Circular Economy Assessment: How can enterprises get started?
Responsible use of natural resources 25 May 2020 Emiel Adriaan de Bruijne Joachim Felix Aigner
Despite several promising initiatives, the global transition to a circular economy has not picked up pace. This is partly due to the fact that enterprises (companies, business, public authorities etc.) are struggling to understand where to start. What is the “baseline”? How far must they travel to truly capture value from a circular transition? Understanding an enterprise’s point of reference and distance to target is key to taking the first tentative steps in the circular transition.
Taking the first steps – Providing Clarity
Understanding the value proposition of the circular economy transition and, more importantly, how to capture that value is key to enterprises taking the first tentative circular steps. However, a lack of clarity with respect to the circular economy baseline or point of reference inhibits that necessary understanding. Identifying and quantifying the point of reference and the subsequent distance to target with respect to unlocking value is key to providing both the clarity and the confidence to an enterprise to move forward.
Any effective engagement with the circular economy should enable an enterprise to identify and, where possible, measure value loss or “leakage” from resource flows associated to a relevant product or production process. On the basis of the identified and measured “leakage points” further initiatives can be developed and implemented which generate value. Enterprises are however inclined to look for opportunities to create value from the circular transition without first and foremost understanding what is their point of reference and where their value leakage is currently occurring.
Planning for value creation without understanding point of reference, assessing leakage and measuring distance to target bears the considerable risk of selecting and developing initiatives which are commercially sub-optimal at best and completely unfeasible at worst.
The key steps outlined herein will briefly describe what we perceive as the most important steps under an effective circularity assessment: point of reference – distance to target, steps that alleviate such risk.
Four Key Steps
Four key steps provide a basis for the selection of appropriate tools and metrics to assess value leakage and creation potentials as well as to estimate the opportunities and challenges in capturing value.
1. Establishing a Point of Reference
A very first step in a circularity assessment should be identification of the practical meaning of “circularity” for the enterprise. A concrete understanding of what circularity constitutes for the relevant processes, products and industry will provide a point of reference with which an enterprise’s distance to target can be determined. Without such a point of reference, conclusions concerning the enterprise’s measure of circularity would be opaque or out of context.
In many cases, existing definitions of “circular economy” and “circularity” will not provide the required concrete point of reference. Such definitions are, more often than not, too general or theoretical and can function as guidance at best.
In order to arrive at a more detailed and fitting definition, the existing general concepts will have to be refined based on the specific context and circumstances of an enterprise’s operations, and/or respective industry. The creation of a “tailored” understanding of circularity (i.e. point of reference) will ensure that the outcome of a circularity assessment:
- Fits within the enterprise-internal and sectoral context; and
- Provides a clear basis for concrete measures to strengthen circularity.
For the establishment of a tailored point of reference, a number of important internal and external sources could be tapped for relevant elements.
The identified elements can be combined into qualitative and, in some cases, quantitative description of what circularity exactly looks like. Such a description is not only valuable for the circularity assessment but may also provide the company with strategic insights.
2. Determining the assessment´s scope
With a concrete point of reference, an enterprise is likely to have enough information to decide on which aspects of its operations the circularity assessment should focus. In most cases, an assessment of all operations will exceed the enterprise´s strategic focus or the available project budget. Limiting the focus of the circularity assessment on one production chain, product or process will enable a more detailed and effective approach and is likely to result in more concrete conclusions on the possible circular measures to be taken.
In any case, it can be expected that at this stage an enterprise will have a robust understanding of its current circularity maturity profile and the defined ambition level towards a circular economy. More specifically, an enterprise will acknowledge potentials scopes, data requirements and practices or processes for commencing the circular transition. Depending upon an enterprise’s individual progress and ambition in this transition, it is advised to either proceed with a qualitative mapping and prioritisation of further activities (step 3) or move on with quantitative in-depth assessments (step 4).
