In Focus: Adapt or die

By  Vero Insurance

Is a circular economy our only chance of survival?

For over a century, commercial industry has relied on its excessive use of unsustainable natural resources. But what happens when these resources are depleted beyond repair? The answer may lie in the virtues of a sustainable ‘circular economy’.

Humanity has a problem. Since the industrial revolution, we have exercised increasing mastery over the extraction, manufacture and use of our limited resources – all in the name of social, technological and scientific progress. But this relentless advance has been matched by an equally aggressive growth in waste.

In fact, almost 90 per cent of the raw materials used in manufacturing become waste before the product even leaves the factory, and 80 per cent of those products are thrown away within six months, according to environmental journalist Richard Girling’s book Rubbish!.

The threat this poses to our planet’s rapidly growing population is well-documented, as is the dwindling, finite nature of our available natural resources. What is less often understood are the financial benefits businesses can reap by adopting sustainable practices.

Restore, regenerate … and profit

Sustainability and environmentalism are values viewed by many business owners as incompatible with profitability. But this couldn’t be further from the truth. The Ellen MacArthur Foundation, established to promote the benefits of a ‘circular economy’, defines the term as ‘an industrial system that is restorative or regenerative by intention and design’.

McKinsey predicts shifting towards a circular economy could add US$1 trillion to the global economy over the next decade, creating 100,000 jobs in the next five years. The World Economic Forum believes the transition would generate material cost savings of AU$26 billion in Australia alone.

The wide scope of circular economic approaches makes these figures merely a starting point. Former ASX company chairman Peter May, a director at biotechnology company Bio-Gene Technology, believes the financial potential of the systems already available will see adoption rates skyrocket.

“The best motivators for businesses changing their business models are finance and government, if you have either of these it makes the change quite compelling,” he said. “When you talk about the circular economy, you are recycling value, so already there is a great incentive for adoption.”

New business models: reducing costs, increasing profits

A recent Harvard Business Review study highlighted a number of current business approaches that support a circular economy.

The first, and most synonymous with circular economics, is closed loop recycling – which involves the recycling of materials like glass, aluminium and steel, which don’t diminish in usefulness as they are re-used. Manufacturing businesses which recycle and repurpose metals are particularly poised to profit in this area, with AU$6 billion worth of metal disposed of in waste streams annually in Australia alone, equal to half of the country’s annual metal consumption.

But inefficient disposal is only part of the issue. The way existing assets are being used represents the greatest area for improvement. Take cars, for example. On average, our vehicles are parked for 95 per cent of their life. The popularity of car sharing services like Uber is seeing this figure increase, while overall ownership is declining. A similar disruption is occurring in the accommodation industry through Airbnb.

Giving up ownership of consumer- and business-owned products may be the most significant structural change to the global economy this century. Electric car manufacturers like Renault are choosing to lease batteries rather than sell them to owners. As a result, the manufacturers retain the batteries at the end of their useful life cycle to recycle them, guaranteeing both environmental benefits and reduced manufacturing costs.

Similar trends moving away from ownership, towards ‘servitisation’ or renting, are occurring in a variety of sectors – ranging from clothing brands like Mudjeans, which leases jeans that are later recycled, to Philips, which rents and recycles lighting equipment.

Benefits for all

In addition to its environmental benefits, the circular economy generally rewards three beneficiaries: businesses, economies and consumers.

First, businesses stand to make immediate and significant savings on materials costs, particularly in industries with short product life cycles like packaging, electronics and clothing.

Businesses also benefit from improved customer relationships. Typically, a business-customer interaction ends after the point of sale; by introducing a second interaction when the consumer returns, replaces or recycles a product, one-time consumers become recurring users. The benefit of a reputation for sustainable practice can also provide an added selling point.

Echoing May’s sentiments, Ryan Collins, recycling programs manager at Australian non-profit organisation Planet Ark, believes the incentives for business adoption are already in place.
“We all know the planet has a finite supply of resources to tap into, so creating waste is a liability for both businesses and the environment,” says Collins. “Reducing waste generation and keeping valuable materials circulating within the economy will be a priority for everyone in years to come and is a significant area of jobs creation.”

Importantly, the value generated for businesses and the economy is shared by consumers too. By reducing premature obsolescence and trending towards re-use rather than replacement, consumers save on ownership costs, while an increased prevalence of product refurbishment allows consumers more choice in how their products are tailored to their needs.

The circular economy is coming

Whether recycling product materials or improving the efficiency or length of their useful life, the circular economy can generate value for businesses, consumers and society.

These benefits are expected to increasingly appeal to businesses as the availability of easily extractable resources dwindles in the coming decades, and demand is inflated by rapid population growth, thereby increasing materials costs.

PwC estimates the world may run out of oil and gas within the next 50 years under current extraction technologies, while the MacArthur Foundation anticipates key resources like zinc will become increasingly costly to locate and extract.

Resource scarcity is expected to be exacerbated by increasingly stringent environmental policies, placing upward pressure on the cost of inefficiently manufactured goods.

Businesses that adapt quickly to this trend will be best placed to reap the financial and reputational benefits of the circular economy, but those that don’t adjust could be left behind. It’s clear that change is necessary. For progressive businesses, it’s a case of making the shift sooner, rather than later. Is your business ready?