Thoughts on the circular economy from the latest April Forum
The first law of thermodynamics states that energy cannot be created or destroyed – you just move it around.
In a perfectly closed system, there is no waste, just a continual repurposing and reforming of energy and matter. This is ultimately the utopian vision of the circular economy - material and value is not extracted and discarded, but recycled, reused and resold.
The philosophy driving it says all the material we need is currently in circulation; we just need to use it better. However, just as a perpetual motion machine doesn’t (and cannot) exist, so the idealistic form of a circular economy is just that.
But we need to try, triggered not just by regulation and a scarcity of resources and materials, but by a real and climatically violent realisation of man’s effect on the planet.
The attempted implementation of high-level pledges is surfacing some significant challenges to getting the wheels turning.
The phenomenon of the circular economy has moved from the fringes to centre stage over the past few years and at its simplest, is about moving from ‘sell and forget’ to ‘sell, extend, recover and re-sell’.
Whilst alluring, this simple idea masks a complexity that even the most sophisticated and advanced operators are struggling with. If the ultimate goal is to get as close as possible to a perpetual motion machine, we are still at the stage of getting the wheels to start going round.
The challenges
Why are we doing this?
The assumption that directors and boards understand what the circular economy is all about is an unsafe one – there is still an education and persuasion job to be done for many. In addition, a new narrative may be required among customers and consumers; most are not yet ready for some of the changes to behaviour, value exchanges and ownership models that may be necessary.
What is the realistic scope?
No company or organisation can do this on their own, as they are all part of multiple interdependencies and ecosystems. If you are trying to build a wheel and a large section is missing, it will become extremely hard to turn. The size of the wheel also has huge implications – too large and overcoming its inertia will be impossible; too small and it will be easy to spin but won’t lead to much forward progression.
How do we make it work?
Very few products are ‘singular’ discrete elements that are simple to re-gather and reuse. The fundamental questions of ‘where is my product?’, ‘what form is it in?’ and ‘how / when will I get it back?’ are not easily answered without huge implications on everything from data privacy to product design. If it is more complex, energy intensive and polluting to reclaim, disassemble and reconstitute, does it make sense to do it?
How do we make it pay?
Creating a loop in a product’s lifecycle implies additional cost – if it exceeds the ‘linear’ cost, and if that cost can’t be passed on to customers, then the economic argument is difficult to win. Shifting a business that is used to a producing and selling, ‘fire and forget’ mentality, to alternative ownership structures, value exchanges and operating models can appear disruptive, risky and lengthy – and who wants that?
Reasons to be cheerful
Given the nature and scale of some of these challenges, it is little wonder we are still at the stage of raising and framing questions, as opposed to positing solutions. While it is challenging, there are many reasons to be cheerful and optimistic:
A key role for new C-suite entrants
A recognition of the potential of new C-suite roles being created in corporations, such as chief sustainability officer, with ‘convening power’ for ecosystems; these create a new voice in the boardroom and encourage a horizontal peer-to-peer network to share learning and drive best practice.
A generational shift
Navigating the very real generation effect and ‘ripple through’ of employees who are more concerned about purpose, values and ‘doing the right thing’ than driving pure financial performance in the short term, can unlock inertia. The potential exists to accelerate this, using the discomfort they feel and their urgency to do something.
Opportunity knocks
The challenge of taking a long-term view, with circularity ‘built in’ rather than ‘bolted on’, is in reality an opportunity to bridge the gap between high level pledges, new structures and operating models, to the everyday behaviours and resultant competitive advantage that may accrue from being a sustainability leader in a market.
The power of collective action
Addressing this topic on your own reveals your impotence, but proactive organisational leaders recognise the opportunity to make real impact by catalysing collective action at a systemic level – engaging the whole value chain, from suppliers through to distributors and customers, leading change across organisations, value chains and broader ecosystems.
Developing a strategy for change
The change design challenge, where the hypothesis is that change will come from the ‘middle-out’, rather than either top-down or bottom-up, creates a leadership challenge; create the conditions where self-sustaining circularity will flourish, identify the ‘hotspots’ where this is doable and give aspiration and inspiration to other areas.
Tell a positive story
It is possible to reset the end-consumer narrative from associations of recycling centres, second-hand clothes and earnestness, to more positive ideas of retained value, appreciation and vintage ownership. Being a steward or guardian of value, for which you get credit for passing on to someone else, changes the idea of ownership.
Track and trace
The ability to track, trace and measure materials is one where the technology largely exists and is already being deployed in fields as diverse as honey, housing and healthcare. Blockchain technology may create its own carbon footprint issues, but the ability to deliver the idea of shared ownership and transferable value is already here.
Redefining value The real fuel to the circular economy engine is a redefinition of value. The value of treating materials as scarce and precious stretches way beyond financial terms to include environmental and social ones. Corporate KPIs need to recognise value in a different way; a regenerative approach must be more highly prized than an extractive one that continues to increase our net debt to the planet. The importance of creating a currency for the circular economy, where the ‘total lifetime value’ of a product is rewarded cannot be understated.
This article summarises a discussion about the circular economy at the April Forum, hosted by April Strategy and attended by a diverse range of senior business leaders.
To talk about any of these ideas and challenges with our experienced team, get in touch with us on info@aprilstrategy.com.