Circular economy: an unstoppable and necessary change
31 de January de 2020
31 de January de 2020
There is a lot of talk at the moment about the circular economy. But what does it involve? How will it affect the current economic model and our everyday lives? What are the main challenges it poses? Who should regulate it? To find out the answer to all these questions, read journalist Pilar Maurell’s interview with the lecturers on EAE’s MBA, Rubí Medina and Yanna Stefanu.
"The circular economy is one of the key routes for heading towards the 2030 Agenda of the Sustainable Development Goals"
The circular economy paves the way for a more efficient and sustainable society. Scientists warn that climate change is already an emergency. We use more resources than the planet can afford. We each generate tonnes of waste throughout our lifetimes and, every day, dozens of pollutants are pumped into the atmosphere that affect our health and the state of the planet. We have to change the way we consume, produce and, most importantly, think. The circular economy is part of the solution.
What is the circular economy?
Yanna Stefanu: It is a new business model paradigm that strives to minimize the use of natural resources and the emission of pollutants that harm people and the environment. Moreover, it aims to use excess resources in production and incorporate the waste generated from products into the production circuits to achieve zero waste emission.
Rubí Medina: Due to the fact that the current quantity of raw materials that exist will not be enough to cover future demand, and the huge amount of waste generated that is managed incorrectly and unsustainably, we need to establish a circular economy in which, instead of talking about the end of a product’s lifecycle. We focus of the reduction, reuse, recycling and recovery of materials, by designing and developing new materials, products, systems and business models.
What areas does it affect?
Y.S.: The circular economy paradigm involves a different way of interacting with the market, with a shift from an economy based on the sale and purchase of products to a service economy in which manufacturers own the product and charge customers for using them. This approach requires changes in conceptualization by the company. When the owner is the producer themselves, they have far more incentive to make the product harder wearing and longer lasting to prevent the need for repairs and reduce maintenance costs. Eventually, when the product reaches the end of its useful lifetime, the owner is keen to recover the maximum value from the product, whether that means giving it an alternative lease of life or obtaining the value of the materials. Therefore, they also have to take these issues into account when designing the product.
R.M.: At a global or local level, in all the sectors and industries. The European Commission has specified five priority sectors for accelerating the transition towards the circular economy: plastics; food waste; critical raw materials, construction and demolition; biomass and biomaterials
How can it be applied?
R.M.: Governments and institutions are responsible for establishing regulations, policies and goals to achieve sustainable development. For instance, in 2015, the European Commission adopted an action plan to help accelerate Europe’s transition towards a circular economy. The action plan sets out 54 measures to close the circle of the lifecycle of products. In addition, various support funds have been set up: European Structural and Investment Funds, Horizon 2020, the European Fund for Strategic Investments (EFSI) and the LIFE program. Moreover, companies have to adapt their processes and management models to embrace the principles of the circular economy. They need to develop basic circular design competences to facilitate the reuse and recycling in order to reduce the consumption of virgin raw materials. In addition, companies have to develop a value chain and operate with sustainable management models, as well as using suppliers that implement processes designed to work towards a circular economy. One way of verifying this is to carry out sustainability audits on suppliers.
Society and consumers must also analyse their real needs and change their consumption habits to reduce their environmental footprint, modifying their guidelines to promote more responsible consumption. They also have to do their part in terms of separating the waste that they generate. According to research by McKinsey, many consumers value sustainability, with 50% of them being willing to pay an extra 13% to 16% for more sustainable products. Furthermore, research and innovation centres are responsible for driving forward the development and application of new knowledge and technologies, as well as promoting innovation in processes, services and business models.
Recycling, reuse or reduction?
Y. S.: The strategies of the circular economy strive to find ways to prolong the useful lifetime of a product and, at the end of this lifetime, to have access to the fully operative product again. These return cycles have to be as short as possible to minimize the consumption of energy and new materials. The cycles that may be applied to a product include maintenance to extend its useful lifetime, thereby maintaining its functionality for the same user, meaning that there is no need to replace the product. Another option is reuse, so that it can benefit a different user. In the case of remanufacture, an in-depth revision of the product is carried out, with the replacement of worn or obsolete pieces, so that it can return to the market with the same features and performance as a new product. When none of these options is viable, we reach the recycling stage, when the pieces are dismantled to recover the materials and manufacture new pieces.
“Growing social and environmental pressures have alerted companies to the need to rethink the use of raw materials and energy”
What is its function in modern companies?
Y.S.: It is really important that companies pay close attention to this phenomenon because the competitive model is changing, with the emergence of new business that will have an impact on companies operating with traditional models. For instance, this is the case for companies offering shared mobility services or product rentals between private individuals. Companies that apply these new business models manage to become far more sustainable than their competitors.
R.M.: Companies play a crucial role because they are responsible for reducing the use of plastic packaging and stopping the sale of single-use products, promoting the development of longer lasting products, preventing consumers from having to change products constantly. They also have to invest in reuse models for their products, containers and packaging. The risks in terms of the supply chain (rising prices and possible shortages of raw materials) and growing social and environmental pressures have alerted companies to the need to rethink the use of raw materials and energy. The circular economy may well represent a challenge for companies, as it will affect their processes and their costs. Therefore, they have to invest in innovation systems that enable them to develop a circular economy. Moreover, a change of management model is required to facilitate the extension of the product’s lifetime, which involves an intensive and environmentally friendly design to increase its longevity, as well as designing recovery solutions.
“The circular economy strives to prolong the useful lifetime of a product and, at the end of this lifetime, to have access to the fully operative product again”
Are companies aware of the need to apply this type of economy within their structure?
