The basics of Circular Economy explained for entrepreneurs and CEOs

The basics of Circular Economy explained for entrepreneurs and CEOs

Entrepreneurs and CEOs generally tend to know a thing or two about sustainability and corporate social responsibility. Circular Economy, however, is an idea that goes far beyond those concepts. To stay informed in this competitive business environment, it is important to understand Circular Economy (CE) and its implications. If doing something good for the environment is not enough, the economic advantages may be. Here are the basics of Circular Economy.

‘The basics of Circular Economy explained for entrepreneurs and CEOs’ Entrepreneurs and CEOs generally tend to know a thing or two about sustainability and CSR. Circular Economy, however, is an idea that goes far beyond those concepts. Understanding Circular Economy and its implications is important in order to stay up to date in this competitive business environment. Read it here:

The basics of Circular Economy: why working towards efficiency is not enough

The Ellen MacArthur Foundation says that the linear ‘take, make, dispose’ model relies on large quantities of easily accessible resources and energy, and as such is increasingly unfit for the reality in which it operates. Working towards efficiency will not alter the finite nature of their stocks but can only delay the inevitable. A change of the entire operating system seems necessary.

Circle Economy puts it this way: in our current economic system, we extract resources from our planet at an ever-increasing pace and turn them into a product that we mostly dispose of after use. From the perspective of an individual or organization, that seems efficient. However, zooming out to a global level shows how unsustainable this approach is.

The basics of Circular Economy: what is it?

The Ellen MacArthur Foundation defines the CE as an industrial economy that is restorative by intention. It aims to rely on renewable energy; minimizes, tracks, and hopefully eliminates the use of toxic chemicals; and eradicates waste through careful design. The term goes beyond the mechanics of production and consumption of goods and services, in the areas that it seeks to redefine (examples include rebuilding capital including social and natural, and the shift from the consumer to the user).

Design to fit

A major outcome of taking insights from living systems is the notion of optimizing systems rather than components, which can also be referred to as ‘design to fit.’ It involves a careful management of materials flows, which are of two types in the CE: biological nutrients, designed to re-enter the biosphere safely and build natural capital, and technical nutrients, which are designed to circulate at high quality without entering the biosphere.

As a result, the CE draws a sharp distinction between the consumption and use of materials: CE advocates the need for a ‘functional service’ model in which manufacturers or retailers increasingly retain the ownership of their products and, where possible, act as service providers—selling the use of products, not their one-way consumption. This shift has direct implications for the development of efficient and effective take-back systems and the proliferation of product- and business model design practices that generate more durable products, facilitate disassembly and refurbishment and, where appropriate, consider product/service shifts.

TedEd has summarized this nicely in a video.

The basics of Circular Economy: what are its benefits?

The Ellen MacArthur Foundation has issued a report called “Towards the Circular Economy: Economic and business rationale for an accelerated transition” in 2014, featuring analysis from McKinsey. It details, among other things, the potential for significant benefits across the EU.

It argues that a subset of the EU manufacturing sector could realize net materials cost savings worth up to $ 630 billion p.a. towards 2025. That would stimulate economic activity in the areas of product development, remanufacturing and refurbishment. Furthermore, CE could create 100,000 new jobs within the next five years if companies put their energies behind developing circular supply chains and increase the rate of recycling, reuse and remanufacture.

In addition, considerable environmental savings are at stake. For instance, the UK economy could save up to $ 1.1 billion annually by keeping food waste out of British landfills. That could also reduce yearly greenhouse gas emissions by up to 7.4 million tons.

Step in the right direction

Heinz Leuenberger, head of the ‘Green Industry Initiative’ run by the United Nations Industrial Development Organization, UNIDO told Deutsche Welle: “Resource efficiency alone will not solve all our environmental problems, but it is a step in the right direction. The ‘Towards the Circular Economy’ study estimates for 2030 the financial benefit of resource efficiency at around $3 trillion per year. 70-85 percent of this potential would be in developing countries.”

