The relevance of the circular economy in 2022 has been increasing month by month with new regulatory drivers coming into force at an unprecedented pace. But most importantly, the link between carbon emissions and resource extraction & production has really been brought to the fore with circular economy taking a prominent position at COP27.
Although our economy is breaking all the wrong records with respect to emissions, consumption etc., the relevance of the circular economy has finally begun to resonate. So, there is a clear need and an opportunity for circularity to become mainstream and a topic that is no longer seen as abstract and peripheral but tangible, viable, and central.
But what is going to drive the transition in 2023 and how? Will there be a real momentum shift and who will see the greatest impacts from the changes?
Below we outline five key drivers, which in themselves are also disruptors that will drive the transition to a circular economy in 2023 with an acceleration not yet experienced.
With the EU Parliament’s adoption of the new EU Corporate Sustainability Reporting Directive (CSRD), the implementation of circular economy is one step closer to becoming a “must-do” rather than a “nice-to-do”.
The CSRD makes reporting on sustainability performance obligatory for more than 50,000 EU-based companies over the next 1-5 years.
One of the key reporting areas is ‘Resource Use and Circular Economy’. The reporting will need to follow the European Sustainability Reporting Standard (ESRS E5), which is expected to be approved in Q2 2023. Companies will need to disclose upon the following core requirements with respect to resource use and circular economy:
ESRS E5 – Resource Use & Circular Economy sets a direction for the circular transition and provides more clarity for investors. It will undoubtedly accelerate the circular transition and create opportunities for companies that prioritise circular principles in their business. Companies will be forced to describe their activities in a systematic and common circular language.
But the impact of the CSRD and ESRS E5 goes far beyond reporting. Now, companies must reflect upon how they actually operate with respect to materials and articulate this in a vocabulary that may be new to many. This is a significant shift.
Companies’ disclosures will also be audited so data and behaviour will need to be specific and precise. For these reasons, companies will also be able to be compared with one another and clear patterns will emerge within given sectors, with a competitive advantage as well as brand and reputation at stake for many companies.
10,000 EU companies will need to disclose according to the CSRD for the financial year 2024 (expanding to 50,000 companies in time). But the systems and processes need to be in place by the end of 2023 to enable accurate tracking of performance throughout 2024. This means that 10,000 companies must define what circularity means to their individual businesses. Do they even have a clear understanding of its actual meaning and is the value proposition understood at the board level?
As ESRS E5 is integrated into larger companies, it is also expected that the companies that are not required to disclose under the CRSD will start communicating circular performance in a similar fashion regardless.
ESRS E5 – Resource Use and Circular Economy will profoundly impact how the circular economy is understood, integrated and communicated in 2023. Those that embrace its relevance, along with the terminology and the disclosure requirements in 2023 will reap the benefits in 2024.
One of the main barriers when transitioning to a circular economy is the lack of a common definition and language, which ultimately discourages investment in the circular transition. However, the EU Taxonomy aims to provide exactly that – a common framework for sustainable finance to mobilise investment in activities that contribute to achieving the EU’s climate targets across six key areas.
In 2022, financial institutions and non-financial companies had to report on the first two areas, namely climate change mitigation and adaptation (the Climate Delegated Act). In March of 2022, the European Commission’s Platform on Sustainable Finance published final recommendations for the four environmental objectives, that is:
- The sustainable use and protection of water and marine resources
- Pollution prevention & control
- The protection and restoration of biodiversity and ecosystems
- The transition to a circular economy
As per previous technical criteria in the taxonomy, these recommendations will make their way to a delegated act, The Environmental Delegated Act, expected to be adopted in Q2 2023.
The circular economy-specific objective aims to support the transition to a more circular, resource-efficient, and low-carbon economy. This objective will introduce new metrics and thresholds that will differ depending on economic activity. Companies that are not eligible or able to substantially contribute to the Climate Delegated Act will potentially benefit from the Environmental Delegated Act which grants them the opportunity to account for their sustainability efforts.
The Circular Economy Taxonomy places a specific emphasis on some key sectors including manufacturing of consumer electronics, packaging, buildings & civil engineering, textiles, and waste management. It has laid out aggressive criteria and introduces new terminology.
For many economic activities, the circular criteria to illustrate substantial criteria is highly ambitious. Nevertheless, the bar will now be set; companies will now be able to use consistent circular terminology for a particular economic activity. If companies struggle to align with the criteria there is no excuse for not at least aligning with the terminology.
Although it will not be perfect and even result in many disgruntled companies, those that embrace the circular economy taxonomy as an opportunity in 2023 instead of reluctantly accepting it will benefit.
For many years, there has been a disconnection between combatting climate change and the transition to a circular economy. Yet approximately 45% of emissions emanate from resource extraction and production. 2022 has witnessed a shift in mindset and understanding; the circular economy, as a key enabler to aligning with the Paris Agreement, was front and centre at the Sharm El Sheikh COP27. It is now clearly understood that it is almost impossible to reach climate targets, especially for industry, manufacturing, and construction, without the transition to a circular economy.
