The circular opportunity

April 3, 2023
minute read

“Circular economy” is a term that has entered our collective lexicon and although for many people this concept is still a kind of synonym for recycling, there are more and more companies adopting circularity principles in their value chain, or initiating business models based primarily on a circular model.

The circular economy takes its founding premise from natural ecosystems, whose resources and materials used regenerate in a closed and continuous cycle. This circularity aims to respond to one of the biggest challenges of our society’s economic model — that it is not possible to dissociate economic growth from increased consumption of natural resources and raw materials. It is urgent to find solutions to this problem, because today we are already consuming 74% more natural resources (data for 2021) than the Earth regenerates in one year. In other words, every year we need 1.7 Earths, which means that humanity is in ecological deficit.

The circular economy comprises several concepts and phases of a closed cycle, which may vary depending on the industry we are talking about, but which we can generally summarise in three layers:

Layer 1 — Design and prevention: this involves designing products from the outset to incorporate as far as possible recycled materials or by-products from other industries. It also comprises optimising such products so that they can last longer and be reused, recovered and ultimately recycled, thus preventing the recurrent need for more products to meet the need for which they were created, resulting in a positive impact on reducing consumption.

Layer 2 — Repair, refurbish and re-use: Re-use allows the useful life of a product to be extended, potentially to its full life span, i.e., until it can no longer meet the need it was produced for. Imagine a pushchair, which is used for a year and then stored in a garage. It will probably stay there for several years, while its useful life time was only one year. Having channels that allow reusing and extending the useful life of a product avoids or delays the need for a new product to enter the system.

Layer 3Upcycling and recycling: some industries, such as textiles, have invested in upcycling to give another use to a particular item. But there are other examples, such as in the food retail sector, where it is already normal to find cakes made with fruit with aesthetic defects and therefore a high risk of not being sold. At the end of the product’s life, it should be recycled.

The circular economy is very much associated with consumer goods and we have been witnessing a very significant growth of reuse channels for textile, electronic and even sports products. If until a few years ago the buying and selling of second-hand products was mainly limited to peer-to-peer marketplaces, such as OLX, Facebook or eBay, lately we have seen the flourishing of online platforms dedicated to buying and selling second-hand products, which can guarantee the consumer the best practices in commerce, as well as product safety and guarantees. ThredUp and Vinted are examples of this, second-hand clothing giants that have made it simple and safe to trade second-hand clothes. Both are already worth over a billion dollars and ThredUp has been listed on the NASDAQ since 2021. Poshmark, StockX or Swappie are other examples, and in Portugal there are also corporate reuse projects such as MyCloma, Forall Phones or Book in Loop and Babyloop (the latter two belonging to The Loop Company). The growth of these platforms shows how reuse is moving from an unregulated niche determined essentially by opportunity, to corporate business models aimed at responding to the growing demand for more responsible consumption channels.

But the big paradigm shift in product reuse will happen in traditional consumer channels. For example, IKEA in Portugal has replaced the traditional “Black Friday” campaign with “Buy Back Friday”, challenging its customers to give new life to furniture products they no longer use. Decathlon organises “Trocathlon” events in its shops, where the customer has the chance to hand over a certain product and receive a discount on purchases in the shop. In the United States, denim clothing giant Levi’s launched the Levi’s SecondHand brand in 2020, allowing customers to hand in items that they no longer need and which are, after being treated and photographed, put back on sale.

Another example that is already present in Portugal and worth mentioning are the so-called “reverse vending machines (RVM)”, machines that automatically collect single-use packaging, be it plastic, metal or glass. Soon (it was supposed to be January 2022) these single-use packages will start paying a deposit tax, which can be recovered by the consumer when returning the packages in this RVM network, which will grow in the coming years.

It is likely that the success these reuse platforms and initiatives are having is due more to financial incentive than consumer ‘green’ awareness. But this does exist and is growing, especially among younger people, and may help explain why reuse and the circular economy is becoming so cool and trending.

The growth of circular business models, or the introduction of circularity principles in value chains, are important levers for a more sustainable and decarbonised economy. They should be seen by companies as part of the path to a more sustainable business model, but also as an opportunity to improve their value proposition, communication with the customer base, and even to create new ranges or business areas, as we addressed earlier with the example of circular channels that large companies are creating in their ecosystem.

The circular economy opportunity is not the same for all businesses and sectors. It varies and there are many factors to consider when determining a good strategy. In the following I will leave some contributions in areas that I think are important to take into account to enhance the growth of circular strategies in the business context:

  • Eco-design: betting on the production of products that use less polluting or recycled materials, less water and electricity and that are designed to last longer, is environmentally more responsible, but also differentiating in terms of value proposition for increasingly demanding consumers in terms of sustainability. This is a challenge that goes beyond the producing company, and it should also have the concern to require its suppliers and distributors to comply with good sustainability practices.
  • Reuse channels: investing in the creation of circular channels, capable of extending the useful life of products, is an effective way of reducing their carbon footprint. But it is also an opportunity to monetise the product (which can be re-sold several times) and to reinforce customer loyalty, as customers return to the brand to return the product when it is no longer useful to them, rather than throwing it away or leaving it stored uselessly. In order for these channels to work, IT systems and management platforms will be necessary to manage the process of collection, classification and pricing. Logistics operators focused on the evaluation, testing, repair, cleaning and photography of products to ensure their quality and safety are also expected to be necessary.
  • Literacy: Create ESG rating indices that allow consumers to make a more conscious and informed decision. Just as it is already mandatory to display the level of energy efficiency in household appliances and the nutritional level in food, it would be useful to legislate in order to create a set of environmental and social performance indicators easily readable by the consumer and indicating the degree of the environmental footprint of their production or their circularity index, for example. These indices could contribute to the environmental literacy of consumers and create positive pressure from them for the supply chain. A practical case is this: when we buy a t-shirt for 3 euros that says “made in Bangladesh”, shouldn’t we ask ourselves under what conditions it was produced and at what cost to the environment?
  • Legislation, incentives, and taxation: a 2021 study by CIP (Confederação Empresarial de Portugal) identified complex regulation and economic and financial issues as the main obstacles in the adoption of circular economy strategies in Portuguese companies. It is important to clarify and simplify regulations, such as waste classification processes, and create incentives for companies to invest in circular economy. Also, for the final consumer, an issue that deserves reflection is the reduction of the VAT value for resold products, as an incentive for reuse by consumers.

An inevitability, but also an opportunity

The planet will continue to warm and to avoid irreparable damage we need to strengthen commitments to climate action. Failure to do so could have dramatic costs. Projected annual losses for a 3°C rise amount to 190 billion euros, to which must be added many more, such as increased food prices or the economic costs associated with climate change-related mortality (EU projections).

The “spotlight” is increasingly pointed towards companies, either through the growing legislative requirements, or through the pressure of consumers who are more and more environmentally demanding, or even through the increasing number of investors who are only willing to invest their time and money in projects that have sustainability at the core of their business model. It is inevitable, therefore, that companies become leading actors in sustainability. Only then will it be possible to achieve the decarbonisation targets currently set.

But this inevitability can also be an opportunity. An opportunity for companies to rethink their business models, making them greener, but also more attractive in the marketplace. An opportunity to invest in new production processes that are more efficient and profitable in the long term. An opportunity to rethink supply chains and distribution channels. An opportunity to involve employees and the community in socially positive projects that contribute to the most decisive goal that we as a society face — climate action.

Ricardo Morgado, Chief Sustainability Officer at The Loop co.
in 101 Voices for Sustainability

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