He also says that one has neglected the cost-benefit of resource efficiency for too long. “Studies show that in Germany, which is a high-salary country, labor costs are around 20 percent. Material and energy costs are between 45 and 55 percent, depending on the industry. Still, if you have to reduce production costs, most CEOs focus on labor. But we think resource efficiency is a key aspect.”

Resource Event has summarized the benefits using pictures.

The basics of Circular Economy: what are the principles?

The Ellen MacArthur Foundation names five simple principles on which CE is based. If you want to read more about these principles, please visit their overview.

  • Design out waste. Waste does not exist when the biological and technical components (or ‘materials’) of a product are designed by intention to fit within a biological or technical materials cycle, designed for disassembly and re-purposing.
  • Build resilience through diversity. Modularity, versatility, and adaptivity are prized features need to be prioritized in an uncertain and fast-evolving world.
  • Work towards using energy from renewable sources. Any circular story should start by looking into the energy involved in the production process.
  • Think in ‘systems’. The ability to understand how parts influence one another within a whole is crucial.
  • Think in cascades. For biological materials, the essence of value creation lies in the opportunity to extract additional value from products and materials. This is done by cascading them through other applications. The complete biological entity should
be considered.

The basics of Circular Economy: will it really work?

Brian Kennell, President and CEO of the United States and Canada for Tetra Pak, wonders whether CE will really work: “Continued wealth generation in the 21st Century requires a new sustainable industrial model that is less dependent on wasting primary energy and materials — as noted in “Towards the Circular Economy.” For today’s CEO, it is a practical business strategy to hedge against resource competition, commodity price volatility and changing consumer demands, and at the same time to reconcile our economic, environmental and developmental objectives. But equally significantly, it protects our precious environment.” He gives three examples of companies successfully deploying the model today: Unilever, Mud Jeans and Ricoh.

Make sure you come up with sustainable solutions

Mark Goedkoop says that circular reasoning can result in even more unsustainable solutions, so he urges us to remain critical.

“We should make sure we are not barking up the wrong tree. If done without thinking things through, design for recycling can even have a negative impact on sustainability. In 1992, I was involved in an eco-design project on a new instrument panel for Volvo’s Dutch department. The design team had decided to use only recycled plastics for this instrument panel. This meant that it would be about 50% heavier than a panel made of new plastics. I told them they were making the wrong decision. Adding weight to a car will increase its fuel consumption.”

Sustainable solution

“After some research, we found that adding 1 kg to the car would cause an additional fuel use of 5-8 kilogram. Using recycled plastic for the panel would save you about half a kilogram of oil. In that case, closing the loop is not going to be a sustainable solution. Instead, the focus should be on weight reduction.”

He continues: “There are many other situations in which closing the loop is not worth striving for. If your products are dispersed over large markets and fast regions, it is difficult and inefficient to collect them for recycling. What is worse, post-consumer recycled plastic usually has very low value as most plastics cannot be mixed. The resulting products are often dirty and polluted with paints, fillers, and other impurities that result in reduced quality.” However, “if the new face of circular economy means retaining ownership and providing products as a service [as mentioned in the simple disciplines], I am in.” He then lists companies that have done well in this area, such as Philips and Xerox.

Circular economy goes mainstream?

Peter Lacey, Managing Director of Accenture Sustainability Services, was at the Circulars, an award show for leaders in CE. He says: “The World Economic Forum has helped put the CE on the map.  The finalists at the inaugural Circulars awards illustrate the extent of progress from established players to small start-ups. If the CE does become mainstream, there may come a time beyond which these new awards no longer serve a purpose.”

Conclusion The basics of Circular Economy

You have learned the basics of Circular Economy. It has a lot of potential and benefits. Not only that, rethinking energy and resource use is an absolute necessity. The companies mentioned above are generally big brands. I run a smaller translation agency as well as a startup called TranslationWebshop. I find it very challenging to come up with solutions of closing the loop. This is especially true since I am one of those service providers instead of a product provider. What is my waste? What is my position in the bigger picture? Am I already on the right track as an online service provider? How do you feel about this? Have you thought about how CE can work for you and your company?

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