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Business Assurance - Viewpoint

How are companies transitioning towards the circular economy?

General insights

Rising on corporate agendas

Circular economy is getting increased attention both in the public debate and with specific legislation emerging in several countries.  In the survey, 3 in 4 companies say they are either analyzing or discussing the topic. However, the approach to circular economy adoption varies. Some have already made circular economy core to their company strategy in order to create economic value and mitigate environmental impacts. For 26%, it is embedded in the company’s sustainability strategy and for 12.4% it is already core to their current business strategies. Companies in Europe reflect a high interest with 81.1% indicating that circular economy has been discussed or analysed.

Circular economy topic analysed/discussed

Internal drivers dominate the transition

Two circular economy transition drivers dominate: cost savings (65.7%) and the ability to support and enhance sustainability strategies (57.5%). Companies do seem more focussed on their own operations rather than external factors such as brand reputation (39.6%) and consumer demand, engagement, and retention (29.6%).  

The full potential of transitioning to circular economy business models seems fairly unexplored, so far. Only 16.6% see new revenue streams as a transition driver. Down the line, companies failing to move in this direction could risk eventually being outcompeted by more innovative businesses that adopt new business models and revenue strategies, changing the paradigm and disrupting the market. 

Companies in Europe indicate a slightly more external outlook, scoring higher than average both brand reputation (47.3% vs. 39.6%) and consumer demand, engagement and retention (36.7% vs. 29.6%).

 

Circular economy transition drivers

Regulatory pressure is less of a factor 

The move on circular economy does not seem to stem from regulatory pressure. This is indicated as a transition driver by 23.4% of the companies, only. Moreover, even fewer (15.4%) indicate stakeholder or investor requirements as a driver.

The numbers do increase slightly when looking at large companies (> 500 employees). Regulatory pressure is a driver for 29.9% (vs. 23.4%), while 20.4% (vs. 15.4%) point to stakeholder and investor pressure.

Circular economy transition drivers

Companies are on the move

Only 5.9% indicate a mature approach to circular economy, 29.6% are in the development phase and 18.6% are just starting out. Over 50% of the companies do say they are exploring or have adopted at least one circular economy business model. The levels of implementation were not investigated as part of this survey.

Within the next 3-5 years, about 1 in 3 intend to adopt one or more models, underscoring the growing relevance. Currently, the most prevalent models are resource recovery (39.6%) and product life extension (30.3%). In the next 5 years, adopting a circular supply – replace traditional resources with fully renewable, recycled or alternatives – seems to be the model growing the most (41% vs 22.6% now). Newer circular economy models such as product as a service and sharing seem less dominant on corporate agendas (17.6% and 12.5% respectively).

European companies report implementation of almost all business models at higher rates. A total of 62.2% have already implemented at least one model compared to 49.4% in Asia. The European picture may be influenced by regulations in specific countries and within the European Union, e.g. the EU Circular Economy Action Plan.

Circular economy business models adoption

The road to success is complex

Top 3 initiatives adopted to achieve a more circular approach are designing products considering environmental and resource impacts during the entire product lifecycle (44.4%), the creation of a more sustainable supply chain (43.4%) and the expansion of products’ life through repair, regeneration and recovery (42.9%).

However, a successful circular approach requires integration of multiple aspects and actions. For instance, 2 in 3 companies that design products considering environmental and resource impacts during the entire product lifecycle are conducting Life Cycle Assessments (LCA). The 64% committed to creating a sustainable supply chain are also working on developing partnerships and multi-stakeholder strategies. This also goes for the 61.4% that are investing in technologies.

Circular economy initiatives adopted/planned

Implementation needs structured measurement

Companies that have already implemented a circular economy business model have a huge potential when it comes to corporate metrics and measurements. Determining the initial level of circularity (baseline) before implementing initiatives has been completed by 24.7%, only. Specific goals and targets have been set by 29.8% while performance indicators have been defined by 26.7%.

Application of metrics seems to be in an early phase. Moreover, companies are largely using their own circular measurement framework (65.6%) rather than those developed by established organizations like Ellen MacArthur Foundation or The World Business Council for Sustainable Development (WBCSD).

Corporate level metrics & circular measurement frameworks

Essential to engage entire value chain

Among companies that have adopted a circular economy initiative, 41% are working with the recyclers and maintenance service operators. This reflects companies’ reported focus on resource recovery and product life extension. A total of 35.7% are working with companies in their supply chains, 18.1% involve specialized logistic providers (reverse logistics) and 17.1% include technology providers in their initiatives.

