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Business Assurance - Viewpoint

How are companies transitioning towards the circular economy?

Adoption, barriers and benefits of circular economy models

Transitioning toward circular economy will transform the way we design, market, use and dispose of products. The move should be economically viable for the companies and supply chain actors embracing the circular journey. This new profitable and sustainable equilibrium will only be achieved, however, by companies innovating their process, product and business models.

In DNV’s recent ViewPoint survey “Circular economy. How are companies transitioning”, five circular economy models have been explored. Adoption of the different models is characterized by an increasing level of implementation complexity and, in parallel, corresponding economic potential.
Not surprisingly there is a higher adoption of models centered around process and product innovation. But what are the main features of the different models? What are the perceived transition barriers and what benefits can be generated?

Resource recovery

These models recycle waste into secondary raw materials. Thereby, waste from final disposal is diverted while the extraction and processing of virgin natural resources is displaced (*). It is the model adopted by most companies with 40% already having such an initiative in place. Others are on the move. An additional 33% say it is on their agenda for the next 5 years, which would bring total adoption to 73% in 2026. The nature of this model implies processes optimization and related cost reductions. Herein lies its greatest potential as cost benefits are achieved without risks linked to changing revenue stream or consolidated go-to market strategies.

Companies that have adopted circular resource recovery models indicate lack of common technical and legal definitions of waste and circularity as the biggest barrier to transition. Experience indicates that many companies face difficulties in re-using materials after these have been legally categorized as waste. In many countries, stringent legislation on waste management can create obstacles for successful implementation.

Circular supply

These models replace traditional resources with fully renewable, recycled or biodegradable alternatives. This reduces demand for virgin resource extraction in the long run. While only implemented by 23% of the companies so far, this is the model expected to grow the most. A total of 41% say that adoption is intended over the next 5 years, which would bring adoption to 64%. Requiring changes in the materials traditionally used, circular supply models especially demand an internal effort by companies in R&D and material innovation. This might be the reason why adoption is limited now but predicted to increase significantly.

Identified benefits fall into two categories: 1) cost saving and competitive advantage; 2) brand reputation. A circular transformation demands that companies are improving internal processes and making supply chains more efficient and resilient to potential disruptions in the raw material market (e.g. price fluctuations or scarcity). These investments support the sustainability strategy and the possibility to create a brand reputation around these topics. Such supply chain improvements would be more accessible under a standardized definition of waste and circular products.

Product life extension

These models extend the use period of existing products by remanufacturing, regenerating, repairing, upgrading or remarketing products and assets. One-third of the companies have already implemented such a model and the remaining companies plan to do so in the next 5 years. This prospect is significant and may be linked to the increasing regulatory pressure on extended producer responsibility. Almost half of the companies with an implemented model (46%) cite the ability to comply with legal and regulatory requirements as a benefit.  This is higher than for other models (average 38%), putting emphasis on the importance of legislation to support progress.

Product life extension model implementation requires significant digital investments. Companies with such a model in place are investing the most in data management and analytics (60%) and technologies to nudging and incentivizing circular behaviors (20%). The first area is linked to the need to know as much as possible about the products and their life-cycle status. The latter underpins the need for active user participation in order to extend the life of products. Only then can remanufacture-, regenerate-, repair- and upgrade services be successful.

Product as a service

These models imply that companies market services rather than their products through lease or pay-for-use arrangement versus the conventional buy-to-own approach. It intrinsically incentivizes a green product design and more efficient product use, thereby promoting a more sparing use of natural resources. This is currently the model facing more resistance in its adoption (18%).  It is very innovative and risk-intense, since it requires a change in the revenue model. Nevertheless, the future potential will be understood as more companies are experimenting with it: among the companies that have adopted this model only 2% say they have not experienced any benefits at all. The model is more adopted across Asia which could make sense as it requires consumers and users to be digitally savvy, and frequent users of apps and mobile technologies.

Sharing platform

These models address under-utilization of products and assets by enabling shared use, access or ownership. This reduces the demand for new products and thus raw materials. Requiring active participation from the customer/user of the service, such models cannot be implemented within the company boundaries only.  Among those with a sharing platform model in place, 23% answered that low awareness and inconvenience prevent active participation from consumers and poses a barrier to transition.  On average this is perceived as a barrier by 18% for other models. Currently sharing platform is the least adopted model. Nevertheless, the future potential seems to be understood. While only 12% have currently implemented such a model, 24% have it on agenda in the next 5 years.

Experience shows that sharing platforms require the highest investment in digital technologies. To make them accessible, user-friendly and efficient, particularly relevant digital technologies are data management systems, track-and-trace, traceability solutions and IoT platforms, and platforms for asset sharing, information sharing and collaboration.

Where are we headed?

In 2021, the earth overshooting day fell on July 29. This marked the day in which society’s demand for ecological resources and services in a single year exceeded what the earth can regenerate within the same year. Achieving a circular economy is crucial for society to cope with the challenges of climate change and limited resources and deliver on our Sustainable Development Goals (SDGs).  The pace of transformation is the main challenge in the years to come. Active partnerships among regulators, companies and consumers are essential to accelerate. Regulators are under pressure to lead the way, ensuring a correct distribution of opportunities and investments while providing enabling frameworks. In light of this, initiatives such as the USA Green New Deal and the EU Circular Economy Action Plan, setting ambitious goals for the application of circular economy, are essential to lead us in the right direction.

Author: Federica Guelfi - Circular economy project manager, DNV