Circular Business Models Avoid Risks and Stimulate Innovative Decision-Making

The world needs less waste.  Every year, we generate over 2 billion pounds of it.  Incredibly, 99% of what we buy is thrown away within 6 months.  Most of this ends up in a landfill where it must be managed and where it pollutes land, water, and the atmosphere.  Globally, many countries export or even trade waste, and some of the most toxic ends up in developing countries.

Our current take-make-dispose consumption model is not sustainable.  With it, we are choking our oceans, harming our people, and continuing an endless cycle of the search for new virgin materials with which to produce new products.

But there is a way out: the circular economy.

What is a circular economy?

The take-make-dispose consumption model is sometimes called cradle-to-grave.  In this model, an object’s obsolescence is presupposed. The goods may be made with low quality ingredients, which saves costs, but then requires disposal or replacement in a relatively short period of time.  Or, the goods may be planned and marketed in such a way that there is continuous and new demand for goods.  Or, the goods produced may be single-use, with no means of reuse or recycling.  Many of these goods are costly to repair, or may not be capable of being repaired at all.  At the end of their life, there is no option but to discard them.

The circular model, on the other hand, is sometimes called cradle-to-cradle.  This model is fundamentally different from the take-make-dispose model.  In the circular model, consideration is given to products from their very inception regarding conservation of raw materials and effective end-of-life processes.  This innovative view takes inspiration from the natural world in the form of biomimicry, and is giving birth to many “as a service” economic designs.

As awareness about the problem of waste has grown, its gotten a lot of attention.  Many companies—as the primary generators of waste—are being called to task by watchdogs such as Greenpeace, and by consumers, who show a buying preference for sustainable products, and who are even willing to pay more for green goods.

The result of circular business practices is relief for our environmental and human systems.  But sustainability isn’t just about doing the right thing.  The Ellen MacArthur Foundation—started by the renowned British sailor and solo yachtswoman—estimates that moving to a circular model represents a $1 trillion economic opportunity.  50 global companies, including Walmart, Microsoft, IKEA, Coca-Cola, and Schneider Electric, have joined the Foundation’s CE100, committing to work pre-competitively with others to develop innovative means to deploy circular business practices.

Circularity spurs innovation

To capitalize on the massive economic opportunity created by circularity, companies are using cradle-to-cradle thinking to impact their short- and long-term strategies, and to balance risks.

One of these risks is resource scarcity.  The World Business Council for Sustainable Development predicts the total demand for resources in 2050 will reach 130 billion tons annually, a dramatic increase from the 50-billion-ton level used in 2014, and an overuse of the Earth’s total capacity by more than 400%.  Further, the US Green Building Council has found that we are consuming resources 50% faster than they can be replaced.

In this resource-constrained environment, companies must begin thinking about how to pivot their business strategy to a closed-loop ecosystem.  Where can virgin natural materials consumption be reduced or eliminated? And how can existing products be repaired, refurbished, or remanufactured?

Areas for companies to consider include:

• Natural materials procurement: What materials can be developed to replace those that are becoming extinct?
• R&D: How can products, and the manufacturing process, be reinvented to reduce and recapture waste? What new products can be developed and marketed using recycled or upcycled materials?
• Consumer relations: What processes and change management models can companies use to increase resource reclamation or repair at the end of a product’s life?

Circularity leads to resilience

Another risk is climate change.  Global warming is destabilizing the climate and making it less predictable.  The result is extreme weather events that come with a heavy human and economic toll.  Case in point: Hurricane Maria devastated the island of Puerto Rico last year, which lost an estimated $10 billion in economic productivity.

This potential exposure makes insurers and investors uneasy.  When Larry Fink, CEO of BlackRock, issued his annual letter to CEOs this year, the tone was focused on the importance of responsible business for sustained growth.  The G20 Financial Stability Board has launched the Task Force on Climate-Related Financial Disclosures (TCFD) which has already begun to influence disclosure mandates—like CDP—and decision-making.

The good news is that the carbon reductions required to meet IPCC guidelines for climate change mitigation are best achieved through enterprise efficiency and sourcing new and renewable energy sources—both of which are regenerative and iterative and consistent with the circular economic model.

Areas for companies to consider include:

• Production processes: Where are energy and resources being wasted and where could they be contained? Could production models be simplified or innovated to result in greater resource efficiency? Are regenerative alternatives available?
• Equipment: Can aging and inefficient equipment be updated? Are there opportunities to use IoT to overhaul manufacturing systems and improve resource consumption? Can existing equipment be refurbished or redeployed?
• Energy procurement: Is there a strategy for procuring onsite and offsite renewable energy? Can savings from renewable energy procurement be reinvested in further efficiency projects?
• New energy opportunities: Is the company exploring onsite energy storage, microgrids, combined heat & power (CHP), or even more innovative solutions like biomass energy generation, heat reclamation, and more?

Business must evolve if it is to survive.  Embracing circularity is the next step many companies can take to embrace long-term thinking in a resource-constrained environment.

Schneider Electric is committed to circularity, and through it, we are helping ourselves—and our clients—set and achieve resource reductions, realize financial savings, and develop innovative strategies.  Learn more in our new white paper.