The Business Case for Circularity
Responsible use of natural resources 6 December 2022
By moving to circular economy and its business models, companies can obtain both value creation and sustainability impact. In this article, we go through our circular value wheel to build a solid business case for more circularity
A transition to a circular economy brings significant benefits to society across multiple spheres including climate change mitigation, human health and the environment. This is nothing new; during the last decade we have seen individual companies transforming their business models and we now see new companies being born circular. But… even with inspiring examples here and there, we are far from where we need to be, overstepping the planetary boundaries and still heavily tied into the take-make-waste -operating model. The transition to a circular economy is simply too slow.
The challenge is that although the positive environmental impacts of circularity are well understood, business drivers are also needed to accelerate the circular transition. Sustainability might be in the core of the strategy on paper, but if the link between sustainability and business value creation is not found, other strategic objectives will overpower.
In other words, if the business case of circularity is not clear, companies tend to prioritize actions that ensure short-term business objectives. It’s just the way most management models are built. Great value creation potential is left on the table.
Luckily, business value creation and sustainability impact can be simultaneously obtained by moving to circular economy and circular business models allowing companies to win along both dimensions.
The business case for circularity
It is crucial that the business value, that can be attained by transitioning to a circular economy is clearly understood and quantified when evaluating which pathway best suits the company. (Our previous article dives deeper into how to identify areas most material to a company.)
Our Circular Value Wheel illustrates three key dimensions through which value of circularity can typically be realized. The three dimensions are business risk, operations and growth.
The article continues below the illustration
In the following, we will elaborate each section of the Circular Value Wheel:
In this context, business risks cover reputation, regulation, and supply chain. Although the ambition should be to move beyond compliance and risk mitigation, the quickly developing regulatory environment poses a very concrete and urgent motivator to get the ball rolling. The upcoming Circular Economy Taxonomy strives to redirect capital flows to circularity.
European companies need to justify to what extent their business operations and CAPEX investments align to the Circular Economy transition. The ‘Right to repair’ announced by the European Commission promotes durability-by-design. These new compliance requirements, if not addressed, pose business risks by affecting access to finance and reputational risks related to stakeholder expectations.
Circular thinking brings an ideal of zero waste, “closing the loop” and ambitions related reuse and recycling into supply chain management. Circularity reduces the dependency on virgin materials and affects the dynamics within the supply chain – or network as it could be described due to the interconnected nature of relationships.
It requires reconfiguring and integrating of upstream and downstream operations in a way that creates value to all stakeholders. The benefit comes in the form of stronger, more resilient circular supply chains and potential for a company to adopt a wider role within it.
From an operations perspective we look at efficiency, quality, and people. The efficiency drivers for circularity include reducing material intensity, ensuring waste recovery for reuse, and enhancing material recyclability. All of these can realise in savings and contribute to the overall business case for circularity.
Ensuring a product’s fit to a circular business model forces us to rethink and recalibrate its configuration all the way through from material use to function, durability, and recyclability. In optimizing a product’s ability to maintain and create value during use in the ecosystem it operates in means holistically ensuring its quality from the viewpoint of all relevant stakeholders.
This enhanced and proven quality of product and total offering is naturally a strong business driver. This is true also when the circular offering includes service elements to supplement the product.
A very business-oriented value driver is seeing circularity as a catalyst for growth: new business models, perhaps new markets to serve, continuous customer relationships all provide lucrative value creation opportunities – and possibilities to differentiate from competitors.
Circular economy calls for and provides great opportunities for innovation on different levels such in material use, product innovation or business model innovation. As an example, circular business models can mean a transition or extension to service business with typically higher margins. As entire value chains transform, there is also a need for system level innovation to “close the loop” – providing another business opportunity and value capture potential.
The move to circularity is a potential source of great competitive advantage. It is also a significant transformation calling for both speedy and fundamental shifts in the way the company operates. The first movers who actively take a role in orchestrating the ecosystem and pushing for circularity have the benefit of positioning themselves in a way that creates most value for themselves and their customers. Customers, who are increasingly undergoing their own transformations. Luckily, circularity is best achieved - and its value realised - together.
To summarise, the business case of circularity draws on three value drivers: reducing risks, the quality & efficiency of operations and potentially bigger top-line from increased competitiveness and innovation. Capitalizing on these value drivers simultaneously build the company’s overall resilience. We claim that all three forces are always at play, but their relative importance to a company (i.e., which are the dominating drivers) depends on the business model, industry, and role in the value chain.
To conclude, moving towards a circular economy is what we need to remain with the planetary boundaries. Illustrating impact across these business drivers is important to justify the investments to gearing a company’s operation towards circular business models – and to play their part in accelerating the transition to circular economy.
Obtaining both business value and sustainability impact
In the video Katri Kennedy puts more perspective on how Circular Business models can serve as key enablers for better businesses and sustainability impact.
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