Circular Economy Materiality Assessment: The first step in an enterprise’s circular transition

We all know that our planet’s resources are finite. Some are now also aware of the fact that about 45% of global GHG emissions emanate from resource extraction and production. However, we are at the same time in a global economy that is a mere 9% circular. Our existing linear economy is unsustainable. Board rooms are slowly acknowledging that transitioning to a circular economy makes both environmental and business sense, yet the transition to a circular economy, albeit moving, is progressing at a “snail’s pace.” A fundamental barrier to the circular transition is definition, specifically definition at enterprise level. What is ill-defined is poorly understood. While a few leading definitions have emerged, they are often too broad for companies to understand how to apply the concept to their own business. Defining what circular economy means to a specific enterprise is an essential first step and is best achieved through a materiality assessment. This article provides a step by stay guide on how to carry out a circular economy materiality assessment.

The breadth and complexity of what the circular economy is (and what it is not) leaves many companies unsure of what it practically means for them, how to develop a circular strategy, and how to achieve impactful, tangible results. There are several reasons why companies fail to meaningfully integrate circular principles into their business and why many circular strategies remain unimplemented:

- Definition: The company initiates a generic circular economy strategy without clearly defining what it means for their specific sector and organization, leading to confusion and inaction.

- Education & understanding: There is insufficient internal education regarding the benefits associated with operationalizing circular strategies, so it is not prioritized alongside other programs.

- Vague ambitions: The vague ambitions lack success metrics and adequate support, such as reward structures or governance. This inadequacy leads to limited internal buy-in.

- Regulatory complexity: The company fails to thoroughly understand the regulatory environment specific to their current and future business, increasing the risks and blind spots.

- Customer landscape: The company lacks the awareness of the changing customer demands (both B2B and B2C) or the willingness to respond to new expectations in a timely manner, furthering a cycle of reactivity or customer attrition.

These common pitfalls are stagnating the transition to a circular economy. Unlike climate impact which has a recognized definition, established frameworks such as SBTi, and a common unit of measure (CO2 equivalent), there is no concrete guidance on how each business should measure their circularity. Ultimately, every company needs to define metrics and criteria that are specific to their business, product, or service. Determining a circular economy definition specific to an enterprise is a critical first step with respect to creating a strategy and commencing the transition. But where does a company or enterprise start? We believe, based upon extensive recent experience, the best place to start is with a circular materiality assessment. Now, having considered the key barriers, let us explore the materiality process in five steps.

Materiality refers to which issues are most important to a specific enterprise. This includes assessing which circularity topics are top priority from an internal and external stakeholder perspective.

Our recommended approach for conducting a circular economy materiality assessment is one that:

- clearly defines what circularity means for your particular industry and your unique company

- explains the regulatory landscape for your specific industry and adjacent, precedent industries

- reveals your current position relative to competition across circular topics

- assesses current customer requests and requirements and anticipates the future-state

- catalogs the various perspectives within an organization to reflect a representative prioritization at the enterprise level

By considering the full breadth of circular economy topics, across the entire product lifecycle from raw material inputs & design to end-of-life management, the materiality assessment results in clear priorities, actionable strategies, and effective KPIs. Our approach, outlined in the figure below, incorporates multiple perspectives including that of regulation, competitors, customers, and internal stakeholders. Combining such perspectives makes it possible to rank circularity topics according to their relative importance to a specific enterprise.

The top 3-5 topics with ‘high materiality’ are typically the relevant starting point for a subsequent baseline assessment, target setting, and implementation roadmap. Below we outline our five-step approach. Note: To exemplify the approach, we have opted for a case with a consumer electronics company and the topic of ‘repairability’. The approach is applicable to all products, services and enterprises.

Objective: Reviewing sector-relevant existing and importantly, upcoming regulation, from a municipal to national (or EU) level, shows what will be required in the future to achieve regulatory compliance. This ensures market access is maintained in key geographies.

Process: A set of geographies and product/process/project categories are defined, and the scoped regulatory landscape is assessed through the lens of circularity topics potentially relevant for a specific enterprise. With a future-focused analysis, it can be helpful to look at adjacent industries and product lines that are indicative of trends in the enterprise’s product or process category.

Example: Relevant regulations relating to repairability could include the Right to Repair bill in the U.S., the French Repairability index, and the EU proposal on batteries to be removable and replaceable by 2024. The state of the regulations (proposed vs. enacted) and the level of legislative activity in the topic of repairability would be compared to other circular topics such as recycled content or waste generation.

Objective: Analyzing competitors’ circularity strategies, targets, metrics, and performance helps to understand which peers are leading on circularity in the industry, what the overarching industry trends are, and how the company is positioned in relation to that.