Y.S.: They still focus on recycling rather than on a circular economy, which is normal because implementing the concept of a circular economy requires changing the business model and this is always far more complicated than improving production processes to reduce the environmental impact. However, market pressure and social pressure in general is forcing companies to look for more sustainable solutions. Nowadays, the customers and consumers themselves demand that economic sectors and companies generate satisfaction for all stakeholders. It is no longer enough simply to keep the customer happy and satisfy their needs. Now companies have to strive to be relevant for society.
How are companies adapting to the new demand of young professionals who, as well as salary, focus on the company’s environmental philosophy and efficiency when deciding where to work?
Y.S.: Absolutely and, in this respect, it is medium-sized companies that are lagging behind the most. In the case of large companies, they have been incorporated CSR and sustainability models for some time now to help to improve the brand image, without reaching the stage of circular economy. At the other end of the spectrum, we have startups, most of which are set up with a clear awareness of sustainability and CSR. In contrast, traditional SMEs find the business models somewhat alien and complicated. In many cases, they do not have enough human or financial resources to fund the modernization required by the market, the labour market and society in general. As such, talent will be more interested in working for a multinational or a newly created company.
R.M.: Research by McKinsey reveals that the younger the generation (millennials and generation Z), the greater their focus on sustainability when choosing their employer. According to Deloitte, millennials overwhelmingly believe that business success should be measured in terms that go beyond simply financial performance. Corporations have to strike a broad balance between their objectives, which must include generating a positive impact on society and the environment, and creating innovative ideas, products and services.
What are the economic and social benefits of the circular economy?
Y.S.: The companies that embrace this new paradigm see improvements in their production costs, environmental impact, brand reputation and, as a consequence, their economic results. At a social level, reduced pollution and less waste generation have a direct impact on a better quality of life, as a result of living in a healthier environment. The circular economy is one of the key routes for heading towards the 2030 Agenda of the Sustainable Development Goals.
R.M.: The circular economy may lead to a 32% reduction in the consumption of raw materials by 2030, as well as lowering waste generation and emissions by applying material cycles and renewable energies. According to the European Parliament, measures such as waste prevention, ecological design and reuse can generate net savings of 600 billion euros, or 8% of annual turnover, for companies in the EU. The European Parliament also predicts that up to 580,000 jobs will be created in the EU as a result.
“Society and consumers must their consumption habits to reduce their environmental footprint”
Where could it be applied but currently isn’t?
Y.S.: In the case of vehicles, we are starting to see the early stages of businesses emerging with a pay-per-use model for electrical vehicles in cities, but cars are still bought far more than they are rented. The industrial sector has to follow the example of printers and photocopiers, which are hardly ever sold any more, but rather they are rented and a charge is applied per use. This same model could be applied to all kinds of machinery for industrial use.
R.M.: The circular economy has been implemented in a diverse range of sectors, but to varying degrees, because greater importance is currently being placed on certain sectors, such as plastics.
Could you give us examples of companies that have shown more awareness in this respect?
Y.S.: Although it is not a company, it is worth mentioning the interesting model of the Zero Waste Council. It is an initiative led by Metro Vancouver, which brings organizations together to make progress with waste prevention in Canada and promote the transition towards a circular economy. The interesting aspect of the model is that it encourages cooperation between different companies, which facilitates the introduction of this new business model. As an example of an aware company, I would say Suez and its water cycle model. In this case, it is absolutely essential, as it is a private company that manages a good as basic and common as water, but which is also a scarce good.
R.M.: The Circulars, an initiative of the World Economic Forum and the Young Global Leaders’ Forum, in collaboration with Accenture Strategy, is the world’s leading award program for the circular economy. The award gives recognition to individuals and organizations around the world that are making significant contributions towards the development of the circular economy in the private sector, public sector and society in general. In the 2018 edition of The Circulars, the multinational company that won the Accenture Strategy was IKEA. The principles of circular design recently developed by IKEA focus on the design of all its products right from the start to embrace reuse, repair, resale or recycling, seeing their products as the raw materials of the future. In the 2019 edition, the winner was Schneider Electric, which has designed and implemented three forms of circular innovations: extending the useful life of products; zero waste generation; and the reuse, repair and recycling of materials, among other initiatives.
Is there still a long way to go?
Y.S.: I would say nearly all of it. Most companies have not even embraced CSR and the circular economy is a step beyond that, and a huge step for that matter.
R.M.: Yes, there is a long way to go, which is why we need stricter regulations, changes in customer and consumer habits and, most importantly, the elimination of old business practices, such as planned obsolescence. According to data on solid urban waste processing in Spain, in 2016, 56.7% went into landfill sites. Of the 92.8 billion tonnes of minerals, fossil fuels, metals and biomass that enter the world economy every year, only 9% is circular or, in other words, reused. The majority of governments have still not grasped the potential of the circular economy and the interrelated benefits for reducing impacts, while also diversifying and enhancing economic opportunities.
What needs to change for the circular economy to become generalized?
Y.S.: The change will be slow because a cultural shift is needed in the social and corporate terrain. As new generations join the consumption and employment markets, this cultural shift will gradually take place, but slowly. Banning planned obsolescence would be a small step in the right direction, among others, but not the boost that circular economy needs to thrive.
R.M.: The objective of the circular economy model is to ensure that the value of products, materials and resources remains in the economy for as long as possible, as well as minimizing waste generation. However, some companies attempt to increase demand and revenue by intentionally reducing the lifetime of their products or their components. This practice is known as planned obsolescence. The good news is that some countries, such as France, have joined the fight against planned obsolescence with legislation that defines the practice as an offence punishable by a two-year prison sentence and a fine of 300,000 euros.