Article
Is circularity always good business?
Going circular can involve high near-term investment but also long-term value creation. The business case is often positive.
Resource management is often sorted into two categories. The first is the dominant linear model of “take-make-waste.” The second model is the “circular economy,” where resources are kept in circulation for as long as possible. Yet, binary distinction between the two is perhaps too simplistic. The economy has always been a mix of circular and linear applications, in varying proportions and intensities. A better heuristic is that resource management sits along a spectrum, with circularity and linearity on each end.
Most analyses point to the cost savings available to corporates from going circular. For instance, a 2015 analysis estimated they could be as high EUR 600bn by 2030 in Europe alone.1 However, going circular is not a free lunch; it requires upfront investment, and it can create commercial risks as business models evolve. Naturally, this makes the existing (and initially cheaper) linear models more appealing. But real-world examples show that circular economy strategies, if carefully evaluated, can offer long-term benefits for the bottom line, not just the planet.
Bin there, done that
Bin there, done that
In the past, the primary drivers for businesses to implement circular approaches were scarcity and profit. Keeping materials in use longer made economic sense when discarding them was more expensive than buying new inputs. But over time, it has gradually become cheaper to discard inputs rather than reuse them. It’s hard to pinpoint an exact moment when this occurred, but historical analyses suggest the Industrial Revolution of the 1800s, and the rise of mass production and consumption in the 20th Century, made virgin materials cheap, undermining incentives to reuse them after processing.
Now, more and more corporates are pivoting back to the circular end of the spectrum. The reason is partly stronger profit incentives; as some resources become scarcer and thus more expensive, the payoff of reducing, reusing, or recycling is higher.
However, three new factors are underpinning the recent resurgence of corporate interest in the circular economy. One is regulation, such as the European Union’s new “right-to-repair” rules.2 Another reason is intensified reputational risk and reward. Social media can quickly inflict harm to brand value if consumers view a firm as needlessly wasteful, environmentally damaging, or perhaps economically unfair, as reflected in recent debates over planned obsolescence in electronic devices.3 And lastly, more circular companies can command better brand value, which could lead to higher profitability.
Rags to riches?
Rags to riches?
While there are cost savings on the table, there are many reasons why a company might not invest in circular initiatives. Although reducing waste and reusing materials can lower operational expenditures over the long run, it can involve sizable upfront costs in the short run. Whole production processes may need to be redesigned to move production from linear to circular models, requiring investment that disincentivizes firms to take the plunge. This particularly applies to small firms who lack capital to embark on large spending sprees. In the absence of regulation, only where the perceived benefits outweigh the costs will firms implement them—and the perception of cost will vary massively from firm to firm.
Circular approaches can make economic sense for companies, but they also come with tradeoffs that headline-grabbing figures tend to ignore. Regulation may eventually force the hand of corporates to implement circularity for the good of society, but in the interim, they can “get ahead” by calculating the potential economic effects of greater circularity for themselves.
#1: New opportunities for profit via operational efficiency
Businesses can generate operational efficiencies by changing how they use resources, such as reducing the inputs they need to produce goods. A recent case study estimated England’s National Health Service could save roughly 10% of its procurement spend by 2030 by implementing circular economy programs, such as remanufacturing medical equipment.4 In the farming sector, thoughtful combinations of precision agriculture technologies can reduce input costs while raising yields for farms and across crop types,5 thereby raising net returns between 1% and 3%.6 Another benefit of reduced resource use is greater resilience against commodity market volatility and supply disruption.
However, tradeoffs also exist. The most significant is perhaps upfront capital investment costs. In a recent survey, around 70% of corporates cited this as the largest barrier to adopting circular economy initiatives.7 The ability to invest varies across business; small farms, for instance, can struggle to finance expensive precision agriculture equipment. While incentives such as tax credits can lower the initial investment burden, in some industries the expenditure required to improve efficiency is simply much higher than the operational savings over an asset’s lifetime.
#2: New opportunities for profit via extra product lines
Businesses can include more circularity-themed products in their portfolio, creating opportunities for new revenue streams. This comes from either selling new products to different customer segments, increasing sales volume, and possibly also charging a premium for green products, increasing margins.
The fashion industry is a good example. The recent growth of resale platforms, such as Vinted, have led to a booming second-hand clothes market. It reportedly grew from USD 141bn to USD 197bn between 2021 and 2023 and could grow three times faster than the general apparel market to 2027.8 The circularity benefits are potentially high in an industry dominated by fast fashion, avoiding the adverse climate impacts of all the raw materials that go into manufacturing clothes—so-long as second-hand purchases displace new purchases.9
The downsides include potentially overestimating consumer demand, as well as commercial risks with new products. Sticking with fashion as an example, the resale platforms could struggle to grow if the consumer appetite for vintage clothes goes out of fashion. Similarly, concerns exist around the authenticity of luxury items on some platforms, creating commercial risks from selling counterfeit items. Both factors can limit profit opportunities, however, one interesting response to the latter has been the growth in private market authentication businesses, which have grown in recent years to service this niche area.
#3: Improved management of supply chains and relationships with clients
The value of circularity for supply chains and client relationships is intangible, and therefore difficult to accurately quantify. Nevertheless, evidence points to upside.
For supply chains, the main benefit is management of supply-side risks. One element is the reputational risk posed by suppliers. Implementing a circular economy approach naturally involves mapping where raw materials and products come from. This builds evidence regarding where supply side risks lie, such as problematic suppliers at the second or third tier. The most complete circular economy approaches would vertically integrate supply chains, providing complete management of resource flows, in the process minimizing supplier risk by bringing resource flows in-house.
On the consumer side, although people’s actions often differ from what they say, there is ample survey evidence that consumers value brands with better environmental credentials. This also feeds through to brand recognition—Patagonia, for instance, has nurtured a premium brand value partly due to its image as a circular, environmentally friendly brand.10
Supply chain risks from circular economy approaches are minimal, but there are clear reputational risks. Companies could stray into greenwashing if they stretch their claims or attract criticism for continuing to sell “linear” products while also entering circular product segments. For instance, the UK’s competition regulator recently found evidence of greenwashing by large fashion labels.11 Similarly, fast moving consumer goods companies have been criticized for their definitions of recyclability, leading to legal action.12
Closing the loop
Closing the loop
Promoting better circularity within a business can offer new opportunities for profit and generate governance and reputational benefits, helping the bottom-line as well as the planet. But whether a corporate pulls the trigger on investment depends on each intervention’s business case. With regulation coming down the track, it makes sense to evaluate the economic opportunity of going circular sooner rather than later.
The author thanks the following people for their input: Mike Ryan, Richard Mylles, Jackie Bauer, Nicole Fröhlich, Gillian Dexter.
For further information, please visit www.ubs.com/institute-disclaimer
