DNV.se

Business Assurance - Viewpoint

How are companies transitioning towards the circular economy?

Overall story

Roundabout in the middle of a forest

Introduction

A circular economy represents a departure from traditional manufacture and consumption patterns. It is intended to reduce consumption of resources by designing waste out of the system. The concept is not new, but results from this ViewPoint survey aimed at gaining understanding of adoption, new business models, actions and benefits applied and achieved by companies transitioning suggest limited take up. This despite the linear take-make-waste industrial model becoming accepted as no longer viable in the face of rapid population growth, resource constraint, sprawling urbanization, climate change, water insecurity and other trends.

The focus on circular economy has both internal and external drivers. There is increasing regulatory pressure on companies to become more circular. The EU circular economy action plan adopted in March 2020 is one of the main pillars of the EU Green Deal and addresses all aspects of circularity from product design to consumer empowerment and waste management. NGOs such as the Ellen McArthur Foundation and World Business Council for Sustainable Development (WBCSD) are rapidly becoming the leader on initiatives and standards, with networks composed by the larger private companies in the world.

Nevertheless, the survey indicates that companies’ circular economy efforts seem primarily driven by internal factors such as reducing costs and enhancing sustainability strategies.

Slow and cautious uptake

There appears to be growing awareness of the need for and benefits of circularity but take up is presently at a low level although some organisations have advanced further and faster. More than half of respondents, report they are beginning to explore the issue and prepared to adopt at least one model within the next 3-5 years. Around 12% report circularity being core to their business strategy but only 5.9% indicate a mature approach.

Responses suggest that most organisations are focussed more on internal drivers than external factors. Less than 40% see brand reputation as a driver and under 30% recognise consumer demand, engagement and retention as important. At present regulatory demand is not being seen as a main driver to transition. Main internal drivers appear to be resource recovery and product life extension. These can give immediate benefits but focussing only on such models can slow the transition.

Evolving strategies

It is not surprising that companies initially seem to primarily focus on existing products and services rather than evolving or radically changing their approach. Compared to process innovations, product and especially business model innovation entails greater complexity in its adoption and require more stakeholder alignment and change.

Only a small number of leaders have progressed to offering newer circular models such as product or service sharing and to generating new revenue models. Moving in this direction at a scale is essential to create a true circular economy. However, this journey is complex. It is only possible when the entire value chain is involved, and it requires multi-disciplinary competence which companies source both internally and externally.

While understandable that this is not the first move, it can be risky long-term not to advance as competitors may be changing the competitive paradigm through more innovative circular business models.

Barriers to overcome

Not surprisingly low awareness, skills and capacity within the organization is indicated as one of the transition barriers. This comes in addition to the lack of regulatory and economic incentives, common technical and legal definitions and high cost of circular solutions. This poses an interesting question in terms of how a circular economy transition could or should be enabled by governments and other institutions.

Only about one quarter of the companies have a baseline before implementing initiatives, set goals and targets or even define performance indicators. When doing so, companies tend to use their own circular measurement framework instead of those established by leading organizations such as Ellen McArthur Foundation or the World Business Council for Sustainable Development (WBCSD). The lack of structured performance metrics and measurement and known, transparent models poses both a threat the ability to identify successful models that can be scaled and ability to communicate efforts in a trusted and traceable way toward customers and consumers alike.

Potential upsides

There appear to be benefits for companies in exploring and integrating digital technologies into their efforts. Today, focus is mostly on data management, traceability and IOT and business decision support, but digital technologies are central to newer circular economy business models and ecosystems enablers both for the effort itself but also as an incentive and reward consumers.

Consumers today demand trust and transparency, instantly. The area of circular economy is probably no different. As circular economy efforts advance, it will be essential to create a trusted environment where innovation and circularity can thrive.  In terms of sharing, those that actually communicate efforts largely use corporate channels and not the product itself.  There is an untapped potential for companies to leverage on digital solutions to connect directly with consumers in order to engage and incentivise sustainable choices.

Leaders

The survey has analysed the 793 companies (12.1% of general sample) who demonstrate the most mature, comprehensive and advanced approach to the circular transition.

Leaders are more inclined to adopt new models and strategies such as leasing, pay per use and sharing. This demands that procurement and supply chain functions integrate circularity more fully into their strategies and systems. Stimulating innovation in the supply base by calling for great circularity can create added value by providing a more resilient and more innovative supply base.

As all companies are facing strong pressures to be sustainable and part of the solution, they are constantly under scrutiny by a diverse range of stakeholders. In order to be transparent, they must be concrete in their commitments and actions. Communication around circularity must be founded on sound metrics that are instantly traceable to refute and avoid being perceived as greenwashing.

The lack of measuring circularity and performance indicators represents both a risk to companies’ ability to communicate in trusted ways and the scalability of the first investments in circular business models. Without science-based measurements of the baseline and improvements, companies might face difficulties in identifying the successful initiatives and scale those up across the organization. Moreover, it is virtually impossible to build the necessary transparency and trust in claimed performance.

Here leaders stand out as more systematic in their approach and in applying corporate level metrics and measurements. This is an essential step in the transition to a stage where circular economies are prevalent and UN Sustainable Development Goals reached.