While it still only represents 7.2% of the global economy in 2023[i], the circular economy is experiencing exceptional momentum.
Circular goes well beyond recycling. In fact, the most untapped value lies between product end-of-use and its recycling, opening up new business models such as product-as-a-service, product life extension, sharing platforms, sell and buy-back, repair and maintenance services, as well as second-hand platforms. The ultimate objective is to create environmental and business value by minimizing the use of raw materials and resources and, therefore, production of waste. This involves creating new industrial value chains, embracing business models based on long-term value, and eco-systemic solutions to help tackle global challenges such as climate change, biodiversity loss, waste, or pollution.
Why is the circular economy gaining more traction?
Several factors are at a play in accelerating the adoption of circular economy principles and initiatives by some companies, and even in a few organizations a more holistic transformation. On one hand, several risks are prompting organizations to adopt circular economies – to remain competitive in the long term.
These include environmental risks (eg increased GHG emissions, scarcity of resources), but also systemic risks linked to geopolitical and economic events disrupting supply chains and the sourcing of materials (eg war in Ukraine, Covid-19 crisis, Suez Canal blockage) Circular business models can therefore help organizations become more resilient and better address such risks.
Social pressures are also at play: more than 65% of buyers consider sustainability when making a purchase. In addition, regulation on the matter is tightening, in particular in Europe (Circular Economy Action Plan, AGEC law). These environmental, social, and legal factors are pressuring organizations to change.
While companies need to respond to these external factors, the circular economy can, at the same time, bring a lot of benefits. As an alternative to traditional business models, it could yield up to $4.5 trillion by 2030. Beyond the economic value, deploying circularity at scale could help reduce GHG emissions by 39% and ease pressure on virgin materials by 28%. A circular economy also brings social value by creating employment opportunities in the field, attracting new clients, and improving brand image. A circular economy therefore brings long-term value to businesses by helping them become more resilient and competitive, as well as making their offerings more desirable to their consumers.
How to move towards a circular economy?
Given these challenges and opportunities, the transition to a circular economy would seem to be an inevitable path. But having the right components is key for businesses to drive their circularity transformation successfully across all stages of their value chains (from sourcing to end-of-life).
To do so, companies need to deploy a holistic approach across these five main factors:
1. Economic scarcity is essential in defining a company’s strategy. Businesses must rethink their strategy to bridge the gap between increasing customer demand on one hand and limited supply in a world with finite resources on the other hand. Business performance is no longer a matter of being competitive in the short term, but of being resilient in the long term – to face potential supply risks, while being mindful of planetary boundaries. For example, Northvolt launched a joint venture with Volkswagen to create a gigafactory of electrical batteries, the first one to be established in Europe. In 2021, the Group produced its first fully recycled battery cell with an ambition to equip 3 million electric cars by 2030. This well illustrates the importance of integrating a circular economy early on at the strategic level, with the objective of supporting an economy of value rather than volume.
2. Product design is the cornerstone of the circular economy. We tend to consider economic circularity at the end of the value chain, synonymous with recycling or repairing (think about mobile phones as an example). But did you know that over 70% of a product’s lifecycle impact is determined during its design phase? Design is a critical stage for businesses to define their circular models. For instance, IKEA designs furniture to be easy to assemble and disassemble, taking into account the diverse lifecycles of its furniture. This can include not only purchasing but also rental, buying back old products that the brand will resell in “second life spaces,” and donating to associations. Product design is key to developing feedback loops between the different stages of a lifecycle and to adapting with agility to an increased variety of consumer behaviors by leveraging product functionality, modularity, and connectivity.
3. The greatest source of value lies between a product’s end of use and recycling. There are many unexplored upcycling opportunities involving reusing, repairing, and “remanufacturing” products. Depending on a product’s level of complexity, recovering components or certain parts can represent sources of supply delivered upstream within the production chain. In a circular economy, the product is analyzed as a whole: some parts may be sufficient to upgrade a product that will no longer be considered as waste. This involves in-depth reflection on reverse logistics, mobilizing supply chains dedicated to the reverse flow of products and materials; this can involve maintenance, repair, remanufacturing, etc. The “Re-Factory”, Renault’s circular economy factory, located in Flins in France, is part of this approach. The manufacturer extends the life of its vehicles and components (such as gearboxes or turbochargers) by offering advanced remanufacturing services based on a unique ecosystem of partners.
4. Achieving scalability requires the transformation of the entire ecosystem. Deploying a circular economy marks the transition from the concept of the extended enterprise, based on the exchange of information between a company and its partners (suppliers, service providers, etc.), to the establishment of something bigger – ecosystems. To enable this step change, new value chains need to be created by partnering with:
- Competitors (horizontal partnerships): Illycaffè has, for instance, proposed to its competitors to agree on a unified recycling standard for all their coffee capsules. The idea is to pool all the capsules and, by extension, the recycling process.
- Actors from other sectors (vertical partnership): Citeo is financed by companies to support the end-of-life of household packaging and paper, including their recycling. Citeo has developed eco-design, collection, sorting, and recycling services, thanks to the pooled action of its customers behind the creation of these solutions, and in partnership with local authorities and professionals.
- Note: These examples demonstrate how collective sharing of information with an ecosystem of diverse actors is key to driving systemic change and defining innovative models. Collective sharing of data will be another important enabler in accelerating the circular economy transition.
5. Technological innovation is the transformation catalyst. Two major innovations will fuel further disruptions:
- The emergence of biomaterials and synthetic biology will provide economically viable alternatives to the scarcity of certain key resources (eg bio-based materials, insect-based proteins), and high planet-impact processes (eg chemical recycling, precious metal recovery). For example, Ynsect and Innovafeed have developed innovative protein flours made of insects that are much less energy intensive and produce less water than traditional proteins.
- The development of reusability solutions in product design and operations (eg product digital passports, materials traceability, exchange platforms, decision-making tools, or design and simulation capabilities) will become increasingly important. For instance, digital twins can help develop next-gen supply chains by creating virtual replicas of physical products, systems, or processes. These replicas monitor, control, and optimize all aspects of a physical twin. This is a technological breakthrough that can accelerate implementation of the circular economy at the scale of an entire sector.
What should be done next?
The five factors outlined above are we believe good entry points for businesses to build their own solutions to achieve circularity, identifying and developing the interdependencies existing between the different stages of their value chains. Businesses will have to be creative and agile, relying on their human, physical, and technological assets to shift towards circular models and deliver economic and environmental value.
Just reducing carbon emissions is insufficient for achieving net-zero trajectories. Organizations need to start thinking in terms of planetary boundaries and resource scarcity when developing their business models. By doing so, they will become more economically resilient in the long term and will better protect our planet.
Achieving a circular economy requires complex and iterative transformation initiatives, but the ambition is worth pursuing. Organizations following this path will be more profitable in the long term by capturing new market shares, delivering tangible value, and setting new industry standards. Our next articles will deep-dive into some of the tools organizations should start implementing to start transitioning.
Author Clément Chenut is director and global head of circular economy at Capgemini. Additional contributors include Alice Blanchard and Stanislas Ancel. Read more Capgemini guest blogs here.
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