Process: The competitive analysis can vary in depth and detail but can cover direct competitors or those that, although not competitors, use similar materials and processes. Direct competitors or peers are those that offer the same kind of services or products and compete in the same market. A company’s position in relation to their peers highlights the circularity topics where they are lagging or leading.

Companies in a similar industry but who are not direct competitors broaden the perspective and are importantly used as indicators to see where a particular sector may be heading. For example, a washing machine is a household appliance that is often regulated in a separate category than consumer electronics, but the ‘right to repair’ movement focused on consumer electronics could quickly spread to affect household appliances. By reviewing enterprise level reports and specific product information, we are able to assess the level of focus and achievement of other competitors in specific circularity topics.

Example: Competitive analysis for repairability could include a comparison of iFixit scores of flagship products, teardown reports, etc. To focus on batteries within repairability, a company could be scored based on their maturity in this space, e.g. a low score for batteries that are not removable in most products and a high score for companies that are already selling replacement batteries and toolkits.

Objective: Understanding and meeting key customer circularity requirements is of growing importance as voluntary requests shift to mandates. Across many sectors B2B customers, retailers, and public customers have introduced circularity requirements, such as recycled material content, sustainable packaging, or enhanced product repairability. Assessing the urgency of the various requests identifies the topics most critical to the success of a company’s current and future relationships.

Process: Given the variety of customer bases both direct and indirect that companies serve, analyzing the ‘customer needs’ can include retailers, consumers, or other original equipment manufacturers (OEMs). The review process considers retailer or OEM enterprise strategies, sustainability requests, and product requirements. For end consumers, survey data or interviews may be leveraged. The result is a body of evidence outlining which circularity topics are most critical to the customer base.

Example: Retail customers often give preference to suppliers who are aligned with their overall objectives. In the case of repairability, higher repairability scores or products with removable batteries may be prioritized over competition to meet the customer and ultimately consumer expectations.

Objective: Interviews with key corporate functions help uncover the internal level of awareness around certain circularity topics and metrics as well as the topics that are most closely related to the existing, overall strategic priorities. This exercise combines the various perspectives to weight the topics at an enterprise level. Process: A cross-functional group of stakeholders is interviewed and are educated on each topic, as it relates to their function. The interviewer and interviewees move through the qualitative discussion to ultimately rank the relevance of the circular topics. Topics rank higher depending on the priorities and reward structures of any particular group. After engaging various functions, the rankings are compiled to represent a cumulative, enterprise level materiality of the circularity topics. Example: In the case of repairability, this topic may already be a high priority for the service teams conducting repairs for products under warranty but may not be a high priority for other upstream functions like marketing & product designers. The interviews uncover the discrepancies and opportunities within the organization driving focus on the most strategic circular priorities.

Once the most material topics have been established, a baseline assessment is conducted. It focuses on the highly material topics and identifies the current performance levels, risks, and opportunities related to the topics that are already underway. This uncovers the existing capabilities within an organization along with any potential gaps that will need to be overcome to enact the circularity strategy.

This assessment determines the maturity of the organization in relation to each of the material topics. Gaps in the organizational structure, data systems, and work processes are often an output of the assessment. Ultimately, the baseline assessment grounds the organization in their starting point and realistically prepares them for the work ahead, i.e. the creation of an enterprise-specific circular economy strategy.

A focused set of enterprise-specific circular economy topics is defined by the materiality assessment, and the baseline study results in a clear understanding of the current state of those topics within the organization. This lays the foundation for setting an ambition and complementary targets. Targets should be set for each of the highly material topics. The level of ambition of the targets may vary among the topics depending on the urgency of external or internal pressures. It is not uncommon for organizations to have a combination of qualitative and quantitative targets set to realize their new circular economy strategy. By considering the findings from the baseline assessment, a tailored roadmap of activities can be constructed to outline the relevant metrics or KPIs that will be used to track towards and achieve the set targets. The most successful roadmaps have:

- a recognized business case

- clear ownership (defined RACI)

- attainable interim milestones

- an understanding of the effort (resources, cost, etc.) for each activity

- anticipated challenges and mitigation plans

The circular economy is a sustainability tenant of emerging importance, and it poses many opportunities for differentiation and competitive advantage for organizations proactive in creating and enacting well-defined strategies. A materiality assessment enables the creation of a tailored circularity strategy that fits the unique challenges an enterprise faces and the goals it wishes to achieve while reconciling the external demands. Our recommended approach to first conduct materiality and baseline assessments ensures a thorough understanding of circularity within a particular business and overcomes the common barriers to a successful transition. Setting targets and implementing an accompanying roadmap creates a strategic prioritization to successfully position the enterprise for the future.