to buy recycled material as opposed to brand new,” Le Moigne explained.
The opportunity here again is cost reduction. Regulations, especially in the EU and the UK, mean waste from production processes can be expensive to deal with. “To recycle [waste products], reuse them, or sell them as by-product for another company is obviously useful from a cost perspective,” Le Moigne said.
“[In] the textile industry, most of the big brands today, like H&M or Levi’s or Patagonia … what do they do? They sell their product, and when it’s used, they buy it back from their customer, and sell it to another customer,” Le Moigne said. An alternative is using a subscription model for reused products to reach new markets and achieve long-term revenues.
Egbert de Jong is global asset manager at DLL Group, a Netherlands-headquartered business that provides commercial, retail, and used equipment finance for companies.
For manufacturers there is opportunity, he said, to create a competitive advantage by designing and redesigning equipment to make it easier to redeploy and recycle. “There is an opportunity to stay longer connected with … customers and follow the equipment during a substantially larger part of the product life cycle. [Manufacturers] also have an opportunity to bundle and sell more services, which provides them extra margin, and helps to keep the uptime [economic lifetime] of the equipment,” he said.
For end users, the circular economy provides an opportunity to pay only for the value consumed during their usage period, de Jong said.
“Through take-back programmes or leasing, the equipment will be taken back by the supplier or other party and the residual value deployed with second-life customers. This can give an economic advantage versus noncircular equipment. Responsibility for technological obsolescence is with the supplier or other third party, and it could add to the sustainability goals of the end users,” he said.
The major risk currently associated with the circular economy is in achieving a return on investment, Le Moigne said. Some large costs of traditional goods production — pollution, for example — are not paid by the producer company. As regulation increases and companies pay more of the total production costs, the circular economy will become more attractive from a financial perspective, he suggested.
This change is already being seen. “In France there is a new regulation that asks [companies] in the furniture market, in the textile market, or the automotive market to finance repair of all product,” Le Moigne said.
He said that under France’s Loi Anti-Gaspillage Pour Une Economie Circulaire (Anti-Waste Law for a Circular Economy), “a company has no other choice but to design and build facilities or [a] service network to help customers to repair their old chair or old table [for example]”.
For chartered accountant Christine Helliar, a professor at the University of South Australia in Adelaide, Australia, CFOs and other business leaders need to take a long-term view of circular economy adoption. “This is five years-plus strategy to really implement it because you need to change, maybe supply chains, production processes … what you’re making and what your raw material inputs are,” she told FM.
She added: “It’s really having a long-term focus. So the risk is that when you have a long-term focus, things might go wrong — you don’t see the benefit for such a long time.”
Governmental regulation should be a driver for implementation, Helliar said, but “there’s always a risk that you decide to do something and then the EU or a government … says no, you can’t do it that way, you’ve got to do it another way”.
De Jong said risk is not usually with the end user but with the supplier, such as the manufacturer or dealer, or with a third party such as a service or lease company.
“The main risk lies in projecting the future values of the equipment, [which] can end up [being] different [from that] expected. And also setting up a reverse logistics process to make sure the equipment is collected for reuse and not disposed of in down-cycle applications [reuse as a lower-value product] or dumped,” he said.
The circular economy means keeping products and material in a loop for as long as possible. After the first loop, information — such as a product’s composition and its length of use — is more difficult to capture.
Le Moigne said: “Technology can help us to capture information [about] the life cycle of a product, and so when you receive it back for recycling or for using … you know better the product, and you know if it should be recycled, it could be reused, or whatsoever.”
In his paper, “Digitalising Material Flows“, Le Moigne says there are two types of technology that can identify and track a product: either “anchors” that are embedded or that are attached.
Anchors can be physical, for example, fluorescent markers or watermarks; digital, such as Radio Frequency Identification (RFID) tags or printed electronics or QR codes; or biological, such as chemical tracers or DNA markers, according to Le Moigne.
Other technologies can aid implementation, Helliar said. Virtual and augmented realities (VR and AR) have the potential for training employees to see how a virtual company can put circular economy principles into practice.
Blockchain and artificial intelligence are also being used in businesses to track and analyse circular economy products and inputs.
3 actions for finance leaders
De Jong recommends three areas where CFOs and other finance leaders can take action to implement circular economy principles.
Overall business: Consider your business set-up from the perspective of it being an end user of equipment, facilities, buildings, machinery, etc., and consider how these can be managed in a more sustainable way. Also, consider the producer or service-provider side of the business and consider what you can do to make the marketing and sales of your products or services more sustainable.
Procurement: In procurement processes, ask suppliers to state the circularity of their products. If your business is more mature in this area, include minimum circular requirements when assessing suppliers.
Financing: Consider alternative ways to finance goods procurement other than paying cash or by borrowing money. De Jong suggested three financing solutions to help businesses become part of the circular economy:
- Leasing in general and more specifically operating leases in which the end user can return equipment.
- XaaS (“anything as a service”) programmes in which equipment is not sold separately but as a component of a larger service offering.
- Pay-per-use solutions, where the customer pays only for the time the equipment is used.
— Oliver Rowe ([email protected]) is an FM magazine senior editor.