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Climate, energy and net-zero

How companies can build circular economy business models

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Reversing the environmental damage and imbalances that have become accepted as structural features of our economic system requires transformational, not marginal, solutions.

Making things less bad is just not good enough. Indeed, the transformation of existing systems is a central idea behind the circular economy movement.

Today, many companies are characterised by so-called linear or extractive business models, where profit is maximised by selling more products and encouraging end-users to keep buying more products or increase their consumption.

Circular business models are also profit-oriented, but the difference is that they seek to make a profit by maximising resource efficiency and cutting waste. Circular business models aim to decouple resource consumption from growth.

The transition to a circular economy is particularly relevant today as inflationary pressure forces governments to prioritise resource and energy security and supply chain resilience.
New global standards such as the European Union’s taxonomy regulation will also make investing in the circular economy transition more attractive, by providing a framework for financial institutions to determine how contributions to the circular economy may qualify as sustainable investments.

As policies to promote the transition to a circular economy gather momentum across the world, support for companies that model their businesses and supply chains according to circular and sustainable principles is expected to grow.

Broadly, businesses that want to embrace circularity can consider four models:

Circular value recovery

This refers to activities that maximise value from products and materials in the after-use or post-consumer phase by cycling them through the economy for as long as possible before they exit as waste.

Recycling is one way to achieve this, but it is usually the least efficient circular strategy. Recycling entails reducing products back to their basic materials, which means that the embedded value of the labour and energy that went into the making of the product is lost, while energy is further consumed during reprocessing.

It is therefore more effective to keep things useful for longer, instead of going straight to recycling. Repair, refurbishment and remanufacturing are some preferred alternatives to recycling.

Circular value recovery can be particularly interesting for industrial parks. In the city of Kalundborg in Denmark, for example, a growing cluster of companies has been exchanging residual resources and reusing one another’s by-products for the last 50 years in the world’s first industrial symbiosis ecosystem. Every year, 62,000 tonnes of residual material is recycled between 14 different partners. The system sustains itself because companies have found that it allows them to cut emissions profitably.

Circular product design

A more direct way to make sure that products — particularly, high-value goods — stay useful for longer is to design them to be longer-lasting, or to design them to be easily recycled or repurposed.

For instance, modular design that makes it easier for parts to be replaced can extend a product’s life. Using pure materials and avoiding toxic compounds also make sorting and recycling easier at the end of a product’s life.

Adopting circular product design and shifting away from planned obsolescence could result in more service-based business model innovations as well. The provision of after-sales services to simplify product maintenance could become a key differentiator for a business.

Circular use

While circular value recovery targets waste and disposal activities and circular product design is focused on the upstream, circular use is about redefining the consumption process.

For instance, by encouraging consumers to choose access over ownership. At a time when consumer demand for clothes swaps and thrift shops is growing, this idea may not be as alien as it seems.

Many companies have already disrupted asset ownership models with sharing models or leasing schemes that allow under-utilised assets to be used more efficiently.

In Singapore, Kaer is a pioneer of the “cooling-as-a-service” (Caas) model, that enables building owners to buy cool air in the same way that they purchase electricity and water. 

Building owners pay zero capex because Kaer owns the cooling units, which are modular by design so it is easy for Kaer to add or remove air-con units as required, avoiding redundancy. The Caas model also incentivises Kaer to pursue higher energy efficiency, which is directly reflected in its profit margin. Kaer reports that its portfolio saves 25,000 metric tonnes of carbon dioxide every year.

Circular support

This final category refers to activities that enable the transition to a circular economy through the provision of digital tools or infrastructure.

Examples include predictive maintenance or asset tracking tools powered by the Internet of Things (IoT), digital marketplaces for second-hand products, reverse logistics networks, platforms for open collaboration and data sharing, as well as technologies and equipment that enable circular manufacturing or production processes.

These four categories of circular business models are by no means exhaustive, and often work in combination.

Circular value recovery initiatives are usually paired with investments in product buyback schemes or take-back programmes, for example.

The journey towards a circular economy will be an iterative process involving dialogues between city planners, policymakers and companies at every stage of the value chain.
Singapore put circular economy on the national agenda in 2019 with the Zero Waste Masterplan and Resource Sustainability Act, and new opportunities will arise as knowledge gaps are bridged.

A key challenge in the conversations I have had with business leaders that intend to embrace circularity is the higher upfront costs relative to linear businesses.

But initial hesitancies shift with time as the value of circular ventures is better understood. The Singapore government also has an existing green public procurement policy, which can be directed to support circularity at scale.

Businesses have a key role to play in the transformation of our economic system to achieve sustainable consumption and production, and now, if ever, is the time to start thinking about how to engage.

This article was first published in The Business Times on 5 Dec 2022.
 

    The views expressed in this research can be attributed to the named author(s) only.