No, a Circular Economy is not just more recycling
Through lockdowns and quarantines, the supercharged adoption of digital solutions and a fierce competition between Zoom and Microsoft Teams that no one saw coming, 2020 was definitely the year of online discussions (and how many they were!). In fact, I closed the year by having two exciting conversations with Marketing students on how the transition to a Circular Economy might affect their sector. Despite the exponential mainstreaming of the term in today's policymaking and political agenda, most people still do not grasp what a Circular Economy actually is, erroneously believing that this is a topic just for waste management officials inside the Public Administration. The first time we noticed this idea was in April 2019, when we organised the first Athens Circular Forum and we are happy to say that this perception among business and political leaders is changing. From our experience and numerous discussions held over the past few years in designing and setting up the Sporos Platform, I will be sharing a series of articles explaining exactly what a Circular Economy in your sector will look like, starting from the very basic question: what is a Circular Economy anyway?
The Unavoidable Problem
In the year 2030, the world will be home to 9 billion people. Out of these, 3 billion will be middle-class consumers, particularly in Asia, where an exponentially increasing share of the population are adopting Western lifestyles. This will inevitably place a huge strain on natural resources, given the rapid rise in demand for materials, products and services.
With the rapid urbanisation that accompanies the population growth, it is currently estimated that around €2.4 trillion of value is being wasted globally each year. Global consumption of materials such as biomass, fossil fuels, metals and minerals are expected to double in the next forty years, while it is proven that already half of total greenhouse gas emissions and more than 90% of biodiversity loss and water stress result from resource extraction and the ‘business-as-usual’ linear pattern of ‘take-make-use-dispose’.
If we continue on this path, by 2050, global demand for resources will almost triple to 130 billion tons annually, which would overuse the earth’s capacity by more than 400%.
The positive news is that, according to a multitude of recent reports, such as studies conducted by the Ellen MacArthur Foundation, McKinsey and Company and the World Economic Forum, among many others, a global transition to a Circular Economy could add €1 trillion to the global economy by 2025, or the so-called ‘Trillion Dollar Opportunity’, and subsequently generate $4.5 trillion of additional global economic output by 2030.
Circular Economy: the Unavoidable Solution
In the broadest sense, a circular economy is defined as a shift from the current linear take-make-use-dispose production and consumption to one where materials are kept in the economic system for as long as possible. This model would bring three main benefits:
to ensure the sustainability of prosperity in the face of an ever-increasing global population;
to guarantee a healthier environment for citizens to live in;
and to increase business opportunities through the creation of secondary raw material markets while shielding them from the volatility of commodity prices that is destined to only increase over time.
In order to have a complete grasp of what the Circular Transition is, it is important to first shine light on what the forces that are pushing for the circularisation of the economy are. There are three fundamental drivers of the circular economy:
A. Resource constraints: with global resource demand growing quickly, there is increasing concern about looming shortages of critical raw materials and water. The same holds true for arable land, as demand for cotton, crops, etc. is growing. It is thus becoming imperative to rethink our resource use.
B. Technological Development: The introduction of new technologies, notably the Internet of Things (IoT) and Big Data and blockchain tools, is enabling the development and adoption of new CE business models (see below), often based on sharing and leasing but also reuse and remanufacturing. New technical systems and tools enable the tracking of products or materials during their life to enable extended use/life and maintaining the highest possible value. Meanwhile, design and manufacturing capabilities are evolving with advances in production, material science and manufacturing, e.g. 3D printing and Artificial Intelligence.
C. Socio-Economic Development: Currently, about half the world’s population lives in cities, and this will rise to six in ten by 2030, according to World Health Organization estimates. Increasing urbanisation supports the development of circular models since urban areas can easily host cost-effective collection and return systems for goods, materials and other resources and thus promote the closing of circular loops, as well as asset-sharing schemes and systems for product reuse.
