Read this article to understand:
- What we mean by the circular economy and why investors should care
- Why, if pursued by consumers, companies and countries, circular solutions could have a big part to play in tackling the climate crisis and other environmental and social issues
- The opportunities and risks presented by the circular economy in key sectors such as electronics, autos, food and fashion
Tim Cooper, professor of sustainable design and consumption at Nottingham Trent University, began using the term circular economy in a 1994 report, Beyond Recycling.
The aim of a circular economy is to eliminate waste and keep resources in use as long as possible to decrease the extraction of new raw materials and energy usage.
There are many ways to do this. The main ones are reuse, repair and remanufacture, and recycling (as shown in Figure 1). But there are other things individuals, companies and countries can do, such as reducing consumption, eliminating unnecessary materials, refurbishing, using sustainable packaging and using energy more efficiently. Companies could also start to rethink business models and the design, manufacturing and delivery of products.
Figure 1: Linear economy versus circular economy
Source: Aviva Investors, December 2021
According to the 2021 Circularity Gap Report,1 if the world becomes just 17 per cent circular – double the number it is now – emissions could be slashed by almost 40 per cent and resource use by 28 per cent versus current trajectories. This would put the world on a two degrees path by 2032 and net zero by 2050.
Figure 2: The development for material extraction (mass) in billion tonnes (Gt) and GHG emissions in carbon dioxide equivalent, 1900 to 2019 and projected to 2050
Source: Circularity Gap Report 20212
E-waste: From deleterious to useful
Electronic waste (e-waste) has become the world’s fastest-growing waste stream,3 as rapid technological advances and growing demand translates into more devices reaching the end of their life quickly.
According to Global E-waste Monitor,4 we generate about three to four per cent more waste each year. In 2019, we reached a record high of 53.6 million metric, or mega, tonnes (Mt) across the world – the equivalent of 7.3kg per capita. People in Northern Europe produce the most e-waste (22.4kg per person), followed by Australia and New Zealand (21.3kg), and the US and Canada (20.9kg). Averages across Asia and Africa were much lower (5.6kg and 2.5kg respectively).
Figure 3: E-waste generation per capita (kg)
Source: Aviva Investors, December 2021. Data from Global E-waste Monitor, 20205
E-waste contains precious metals like gold, silver, platinum and palladium (which the report gives a value of $57 billion). It also encompasses hazardous substances such as mercury and cadmium, which pose severe risks to human health and the environment (see Figure 4). Only 17 per cent of e-waste is recycled, while the rest is dumped or incinerated – up to 95 per cent of those emissions are caused by production.
Figure 4: Effects of e-waste
Source: Global E-waste Monito, 20206 and Aviva Investors, December 2021
The first task is persuading consumers to think more deeply about their consumption patterns and to find ways of keeping items in use for longer, potentially partnering with third parties to recycle or refurbish old devices or components.
Repurposing food waste
If food waste were a country, it would be the third largest emitter of GHGs after China and the USA.7 Uneaten food accounts for 25 per cent of all fresh water usage globally. The social costs are huge: while nearly ten per cent of the world’s population go hungry, we continue to throw way food.8
Worse still, when food waste goes to landfill, it decomposes and creates methane, which, as Figure 5 shows, is 28 times more powerful than CO2 at warming the planet over 100 years and 80 times more powerful over 20 years. Since the Industrial Revolution, methane concentration in the atmosphere has more than doubled, and about 20 per cent of global warming can be attributed to this gas.9
Figure 5: Strength of greenhouse gases (molecules of CO2)
Source: Environmental Protection Agency10
Making the food system circular would prevent waste, for example redistributing surplus food to people who need it most and using food by-products or waste to create new products.
Rick Stathers, senior ESG analyst and climate specialist at Aviva Investors, believes the ideal solution would be not wasting food in the first place. When that is not possible, turning it to compost and catching methane generated in landfill and using it as a source for generating electricity or heat could be better.
Making the food system circular would prevent waste, redistributing surplus food to people who need it most
Most landfill content is organic matter and the biogas they produce can be managed relatively simply: sending tubes down into a landfill’s depths that collect gas, which is piped to a central collection area where it can be vented or flared. Better still, it can be compressed and purified for use as fuel in generators, garbage trucks, or mixed into the natural gas supply.
