What we talk about when we talk about the circular economy
Roughly a year and a half ago, when the Dutch materials company DSM examined where its businesses stood in terms of circular practices, the company’s leadership wasn’t particularly happy with the process for doing so.
They’d created their own system to evaluate the company’s adoption of bio-based ingredients, its use of recycled materials and its production of fully recyclable or reusable products. Using revenue as the metric, DSM found that 26 to 27 percent of its value chain met its definition of circular, but revenue didn’t seem like the best way to measure progress, said Jeff Turner, the multinational’s vice president of sustainability.
"It was easier for us to do because it’s how we track internally, but circularity is about resources, and you measure resources in terms of pounds and tons and kilograms," Turner said.
In other words, it was important that DSM use a weight and volume-based system of measurement when it came to tracking its progress toward circular models of design and production.
The other missing piece was how to measure the impact of collaboration. "When we did the work, we weren’t entirely satisfied because it was just us, it was our definition, and we wanted to be sure that a metric for measuring circularity would work not only for us but for our customers, our suppliers and for other industries," Turner said.
So when the World Business Council for Sustainable Development last year began conducting analysis with the goal of creating a framework for measuring circularity, DSM signed on as co-chair. The company is one of roughly 20 WBCSD members from various industries — including chemicals, forestry, waste management, consumer brands and electronics — that worked with the organization to develop a draft framework.
These companies and more are pilot testing the latest draft, with testing expected to wrap up around mid-March. A public comment period will follow in late spring and early summer. The organization aims to have finalized guidelines by end of year.
"With this framework, we’re trying to provide a common language and a consistent way for companies to measure the circularity of the resources they depend on and the products they put out onto the market," said Brendan Edgerton, WBCSD director of circular economy. "It’s really a three-part process that we’re putting together. The first goal is to understand the resource and material flows across the company, the second is to understand the financial implications of that, and the third is looking forward at what the risks and opportunities are."
The reason it’s important to share a common language and definitions is that when it comes to circularity, collaboration is key.
"It’s very important for companies to be able to communicate with each other. Circularity is not something you can do on your own, you need your value chain partners," said Suzanne Kuiper, a senior consultant on the Dutch sustainability team at KPMG, who’s been working closely with the WBCSD on the framework. "And in order to collaborate, you need to speak a common language. What do I mean when I say, ‘I’m closing the loop?’ And what does my client or my supplier mean?"
The circular economy is defined by the Ellen MacArthur Foundation as "gradually decoupling economic activity from the consumption of finite resources and designing waste out of the system."
"It’s very much related to a company’s business model," Kuiper said. "If I have a traditional business model, I generate more revenue by either raising the price of my products or selling more products. So I have an incentive to stimulate consumption by getting more products out there."
With circularity, the ultimate goal for a company is to rethink its "linear" business model. This can mean moving from a product to a service or subscription model, for example, or creating a buyback model where the company collects a product when the customer is done with it and then refurbishes and resells it.
One example of a subscription service is Bundles, a Dutch startup that rents high-end washing machines and dryers. Rather than shell out a large sum upfront, the customer pays a monthly fee for a machine, which an engineer installs in their home. And Bundles deals with any maintenance issues.
Models such as this incentivize manufacturers to design an efficient, long-lasting product, which reduces waste and cuts costs, because maintaining a product is typically less costly than building a new one from scratch. Customers benefit because they share in the upside of using a well-made product (rather than opting to buy a cheaper, less efficient model), and they avoid the cost of repairs and hassle of disposal.
Moreover, a circular business model greatly can reduce the risks that come with a linear model. These include resource supply and price volatility, which can be affected by both natural supply limits and geopolitical conflicts.
For example, many critical raw minerals — such as aluminum, graphite, iron, lead, salt, tin, mercury and zinc — are found in China. This makes the current trading tensions between China and the United States a potential risk for both the suppliers and end users of those minerals. Other risks include an increasing number of environmental regulations and harm done to a company’s brand or reputation. As consumers become more environmentally aware and conscious of the impact of the products they buy, they’re demanding less destructive options. The global movement against single-use plastics is an example of this.
The flip side of risk is, of course, is opportunity. In addition to cutting costs, a company that shifts to circularity may gain customers and find it easier to recruit talent.
Of course, there are countless ways to look at circularity, depending on the company and the industry, which makes creating a common framework for measurement tricky. "We aspire to something that does work for all kinds of industries," Turner said. "But we’re also conscious that there are steps we need to go through, and that we can’t try to run before we can walk."
Turner, Kuiper and Edgerton are part of the panel "Measuring Progress in the Circular Economy" Feb. 27 at GreenBiz 19.