How Businesses Can Support a Circular Economy

Since the industrial revolution, we have been able to get away with relying on natural resources to raise our standard of living. But as these resources become scarcer and more expensive, we need to find new ways to create a more sustainable environment.

This was the focal point of the recent Paris Climate Summit. While most of the discussion revolved around reducing emissions targets, global leaders also discussed the need for a circular economy, which essentially involves decoupling economic growth from the extraction and consumption of scarce resources with negative footprints and making existing resources productive for as long as possible. In his speech at COP21 European Union Commissioner for Environment, Maritime Affairs, and Fisheries Karmenu Vella stressed the need to switch to a more circular economy. He said that the EU had set aside €650 million to fund innovative ways to change consumers’ usage of raw materials, reduce electronic and food waste, develop new recycling techniques, come up with new construction materials and new ways of using old ones, and create new energy sources out of waste.

Employing a circular supply chain would help make processes, such as product design, procurement, and waste management, more efficient and productive. We see three ways businesses can start: 1) recycle more and better, 2) rent goods, and 3) lengthen the longevity of products.

1. Practice more closed-loop recycling.

There are two main forms of recycling: closed and open loop. They’re not equal. Closed loop involves reusing materials such as glass, steel, and aluminium that can be recycled continually. Open loop, or “downcycling,” takes into account the fact that materials (e.g. paper) downgrade to lower quality with each recycling, so this involves either only recycling materials that won’t deteriorate over time or extending the lifespan of materials before recycling them.

Companies like Dell have started establishing closed-loop supply chains to get more value out of the materials in its products. Plastics, like paper, tend to lose their inherent value after each recycling, so companies are less likely to reuse them over time. Along with its business partners (such as Wistron GreenTech), Dell has developed ways to prevent some of the plastics it uses from deteriorating, so it can continue to recycle these materials.  This saves Dell money, reduces carbon emissions by 11% compared to creating the same products with new plastics, and appeals to the increasing number of customers who want environmental friendly products that are high quality while not more expensive.

Another example is France’s MTB-Recycling. The company recovers copper wiring from retired vehicles and re-processes it to produce 99.9% pure copper that can make better-performing wiring. This is one of the reasons it is the preferred supplier of Renault, a car manufacturer that is committed to the circular economy.

2. Rent instead of sell.

Recycling, no matter how good, is not enough, because businesses are ultimately depending on the end users to recycle their unwanted goods. So some companies, instead of selling products to customers, have turned to renting or leasing them instead. In this type of “servitization,” or selling the use of goods instead of the goods themselves, companies effectively retain the ownership of the goods throughout their life cycle, as customers must return the product to the sellers. Take Renault’s electric cars as an example. Instead of selling the batteries to its customers, the company leases them. This means that when the batteries no longer work, the manufacturer can re-engineer or recycle them for future use.

Another example of servitization is Mudjeans. In this case, when the customers no longer want a pair of jeans, they are asked to return them, at which point Mudjeans will reuse the material to make new jeans or turn them into vintage pairs. The company saves money on sourcing materials, wastes less, and attracts a new segment of environmentally conscious customers.

3. Offer ways to lengthen and widen the use of products.

Instead of just melting unwanted products down, many physical goods can undergo “remanufacturing” to extend their longevity. This means that they can be re-utilized for secondary or emerging markets with a less sophisticated infrastructure. A good example of this comes from UK-based Fonebank: it buys old smart phones to refurbish them and sell them as smart phones, giving the older technology a second life. Apple, too, sells refurbished products for a cheaper price.

Many companies have been refurbishing and replacing worn-out product parts so that they’re “new,” perform better, and continue to be useful. The U.S. machinery company Caterpillar has been remanufacturing their machines and equipment since 1973. Since 65% of the company’s costs involve materials, salvaging materials for remanufacturing equals a lot of savings – restoring old existing parts is always cheaper than producing new ones. The savings are also passed on to its customers to ensure that they turn in their used parts to Caterpillar. The gains are not only accrued to businesses.  It is estimated that remanufacturing a cylinder head leads to 61% less greenhouse gases, a 93% reduction in the use of water, and an 86% reduction in energy used compared to producing a new one.

Renault, on the other hand, recovers some 43% of car parts for remanufacturing. Annually, it now refurbishes some 30,000 engines, 20,000 gearboxes, and 16,000 fuel injection systems. The result: parts are 30 to 50% cheaper for customers, and save 80% more energy, water, chemical products, and waste that would otherwise result from producing new parts.

At the Paris Climate Summit, 196 countries signed an agreement to create a better future. But this won’t happen without innovative solutions from businesses and consumers. The sooner we build a circular economy, the better it will be for all of us.

This article is also featured on Harvard Business Review, and is written by Mark Esposito, and Terence Tse.

Mark Esposito

Professor of business and economics at Hult International Business School and at Thunderbird Global School of Management at Arizona State University; a faculty member at Harvard University since 2011; a socio-economic strategist researching the Fourth Industrial Revolution and global shifts.

Terence Tse

Professor at ESCP Business School and a co-founder and executive director of Nexus FrontierTech, an AI company. He has worked with more than thirty corporate clients and intergovernmental organisations in advisory and training capacities.

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