Becoming truly circular is not possible without involving a service or product’s entire value chain. Procurement departments and supply chain managers must integrate circularity into their strategies, systems and supplier to be really able to stimulate innovation and make a circular transition.

External Partners for circular economy initiatives

Lack of incentives and knowledge pose barriers 

The lack of attractive regulatory and economic incentives for sustainable design (34.5%) and common technical and legal definitions of waste and circularity (31.2%) top the list of transition barriers faced by companies seeking to design and implement circular economy initiatives. The high cost of circular solutions, i.e. difficulty to maintain, reuse or repair, is highlighted by 30.6%.  

It is worth mentioning that 23.6% say that low awareness, skills and capacity within my organization is a transition barrier. Only 18% indicate low awareness and inconvenience perceived by consumers as an issue. This highlights the importance of internal knowledge building within organizations to succeed in transitioning business models. In addition, there seems to be a gap to be filled when it comes to technical, legal and regulatory frameworks.

Circular economy Transition barriers

Cost savings is a main benefit 

Companies are mainly concentrating efforts on resource recovery programmes and product life extension or regeneration. Cost savings tend to be a typical benefit generated by such business models. This is reflected in the survey results by 57.2% of the companies. When diving into the details, 62% experienced cost savings in waste management, 56.8% in procurement of resources and input factors/raw material and 45.2% in operations and productions.

A high number of companies improved their public image and brand reputation (41.1%). The ability to comply with legal and regulatory requirements was reported by 38.5%. A total of 32.6% derived a strategic benefit, i.e., competitive advantage, and 21.6% were able to open new revenue streams.  The ability to gain market shares and enable new revenue streams is essential to scale pilot initiatives, maximizing impact and realizing the circular business model’s potential.

Circular economy benefits

Few companies communicate performance 

The pressure on companies to operate sustainably is significant, from internal employees to external stakeholders and consumers. How concrete and tangible commitments and actions actually are is constantly under scrutiny.

It is interesting that 28.3% have not communicated the performance of a circular product or initiative. Among those sharing, corporate channels seem preferred. The corporate sustainability report was used by 27.6% while 26.8% communicated through the corporate website and/or other institutional communication channels.

Only 19.3% shared through a product label. This could be because it is harder to demonstrate the validity of claims or share detailed information. Solutions based on blockchain technology and tagging, enabling digital traceability, can and are already helping companies reach out to consumers. Such solutions let anyone instantly check details and validity of product claims.

Circular economy communication channel

Teams must be multidisciplinary

Circular economy project teams consist of multidisciplinary competences, sourced either internally or externally. Professionals within strategy were involved by 66.9% (internal 50.6%; external 16.3%), procurement by 61.9% (internal 45.6%; external 16.3%), sustainability by 65.7% (internal 45.4%; external 20.3%), operations by 66.5% (internal 45.4%; external 21.1%), R&D by 61.2% (internal 45.2%; external 16%) and digital and innovation by 50% (internal 29.8%; external 20.2%).

Companies do tend to require different levels and involvement of expertise depending upon the maturity level of their circular economy model. Typically, the more advanced you are, the more involvement of experts within all disciplines is required. External resources, especially in more specialized areas, tend to be particularly relevant in the early phases.

Circular economy project team competencies by company’s circular economy maturity self assessment

Digital solution application is not widespread 

Companies implementing or considering digital solutions to support their circular economy projects are exploring information and data management (32.1%), traceability solutions and IoT platforms (20.4%) and business decision support (17%). Application of digital solutions does not seem too widespread yet, especially among small companies (<100 employees) where 30.1% are not applying them at all.

Digital technologies are seen by 19% as an enabler and necessary for initiatives to be effective and 12.1% indicate them as a key driver of the circular economy transformation. In addition, 28.1% sees the role of digital technologies as enhancing the initiatives’ efficiency, showing how a scalable circular economy transformation requires a digital and a data-driven approach.

Digital solutions and relevance for circular economy

Third party role can add value 

When asked about the value third-party organizations can add to circular economy projects, 30.9% indicate to demonstrate compliance towards regulators and 28.3% say to increase trust toward customers and final consumers.

As the survey results show, the circular economy transition requires systematic change, partnerships and involvement of the entire value chain. This includes consumers. A third party enabled by new digital technologies can act as a facilitator, creating a trusted environment where innovation and circularity can thrive.

Circular economy third party role