The Circular Economy: Rethinking The Relationship Between Markets, Consumers and Natural Resources

Tuscan Leather:

The first love is the sweetest. Sadly (depending on how you look at it), the opposite is true for blog posts; writing this was excruciating. Insecurities come with putting anything out in the world for everyone to love, hate, or completely ignore – it is something that I have come to accept. Drake seemed to have lost track of time counting how many hours he had spent on that intro. I can relate.

My name is Bantu Qodi Ndlela. My maternal family is fun, loving, strangely self-aware, and full of polymaths. My paternal side is serious, a little political, loves the outdoors, and is full of charming individuals. I have inherited a bit of both sides. I love music, sport, and laughing. I am just a guy’s guy until you get to the climate change part – it appears to be an outlier. My interest in this topic was sparked while I was in university. In doing research while inventing a biofertilizer with a friend of mine named Nkululeko, we learned about the excessive damage that agricultural practices have had on the environment. I wondered if other industries were causing the same strain on our beloved planet. My time in Cape Town introduced me to green technology and these amazing companies that were doing their bit to create a better environment for future generations. Whilst also in Cape Town, I randomly picked up a magazine from the shelf known as the Green Economy Journal, in which I learned about the circular economy. So here we are.

A few things to consider: I was debating in my head as to how often we should release a blog post. My initial conclusion was once a month in order to maintain quality control and allow for topic suggestions from my subscribers, but I have recently learned that absence does not make the heart grow fonder – we would hate to be forgettable. Once a week is also unrealistic, again, for quality control reasons. The Closed Loop will have a new blog post every fortnight.

Secondly, this blog is for anyone who is remotely interested in climate change, sustainable solutions, and the economic opportunities around them. Whether you are a student, a consultant in this space, a curious joe, or merely cheering me on, I appreciate you all equally (true, in this case). It is an interesting space to explore, and I hope it sparks something, anything, in you. Over time, we will look at business models, explore all major industries, policymakers, and the most controversial topic: human behaviour.

Thirdly, the first few posts might seem a little all over the place, but I promise that I will get better at this.

Lastly, we have opted to refrain from going into the hard science of climate change and the radical aspect of activism. While I think it is important what Greta Thunberg and her ilk have been doing, this blog has opted for a different approach. This is an exciting problem that presents an ocean of opportunity. The focus will be mainly on strategic solutions needed to encourage organisational growth that is decoupled from resource extraction. How can companies eliminate waste from the planet while maintaining a competitive advantage?

I do feel it is important that we delve deeper into the framework of the circular economy, so this will not be my last post about it. This is just a brief overview of what it is and how it came about. It is a concept that will carry the foundation of this blog. If you have any questions or feel that I have left anything out, please feel free to contact me.

Enjoy.

Nickels and Dimes:

The emergence of the First Industrial Revolution birthed a new era of commerce. Society shifted from agrarian to industrial – where resources are abundant, cheap, and the environment is not a widespread concern. This linear approach to satisfy a growing population and ensure economic growth had or has been successful for almost a century. Companies can, with jaw-dropping efficiency, extract raw materials from below the earth’s surface, manufacture inexpensive products, and then sell them to every customer imaginable. The customer, in turn, uses and then discards of the product after use. This cycle is known as the linear, “take, make, waste” approach and has been the catalyst of economic growth since the early 1900s.

We are now at a point in society where the linear approach is no longer sustainable due to a variety of factors such as a continuously rising global population, the limited availability of non-renewables (metals, minerals, and fossil fuels) that cannot keep up with demand, and the inability of the planet’s natural systems of land, water, and forests to regenerate themselves. The current economic system is unsustainable - and rather than being a universal remedy, this ‘business as usual’ approach is now the source of the earth’s most delicate problems.

The linear economy model.

“Let’s Change Clothes..... and Go!”

When Jay-Z made this statement, it was in the most literal way. He wanted the whole hip-hop culture to stop wearing sports jerseys and start wearing suits; encouraging his peers to "handle their business." The humble beginnings of 'Corporate Hov' right before our very eyes. It is a similar story here - the relationship between production and consumption needs a complete dressing down.

How did we get here? The market dictates. The turn of the millennium saw the reversal of a 40-year-old pattern in which commodity prices decreased as economic growth prospered. Before then, It seemed to be a relationship in perfect harmony. From the year 2000, the relationship took a toxic turn when commodity prices increased as the economy and the global population grew. The price of oil in December 2014 was 50% higher than in December 2000. It became a pattern that companies could no longer run away from. The earth’s resources are limited, and this fact was beginning to take a toll on business operations.