The Emissions Gap Report 2022, fittingly titled “The Closing Window”, is a testimony to the inadequate action taken to combat the global climate crisis. A rapid and systemic transformation is essential to reach the goals of the Paris Agreement, and the report presents some key actions to get on track. Identified as one of the three most important actions to accelerate the transformation of the industry sector is to “reduce material waste and recirculate materials”.
By using fewer materials and increasing the longevity of products, both emissions and costs can be lowered. Another identified action of importance is to “reduce demand and enhance access to energy-efficient, material-efficient and CO2-neutral materials”. An efficient, longevity-focused design and a strong sharing economy will reduce the demand for products and materials.
The push to reach climate targets has never been stronger and will only accelerate in 2023. Applying the circular principles of e.g., designing out waste and extending product lifetime is imperative to reaching those goals. A circular plan is now expected to be an essential element of any decarbonisation plan in 2023.
Both investments in the circular economy and access to finance concerning product development, start-ups, city initiatives etc. are of critical importance to the circular transition. The last 12 months have seen a shift from taking tentative steps to real progress with respect to investment and finance much of this due to regulation, in this instance the Sustainable Finance Disclosure Regulation (SFDR).
There has been a significant increase in e.g., the creation of debt and equity instruments related to the circular economy. 2022 has also seen an increase in the number of private market funds, including venture capital, private equity and private debt and investment in circular economy activities.
A key barrier to investment has been clarity of circular definition e.g., what exactly is a circular real estate or a circular enabler? This lack of definition results in a lack of trust which creates investor doubt and ultimately impedes investment. Article 8 and 9 funds, with respect to the SFDR, require detailed definition, so investment cannot be forthcoming without definition. But now with the introduction of a circular taxonomy, both article 8 and 9 funds will have clarity of definition; thus, investment is expected to increase substantially in 2023.
Illustrating climate impact, mitigation is invariably the primary sustainability objective of article 8 and 9 funds. This is now expected to change in 2023 with a broadened focus incorporating circular assets and portfolio companies that delivers an economic activity deemed to contribute substantially to the circular economy transition.
Clarity of definition and clarity for how impact is actually tracked and disclosed is critical to investors, especially in today’s investment climate with accusations of greenwashing at the fore. The requirements of the SFDR combined with a circular economy taxonomy provide much-needed clarity (albeit far from perfect) which will embolden investors in 2023.
The built environment and associated industries are the largest component of our economy with its impact on the environment and climate change being significant. In 2023 the buildings sector is expected to anticipate significant circular disruption. This disruption has ripple effects across the economy, hence why it can also be considered a driver in itself.
Any shift or progress by such an enormous component of our economy is significant for the transition to a circular economy. Nearly half of the resources extracted globally are used in the built environment, yet the definition of circular economy in the building sector has remained ambiguous. This is expected to change considerably in 2023.
The introduction of a circular economy taxonomy in 2023 will have a significant impact. The Taxonomy has placed the built environment within its “crosshairs” as a target sector. There is now a clear definition as to what classifies as substantial contribution to circular economy. The EU’s Sustainable Products Initiative is also expected to have an
impact on the sector in 2023. However, the sector itself is beginning to recognise that embedded carbon, or decarbonisation, is ultimately about materials and material choices.
Thus, the transition to a circular economy is now being seen as a critical component of the sector’s low-carbon transition.
Linked to the above, both investors’ and customers’ understanding of the circular economy is also increasing along with rising circular expectations. Therefore, no actor in 2023 within the building’s value chain will be unaffected by the anticipated circular disruption.
Investors will shift investment flows into taxonomy-aligned, or at least taxonomy-ambitious circular infrastructure and real estate. The definition of what is, or what is not a circular building is now becoming clearer for investors which brings trust and with trust comes investment. Public authorities and agencies will be the main new customer catalysing the demand for circularity and determining the disruptive path through developing increased political mandates, new targets and mandatory standards.
Developers in 2023 will need to elaborate tender requirements and standards to comply with clients’ circularity targets and contractors will need to secure circular materials, handle supply challenges and evolve with respect to circular construction techniques. Product and material suppliers will need to develop substantially different products and materials that comply with the requirements while handling supply shortages of e.g. secondary and bio-based materials.
Despite the issues that the circular disruption causes, a circular transition in the building sector also presents a great opportunity in 2023. The complexity and interconnectivity of the transition will force actors to cooperate and together develop innovative solutions. This not only creates an opportunity for established enterprises to transform but also creates an opening for new and ambitious entrants to the market in the coming months.
Will 2023 be the year where the circulation transition takes a big leap forward? Could there be circular optimism in the air?
It certainly looks like 2023 will see greater progress in the transition than any year prior. The regulation and legislation are now much more aggressive whilst the understanding of the role of circular economy with respect to e.g. combatting climate change has never been greater.
Businesses, governments, and investors alike are now realising that transitioning to a circular economy is not merely beneficial, but crucial. Those that recognise the fact that circular economy is now no longer something abstract or peripheral, but rather tangible and central will reap the business and financial rewards in return.
Want to know more about energy planning and net zero roadmaps? Contact Patrick Moloney, Head of Strategic Sustainability Consulting at Ramboll.