The European Commission estimated that just for Europe, a Circular Economy can bring savings of up to €600 billion for EU businesses and can lead to the creation of 700.000 jobs by 2030, while reducing EU carbon emissions by 450 million tonnes by 2030.
Circular Economy Business Models
A circular economy is by nature holistic: it does not only refer to the objective of reducing waste to a minimum, but also to the rise of new business models. In a circular economy, sharing, leasing, reusing, repairing, refurbishing and recycling play a much more important role than they do today.
A. Circular Design and Production: These business models focus on the application of reduce/recycling strategies in either the product design or in the production phase. This includes designing products for modularity, easy repair, disassembly, recycling and longer product-life. Virgin materials are substituted with secondary or recycled materials while reducing the input of hazardous substances. These Circular Business models also focus on the development and deployment of innovative materials and process technologies that increase the circular resource efficiency.
B. Circular Use and Life Extension: The focus for these business models is the application of reuse, repair, repurposing, refurbishing and remanufacturing strategies to generally-accepted industry standards. This can include a product’s life extension through Product-as-a-Service (PaaS) or sharing business models as well as the repurposing of abandoned buildings and other assets through the decontamination and redevelopment of abandoned brownfield sites.
C. Circular Value Recovery: Businesses in this area would mainly address recycling and recovery strategies for after-use products: the recovery of either energy or materials and chemicals from waste, residues, by-products, bioresources and nutrients from bio-waste and wastewater sludge is the main focus of these business models, but they can also concentrate on the recovery of waste heat, for example from energy-intensive industries to be used for district heating in urban areas, or the reuse of treated wastewater.
D. Circular Support: These are all the business models that focus on the support and facilitation of all other Circular strategies in all lifecycle phases. These include the development and deployment of key enabling ICT technologies and services that support or facilitate other circular business models and value chains. On the other hand, Circular Support business models would also be those providing a boost to education, training and knowledge-sharing for the Circular Transition.
The Role of Finance
Most financiers are not familiar with the Circular Economy, and in particular with the correct assessment of risks (linear and circular) and opportunities, which hampers the bankability of CE projects and businesses. Due to the presumed associated risks, access to finance is hindered, especially for circularity-enabling SMEs. The available financial instruments offered by commercial and non-commercial lenders are not always recognised by the market as being able to finance Circular Economy projects.
Moreover, SMEs often lack knowledge about what funding and financial instruments are available and fit for Circular Economy projects/businesses. This is one more gap that Sporos Platform is ready to address, by establishing tools focused on CE needs, which are fit for purpose and tailored to SMEs.
Greek financial institutions appear to have become more risk-averse when lending to SMEs and high levels of nonperforming loans still weigh on the supply of credit, especially for segments within the SME population that are deemed medium-risk by a system that does not have dedicated metrics and methodologies for their comprehensive valuation.
A first step when deciding whether to finance a circularity enabling project is to assess the associated risks, which will be reflected in a higher required risk premium. In view of the particularities of the Circular Economy, this is not straightforward. Assessing the risks of a circular project or business should be related to the assessment of its counterfactual, a linear economy project or business.
This is why Sporos Platform works on developing inclusive financial and non-financial metrics to recalibrate the measurement methodologies of linear risks (e.g. regulatory risk, raw material or component-related risk, environmental and social risks and liabilities, etc.), and improve the comparability between linear and circular models in the different sectors (i.e. ensuring comparability of the financial metrics of circular and linear projects), assessing whether a linear project can be transformed into a circular one at a comparable risk and return level. The core aim is to establish a level playing field between linear and circular investment decisions by measuring impact and internalizing the externalities for each portfolio company.
In this manner, investors are becoming increasingly aware of the linear risks as a result of the ‘take, make, use, discard’ model and see the advantages of being the first movers in supporting the transition towards a Circular Economy. This private capital shift will follow and accompany the regulatory and societal shifts already underway, which taken together, will operationalise a Circular Economy for the betterment of our economy, our jobs, our food, our cities, our lives and our planet.