In 2011, fashion retailer H&M saw their first-quarter profits decline by 30% largely due to a sharp rise in cotton prices. Between 2004 and 2008, rising prices of steel, plastics, copper, and aluminium added approximately $1.35 billion to the costs of multinational home appliance manufacturer Electrolux, forcing increased cost-cutting. For comparison, the company’s total operating income was approximately $660 million in 2007 and $180 million in 2008. These are just two examples of huge companies that show the volatile relationship between commodity prices and their effect on a company’s bottom line.

The reality is that business operations today will soon mean not enough resources for growth and global prosperity tomorrow. Companies whose growth is tied to scarce resources might find themselves at a competitive disadvantage. The unpredictability of these prices makes it impossible to forecast and compete against agile, lean startups whose growth is not tied to resource-intensive inputs. This is a trend that has started at the turn of the century – not only are startups disrupting the natural order of business, but traditional companies are also now reconsidering their business models and making the transition to a circular economy.

What is the Circular Economy?

As a concept, the circular economy has been around for a few decades. As you have might have already gathered, it simply refers to the decoupling of economic growth from scarce resource use. There are two types of material use: biological (renewable) materials, designed for reuse and ultimate return to the ecosphere; and technical (nonrenewable) materials, designed to move back and forth between production and consumption with minimal loss in quality or value. The circular economy organically creates zero-waste value chains, benefiting all stakeholders of society. By decoupling scarce resource use from growth, organizations protect themselves from volatile commodity prices and become more resilient to supply disruptions.

The transition to a circular economy has the potential to reshape the relationship between production and consumption in a way that benefits all. It is also a big opportunity for early adopters to gain a competitive advantage. Accenture Strategy has indicated a $4.3 trillion reward for ‘turning waste into wealth’ by the year 2030. The term ‘waste’, in this context, refers to the underutilized assets, products, and natural resources. The circular economy is about eliminating the entire concept of waste and recognizing the value in all products. Effectively, it is an opportunity to move from a resource-based economy to a performance-based one.

There are three fundamental drivers of the circular economy, which we will dive into at a later stage:

1.) Resource constraints – because the current economy is wasteful and does not leave enough resources for all forever. 2.) Technological development – because the introduction of new technologies, notably digital innovations, is making the circular economy increasingly attractive and viable for businesses. 3.) Socio-economic opportunity – because decoupling constrained resources from growth not only enables inclusive growth but also empowers customers to squeeze the most value out of products and assets.

The circular economy is about utilizing and maximising products and assets that would normally be labeled as waste.

The Colour of Money:

There is a common misconception that in order to align with climate-friendly objectives, companies will inevitably forego a certain percentage of revenue. I do not agree with this at all! The circular economy has shown that applying the right business models can add immense value and future-proofing to an organisation. Prominent studies done by several organisations have estimated the size and potential of the circular economy:

• European Union (EU) Commission: €600 billion in net savings for EU companies and up to two million jobs by 2030.

• Ellen MacArthur Foundation: €630 billion by 2025 in the EU (a focus on a subset of manufacturing industries) and €700 billion in material cost savings (a focus on global fast-moving consumer goods sectors).

• Waste & Resources Action Programme (UK): €400 billion cost savings and 160,000 jobs for the EU27 economies by 2020 (focus on food and beverage, built environment, and manufactured goods).

• UK Department for Environment, Food, and Rural Affairs: €63 billion per year in the UK (energy, waste, and water efficiency focus).

• The Netherlands Organization for Applied Scientific Research: €7.3 billion and 54,000 jobs for the Dutch economy (a focus on metal and electrical sectors and bio-based waste).

Ultimately, the circular economy is about eliminating waste and seeing value in all products and assets. There are four distinct forms of waste in the circular economy: wasted resources, wasted lifecycles, wasted capability, and wasted embedded value.

The table below summarizes how every form of waste can be turned into an opportunity.

Source: The World Economic Forum.

I am super excited about future posts because we will dive deeper into how industries such as agriculture, apparel, automotive and transportation, construction, consumer electronics and IT, energy, and industrial equipment can monetize this waste opportunity.

The circular economy is all about performance. The transition will be daunting, but it is inevitable and necessary. The benefits it promises to growth, consumer satisfaction, and most importantly, the planet – will be worth it. Companies can gain a competitive advantage and future-proof their organisations.

However, we need to proceed with caution. I do think policymakers are a step behind with technology as it is moving too fast (not necessarily a bad thing as it encourages innovation), but this cannot be the case with the circular economy. As it moves from think tanks in high-rise buildings to everyday life, it needs to be monitored. Developing countries such as ours, for example, are still living in a resource-based economy where the resources are shared by a few of the elite. The circular economy cannot afford to go under the same route. When done right, it has the potential to benefit the lives of the majority.

See you in two weeks.