Reducing food waste can also make businesses more efficient. Crisps company Walkers has embraced this mindset by capturing CO2 from beer fermentation and mixing it with potato waste to turn it into fertiliser for use on fields to feed potato crops. This is estimated to slash CO2 emissions from its manufacturing process by 70 per cent.11
Other examples are emerging. A research paper, published in the Brazilian Journal of Operations & Production Management, argued sweet potato waste could be used to create ethanol and alcohol-based hand sanitizer.12
The auto industry
Cars and other vehicles are responsible for around a fifth of CO2 emissions and are a major consumer of natural resources – including 80 per cent of global rubber demand, a quarter of all aluminium and about 15 per cent of the steel market.13
The adoption of circular economy practices, combined with electrification, has the potential to reduce emissions by up to 75 per cent and non-circular resource consumption by up to 80 per cent per mile by 2030.14
The adoption of circular economy practices has the potential to reduce carbon emissions by up to 75 per cent
Renault is seen as an industry leader for circular solutions. Back in 2008, it created a specialised subsidiary to take control of waste materials and parts, recycling copper, steel, aluminium and plastics. More than a third of new vehicles are made from recycled materials, while one of its plants outside Paris refurbishes tens of thousands of engines and gearboxes each year, delivering energy, water and chemical savings of 80 per cent and generating more than $500 million in revenues for the company annually.15
Meanwhile, in the US, Ford and McDonalds are partnering to upcycle the fast-food chain’s coffee bean waste into reinforced plastic car parts.16
Electric batteries are a particularly thorny issue. As they are expensive and carbon-intensive to produce, viewing them as a component-as-a-service might make sense. Instead of owning their battery, vehicle owners might pay for electricity and battery use by subscription or mileage. This approach has been widely adopted in China by companies like NIO. Ample, a San Francisco-based start-up, has invented a platform that delivers a full charge to any electric car in minutes using autonomous robotics and smart-battery technology.
Fashion: Owning less is good
The environmental and social effects of fast fashion have been well-documented. According to UK charity Waste & Resources Action Programme (WRAP), £140 million worth of clothing ends up in landfill or is burnt each year, while less than one per cent of fibres used to make garments are recycled into new clothing.17 Companies across the garment supply chain could cut their carbon, water and waste impact by three to ten per cent if they made clothes that last just three and nine months longer.
However, there are some positive signs emerging. The second-hand market is projected to double in the next five years, reaching $77 billion – as Figure 6 shows - and twice as big as fast fashion (at about $84 billion) by 2025.
Figure 6: The growth of the second-hand market
Source: thredUP, 202118
Rentals as a solution/Stuff-as-a-service
The notion of renting stuff instead of owning it is getting traction across industries, from furniture and cars to jeans and music, and is the logic behind platforms like New York-based company Rent the Runway, UK-based Girl Meets Dress, or China’s Y Closet.
More community-based sharing among peers, friends and neighbours could be a way to maximise the useful life of a product
DIY tools are a prime candidate for the sharing economy and companies like B&Q have started rental schemes. Also, more community-based sharing among peers, friends and neighbours could be a way to maximise the useful life of a product.
However, Cooper believes rental schemes only work if they make economic sense for customers. Another potential barrier is that some people cannot afford credit – and the notion of products-as-a-service will have cashflow implications and credit risks.
In a strange irony, the solutions to fostering a more circular economy are also circular – involving critical feedback loops between governments, companies and consumers. With younger demographics at the forefront pushing for change, new societal norms are emerging thanks to nudges, incentives and education.
Another way to push circularity is through corporate leadership, since this tends to drive different industries. Ikea, for example, is engaging with its customers by offering workshops in upcycling and repairing products, cutting waste and even growing food at its London store in Greenwich.
Additionally, systemic changes, technologies and infrastructure are needed to motivate people to do the right thing.
The bottom line
Government policies and investments have a critical role in driving circular solutions. Some policies are already taking shape: the most recent iteration of the EU’s circular economy package includes revised targets on recycling, a binding landfill target and an EU-wide strategy for plastics, including a target to eliminate single-use plastics.
Stathers believes the doughnut economic model offers useful guidance on how we should pursue a more circular economy (see Figure 7). “The economy has to function between these two constraints (environment and social). We need to rethink economic and business models to build a more prosperous planet.
Figure 7: The doughnut economic model
Source: University of Cambridge, March 201519
“Our consumption is putting pressure on the planetary system and it cannot be sustained,” he adds. “We have the wisdom to fix these issues, all we need is the will.”
