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VIEWPOINT: Virtuous circles

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“Circular economy business models can dramatically reduce the cost of source materials.”

The industrial revolution created linear economies in which raw materials were sourced, turned into products as cheaply as possible and then sold to consumers. For centuries little thought went into where and how end-of-life products would be disposed of – but waste is now one of humanity’s biggest headaches. We also are running out of easily extracted resources, which drives up their prices. Making, selling and throwing away goods is not only destroying the planet, it’s increasingly cutting into profit margins. Hence the arrival of the so-called “circular economy” in which products are designed from the outset for repurposing time and again. For companies that convert to the circular economy business model, sustainability is no longer a peripheral issue – it becomes the heart of the business.

All the hot air being generated by governments and NGOs about climate change has hardly changed how manufacturers go about their production, but saving money will certainly get their attention. Circular economy business models can dramatically reduce the cost of source materials – a prospect that multinationals are now examining with keen interest.

Philips NV and Cisco have instituted circular economy teams to plan their transitions into this sustainable future. The trick to circular or “closed-loop” business is in the initial design of products so that manufacturers make savings by keeping resources in use rather than producing cheap and quickly discarded products. Where products can be easily recycled back to the manufacturer for repurposing, their embedded energy, materials and labour are preserved. In a sense, products are leased rather than purchased outright. There is serious money to be saved – and made. A 2012 Ellen MacArthur Foundation report estimated that the circular economy could save the EU US$380 billion annually in materials for medium-lifespan consumer durables such as cars, furniture, and household electric appliances. It further estimates that the world could save as much as US$700 billion each year on single-use consumer goods like packaged food and beverages. In essence, circular economies would take manufacturing back to nature – but in the hardnosed manner that businesspeople understand. In nature, there is no waste and every organism takes and gives to the ecosystem. By focusing on entire systems instead of individual components, closed-loop industrial processes will recycle materials indefinitely. Recognising that “green economy” alternatives are financially out of the reach of most people, circular economies offer the promise of being accessible to all, while also economically viable for companies able to undertake the production shifts. Early adopters may grasp this concept as the opportunity to dominate their markets – and most significantly, regulators and interest groups won’t be driving change, they need only to allow it happen. ❐

Author: Clive Lotter is an Integrated Reporting Consultant and writer of annual reports for listed companies