The Breakdown: Circular Economy

What does the term “circular economy” refer to? What are its core components?

The circular economy is a framework that organizes how value is created. The defining feature is the decoupling of economic activity from the consumption of finite resources. Circularity is reached when value is created and fully retained. The “how” of circularity is very much an open book, and presents an enormous opportunity for innovators. There are three core pillars: designing out waste and pollution, keeping products and materials in use at their highest value for as long as possible, and supporting nature’s regenerative systems. 

The linear economy, circularity’s antecedent and the reality in which we currently find ourselves, is characterized by the take-make-use-waste paradigm. Circularity closes the loop by eliminating the waste part. I think about circularity as the opposite of planned obsolescence.

Why is a circular economy model essential for achieving long-term sustainability and climate goals?

Circularity is primarily an economic idea. Mainstream sustainability initiatives are generally tactical attempts to make the things we do less bad by mitigating the harmful byproducts of linear production at the margin. Circularity, on the other hand, systemically addresses the underlying causes not just of climate change, but also biodiversity loss and pollution. 

By mapping the entire economic value chain and rooting out waste at the source, circularity resolves negative externalities that otherwise would go unaccounted for. In so doing, it generates outcomes that are both environmentally and economically sustainable. The consulting firm Circle Economy estimates that if the world economy were 17% circular by 2032 (up from 8.6% today), global warming would be kept below 2℃ by cutting greenhouse emissions 39%. We have a lot of work to do and not very much time. 

Do you expect more companies to adopt a circular economy model? What’s preventing more from adopting it so far? What is the timeline on which companies are adopting the circular economy?

I believe it is inevitable that the entire economy will transform to circular. Every long-term constraint one can imagine requires it. Resource cost and availability, supply chain pressures, political and regulatory trends, even consumer preferences, are all moving towards a world where the waste we generate must be tracked, managed, and re-valorized. Transformations always seem obvious in hindsight, and impossible at first. Think of the transformations we’ve seen lately: lean management, digitization, and now electrification in the mobility sector. Circularity is like these, but bigger. 

There is much we must unlearn in order to accomplish it. In my opinion, the greatest shift we need to undertake is our collective understanding of the role of the firm and what that means for innovation strategy. The internet era suggested that small, incremental change is the prudent way to go. That won’t work for the circular transformation. As Lloyd George said, “you can’t cross a chasm in two small jumps.” To remain relevant, every company will need to be in the circularity moonshot business.

What value do circular strategies bring to our economy?

Credible analysts have taken a shot at quantifying the opportunity. In 2015, Accenture said the circular economy would “unlock” $4.5 trillion in growth by 2030. Honestly, that seems low to me. Is there any credible scenario in which firms can bring their current linear model–with its dependence on increasingly rare minerals, single-use plastics, long supply chains, short product cycles, and destructive pollution–into the next decade and hope to hold onto their current valuations? And for the pioneer brands that profitably master circularity first, is there any doubt that they will become category leaders? Again, think of recent transformations. How did digitization change retail? What has electrification done for valuations in automotive? As transformations go, circularity will be of even greater magnitude, because it will touch every part of the economy.

What are examples of circularity in action?

It’s still in early days, and admittedly, progress has been slow. You see small brands trying big things, and big brands trying small things: sub-scale experiments often with frustrating outcomes. Generally, you see successful circular models applied first to capital goods that are expensive, complex, and suited for planned maintenance. Rolls-Royce is credited as the leader with the “power by the hour” subscription service for their jet engines: airlines pay a flat hourly rate for each motor as they use it, and Rolls Royce handles all installations, check-ups, maintenance, and decommissioning. You see other industrial companies utilizing the same subscription-based business model. Ricoh (office equipment) and Philips (commercial lighting systems and medical equipment) follow suit. 

On the consumer side, brands are still figuring it out. Apparel and CPG are areas of particular focus. My favorite example is very recent: last week I took possession of a pair of running shoes that I don’t own. The Swiss shoe company On just introduced the Cyclon, a shoe which you rent out for a monthly fee and when they’re used up, On sends a new pair, and collects the old to be recycled. The innovation is in the model: they’re controlling a greater share of the value chain. So you see signs of progress. It’s taken over 20 years to get from “power by the hour” for jet engines to “sneakers as a service.” But the pace of change is accelerating rapidly.