3. Value Potential Mapping - Map and prioritise existing and emerging Circular Economy activities
Most companies are already implementing measures towards circularity (e.g. recycling, waste minimization). Yet, these activities may be fragmented and the full value potential is not exploited or they do not achieve their purpose. These actions will therefore need to be scrutinised and bundled as to monitor and communicate progress transparently. Through proactive stakeholder engagement and collaborative working sessions, specific value potentials will be attributed to the different types of value as outlined above.
|Example: A manufacturing enterprise of a certain size is likely to have environmental targets in place as part of their environmental management obligations (e.g. share of recycled input to new products). The same company but a different department is perhaps engaged in a dialogue on Circular Economy initiatives (e.g. on closing material loops) in the local region. In such a context, this step seeks to identify potential synergies of both thus far isolated managed activities and provide an integrated approach supplemented with the right indicators.|
Some value potentials may exhibit cascading effects or co-benefits on several economic levels for which strategies to capture this value need to be investigated. Eventually a sound basis for decision-making and comparison of distinct initiatives is to be provided and substantiated by means of potential metrics, i.e. the distance to target is qualitatively described.
The final output of this step is a set of factsheets on existing and future activities which provides a basis for connecting intentions and activities across the company. Next to the identification of potential synergies between different activities and a feasibility check of ideas and measures, potential scope descriptions for follow-up quantitative assessments (step 4) are provided.
4. Value Leakage Assessment - Locate, measure, and continuously monitor value leakage in a Circular Economy
If companies have already a proven history of Circular Economy initiatives as well as supporting data and an unambiguous scope (e.g. product, component, or life-cycle phase) was defined in step 2 or 3, a quantitative value leakage assessment is the next logical step. It is clearly in the interest of companies to really scrutinise any of these initiatives and to quantify their contribution to value capture and creation.
|Example: A company producing fast-moving consumer products (e.g. packaging) may be facing progressive legal obligations due to extended producer responsibility schemes. Moreover, many conventional strategies and measures (e.g. longevity or reusability) for circularity may not be applicable to these products. It is therefore necessary to identify and quantify potential externalities (e.g. environmental and health impacts) and economic losses (e.g. commercial value of material losses due to incineration or landfilling) as well as internalise them for proactive and well-informed decision-making.|
This step aims to provide a time and resource efficient assessment in early stages of engagement with the circular economy concept. This is achieved by the intelligent framing and linking of readily available data from e.g. annual reports, databases and statistics. With this quantitative assessment enterprises can locate hot-spots, understand how much value leakage is occurring, and identify the main factors contributing to the current value leakage. The quantification and simulation of value leakages is facilitated by means of applicable metrics and indicators (see non-exhaustive list of potential indicators below)), i.e. the distance to target is quantified.
The final output of this step is a detailed analysis report referring to a specific initiative or activity which provides specific information and actionable results for value capture and creation, ultimately paving the way for implementation and continuous performance improvement.
Distance to Target Determined
Main outcome and benefit of a circular assessment as described in the four steps above is the qualitative or quantitative measurement of a company´s distance to the established circularity point of reference (i.e. distance to target). The distance to target, which will entail a collection of value leakage findings, does not merely indicate where a company stands in terms of circular economy. It also:
- Provides a starting point for the identification and development of value-creating circular initiatives; and
- Helps the structuring and improvement of existing but fragmented circular initiatives.
Ultimately, a substantiated roadmap to engage strategically with the Circular Economy is provided. In addition, metrics (or performance indicators (KPIs)) to measure and articulate circularity are established for further target-setting within continuous improvement processes.
Next to the strategic value of having identified the future value potentials of the circular economy, there are immediate benefits of a baseline assessment.
Moving from a linear business model to a circular one is, in itself, not a linear process but rather a commitment to an ongoing cycle of exploration and improvement. We believe that this cycle of exploration and improvement requires a diverse skillset and a dedicated circular mindset, both of which our specialists provide to our clients. In commencing the circular transition, it is imperative that, from the outset, the point of reference is understood but above all the distance that a particular enterprise needs to travel clearly understood. Our systematic methodology to measuring “distance to target” provides our clients with both the guidance and encouragement to take their first steps on their circular transition.
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