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Demystifying Circularity – Introducing the Circular Company

Michael Hanf

Managing Director of Taival Germany, Executive Partner

The Climate Crisis has been hitting the front pages all over the world and its impact can be felt in our private and professional life. Governments around the world are preparing or putting in place regulations to drive the shift towards a sustainable circular economy, investors are establishing green accelerator and incubator programs, and employees are looking for an employer with a purpose.

While the cry for a sustainable circular economy is getting louder, many companies struggle with understanding what this paradigm shift means for them and how that can come out at the other end stronger and more resilient. Over the past months, I had many discussions with professionals from different backgrounds and I was able to co-develop and conduct our Circular Economy Assessment with several companies. In this article, I will try to capture some of the key findings from these activities to demystify circularity.

Circular Economy and Circularity – a brief introduction

Let’s start with a short definition of the key terms. What do Circular Economy and Circularity mean?

According to the European Parliament, the Circular economy is “an economic model based inter alia on sharing, leasing, reuse, repair, refurbishment, and recycling, in an (almost) closed loop, which aims to retain the highest utility and value of products, components, and materials at all times.”[1]

So, what does that mean?

From a company point of view, this means that products, components, and materials are kept in use for as long as possible with a specific focus on maintaining their value. The value in this context is defined by the waste hierarchy that ranks waste according to what is best for the environment. The waste hierarchy consists of the following levels: Reduce, Reuse, Recycle, and Recover. In February 2019, the Ellen MacArthur Foundation developed a systems diagram, that outlines the key elements and logic of a circular economy model:

Figure 1: Circular Economy Systems Diagram, Ellen MacArthur Foundation[2]

 

Dimensions of a Circular Company

Many companies still see circularity as equivalent to recycling. While recycling is one element of the circular economy, becoming a circular company requires a broader and more holistic approach. We have identified three main dimensions that further break down into capability areas:

  1. Organisational Preparedness looks inside the organisation on how the organisation is organised, prepared, and enabled to drive circularity. It includes:
    • Strategy, mission, and vision
    • Organisational design
    • Operating model and practices
    • Corporate Culture
    • Impact, risk, and opportunity management
    • Target setting
  2. Advocacy looks at the world outside of the organisation and how the company drives and influences the shift towards a circular economy across the value chain as well as in the broader society. It includes:
    • Value change engagement
    • Engagement in initiatives
    • Reporting
    • Social and political engagement
  3. Circular Performance looks at the core of a company’s production of products and services considering how circularity is reflected in the product portfolio and the production process. It includes:
    • Percentage of circular products
    • Usage of circular raw materials
    • Zero waste production practices
    • Recovery of material lost along the value chain

 

While some companies are addressing some of the capability areas, only a few have taken a holistic approach and have completed their journey toward a fully circular company. Furthermore, the need for systemic change to enable companies in achieving the status of a fully circular company has become evident in our projects. That is why strong cooperation between regulators, companies, investors, and consumers is required to create a circular economy and overcome the prohibiting factors we see today.

Underlying capabilities and key challenges

The positive news is that we see many companies take strong action to address the climate crisis and position themselves to operate in a sustainable circular way. The downside is that only a few companies have been able to walk this path successfully to the end.

Through our work, we have seen several challenges companies are facing. Not surprisingly, we have seen challenges also across industries and geographies. The most common ones are described in more detail below:

Measurable Target system

“You are what you measure.” Based on this quote, often attributed to Peter Drucker, it is critical to develop a target system with quantitative KPIs that continuously measure the degree of circularity across the organisation incl. e.g., the percentage of circular products, the amount of waste in production and along the value chain, the percentage of recycled and bio-based materials, etc.

Circular Operating & Organisational Mode

Clearly defined roles and responsibilities within the organisation enable teams and individual experts to understand their roles and take action that is aligned with the overall strategy, mission, and vision. While a sustainability team is important as a central hub for sustainable circularity knowledge and for coordinating initiatives across the organisation, a decentralised approach that brings responsibility close to the “place of action”, is critical to ensure concrete actions and outcomes.

Capacity and Capability building

In many organisations we have worked with, the knowledge and expertise within the sustainability and leadership team is at an advanced level. While this is important and critical to advance the sustainable circularity agenda, competence and capacity building across the organisation needs to be prioritised to enable employees to understand and take circular actions whenever and wherever feasible and required.

Circular Business Model Innovation

While a lot of organisations experiment with circular business models and operations, they are often lacking a systematic approach to test and scale circular business models. Scaling circular business models requires an approach that goes beyond the financial business case and considers also other value levers, e.g., the impacts on circularity, environmental and societal sustainability etc.

Value Chain transparency and management

Circularity requires an end-to-end view of the value chain. From the time raw materials/resources are mined to the point in time a product reaches its end of life and beyond. Many companies have a limited understanding of their value chain and do not have a clearly defined view of their own role within the value chain. It is therefore critical to model the end-to-end value chain, define responsibilities, and create a clear perspective on the interactions and coordination requirements that enable circularity. This can mean working with partners along the value chain, interacting with regulators, or engaging with a value chain orchestrator.

Circular Product Design

Last but not least is the perspective on designing circular products that consider the full lifecycle incl. (re-)use, repair, refurbishment, rental, etc. Often products are designed only for use of recycling, which is a too limited perspective, as it does not consider the extension of the lifetime of a product or the re-use of the product itself but focuses on reuse of its materials. A circular company needs to have clear guidelines for circular product design that considers circular material considerations as well as additional sustainability aspects, e.g., CO2 footprint, biodiversity, etc.

 

Conclusion

While a lot of companies have identified sustainable circularity as a key element of their long-term strategy and started small projects to explore possibilities and opportunities, most companies are still missing a holistic approach, that will enable them to shift their operations, products, and services towards a circular model. Developing a broad understanding of the requirements and opportunities a circular model provides is critical at leadership and organisational levels to enable a transformation that provides long-term results.

 

References

[1] Closing the loop: new circular economy package, Briefing January 2016, European Parliament, https://www.europarl.europa.eu/RegData/etudes/BRIE/2016/573899/EPRS_BRI%282016%29573899_EN.pdf

[2] The butterfly diagram: visualising the circular economy, Ellen MacArthur Foundation, February 2019, https://ellenmacarthurfoundation.org/circular-economy-diagram

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