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Commentary

Circularity in the Era of Overshoot

Scaling up the circular economy remains a significant challenge in the current geopolitical climate, says Dr Anthony Kirby, Head of Regulation and Risk for Asset Management and Capital Markets in Europe at EY.

Plans for the roll-out of circular cities are gathering pace worldwide, whether based on the principles of economist Kate Raworth’s Doughnut economics (Amsterdam) or the concept of urbanist Carlos Moreno’s 15-minute cities (Paris). There is talk among scientific institutes for sunnier climates of growing microalgae at scale for numerous applications, including biofuels and biotechnology. There are also discussions at space institutes such as NASA and SpaceX about employing captured CO2 to synthesise sustainable fuels, reducing the energy demand for displays, lighting and consumer electronics, and harnessing natural solutions for carbon capture, sequestration and storage – in the manner of blue carbon sinks in coastal ecosystems such as kelp beds, mangrove roots and sea-grass meadows.

The circular economy is hardly a new idea of course, even if its applications are contemporary. As early as 1966, Kenneth Boulding’s essay, ‘The Economics of the Coming Spaceship Earth’, raised awareness of an “open economy” with unlimited input resources and output sinks, in contrast with a “closed economy”, in which resources and sinks are tied and remain as long as possible part of the economy. In their 1976 research report to the European Commission, ‘The Potential for Substituting Manpower for Energy”, Walter Stahel (later, the founder of the Stahel Institute) and Genevieve Reday sketched the vision of an economy in loops (or a circular economy), and its impact on job creation, economic competitiveness, resource savings and waste prevention. The report drew its thinking in part from other regenerative models including industrial symbiosis, biomimicry and cradle-to-cradle.

By the early 2000s, China had integrated the notions of non-linear systems and circularity into its industrial and environmental policies to make them resource-, production-, waste-, use-, and life cycle-oriented. This took place particularly in the context of particular rare earth supply acquisition, for metals such as neodymium, samarium and dysprosium, and supply chains for other metals vital for the manufacture of electric vehicles, such as lithium and cobalt.

By the end of the noughties, the Ellen MacArthur Foundation was instrumental in the diffusion of the concept in Europe and the Americas, as a system in which activities which preserve value are favoured. Resources include raw materials, products, energy and water are used efficiently and kept in productive, high-value loops for as long as possible, through product and service re-design. According to the foundation, the circular economy is a system where materials never become waste and nature is regenerated. In a circular economy (or circularity) products and materials are kept in circulation through processes like maintenance, reuse, refurbishment, remanufacture, recycling, and composting. It tackles climate change and other global challenges, like biodiversity loss, waste, and pollution, by decoupling economic activity from the consumption of finite resources.

The circular economy is based on three principles, driven by design (see butterfly diagram below):

  • Eliminating waste and pollution;
  • Circulating products and materials (at their highest value);
  • Regenerating nature.

Reduction, recycling, responsibility

The European Parliament meanwhile defines the circular economy as: “…a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended”. It proposes three immediate benefits for reusing and recycling products through switching to a circular economy:

  • Reducing the total annual greenhouse gas emissions by slowing down the use of natural resources, mitigating landscape and habitat disruption and helping to limit biodiversity loss;
  • Reducing the dependence on raw materials, given that the world’s population is growing (as is the demand for raw materials) yet the supply of crucial raw materials is limited;
  • Boosting the opportunity to increase competitiveness, stimulate innovation, boost economic growth and create jobs (an estimated 700,000 new jobs in the EU alone by 2030).

One of the most prominent challenges of any circular approach is how to treat the ubiquitous problem of packaging. Packaging represents a growing issue and the average European generates nearly 180 kilos of packaging waste per year – that’s around half a kilo for each person every day! However, when it comes to the potential for reuse or recycling, wide differences exist between EU member states regarding the treatment of municipal waste. The preferred hierarchy for disposal consists of prevention, then preparation for reuse, followed by recycling, recovery and finally, landfilling (under the guiding principle that the ‘polluter pays’). The UK operates separate door-to-door collections of paper and biowaste, as well as mixed collections of glass, plastic and metal, but more effort is needed to create more ‘bring points’, such as reverse-vending machines, for waste disposal.

Extended producer responsibility (EPR) schemes – the provision of incentives to producers to take into account environmental considerations when designing their products – are a proven path to packaging circularity, and a big step towards achieving a circular future for each corporate sector. For example, from a practical corporate supply chain perspective, and according to Austrian textile and fibres producer Lenzing: “the concept of the circular economy aims to keep raw materials in a closed loop. In this way, resources are maximally used, the need for new ones is reduced, waste is avoided and the life cycle of products is increased. In short, the waste of today becomes the raw material of tomorrow – the same as in nature. In this way, the circular economy differs from the current economic system i.e. the linear system, in which products are manufactured, used and disposed of”.

The topic of EPR is particularly relevant in the UK’s textile recycling industry on account of calls from the Textile Recycling Association (TRA) upon the UK government to implement its long-overdue EPR scheme, as processing plants nationwide operated by textile collectors and sorters near full capacity. According to Edie: “…The repercussions of a failure to collect waste textiles could be catastrophic for the environment, according to the TRA, with potential consequences including microplastic pollution, water contamination and the accumulation of textile waste in landfills. The UK’s used textiles industry, valued at more than £1 billion per year, holds significant economic importance, with an estimated one in every 25 jobs in the UK linked to this sector”.

Europe’s policy response

When it comes to drivers behind the use of EPR, policymaking is a key consideration in terms of achieving the EU’s 2050 climate neutrality target and to halting biodiversity species loss. In March 2020, the European Commission presented the Circular Economy Action Plan (CEAP) featuring 35 actions along the entire life cycle of products. The CEAP focuses on how products are designed, promoting circular economy processes, encouraging sustainable consumption, ensuring that waste is prevented and that resources used are kept in the EU economy for as long as possible. The initiatives also aim to promote more sustainable product design, reduce waste and empower consumers, by creating new measures such as the right to repair.

In February 2021, the Parliament adopted a resolution on the new CEAP demanding additional measures to achieve a carbon-neutral, environmentally sustainable, toxic-free and fully circular economy by 2050, including tighter recycling rules and binding targets for materials use and consumption by 2030. In March 2022, the Commission released the first package of measures to speed up the transition towards a circular economy, as part of the CEAP. The proposals include boosting sustainable products, empowering consumers for the green transition, reviewing construction product regulation, and creating a strategy on sustainable textiles. In November 2022, the Commission proposed new EU-wide rules on packaging. It aims to reduce packaging waste and improve packaging design, with for example clear labelling to promote reuse and recycling; and calls for a transition to bio-based, biodegradable and compostable plastics.

The CEAP introduced legislative and non-legislative measures targeting areas where action at the EU level brings real added value. Measures that will be introduced aim to:

  • Make sustainable products the norm in the EU;
  • Empower consumers and public buyers (e.g. introducing a ‘right to repair’);
  • Focus on the sectors that use most resources and where the potential for circularity is high such as: electronics and ICT, batteries and vehicles, packaging, plastics, textiles, construction and buildings, food, water and nutrients;
  • Ensure less waste;
  • Make circularity work for people, regions and cities;
  • Lead global efforts on circular economy.

Monitoring progress towards a circular economy, and its direct and indirect benefits, allows the EU and national authorities to assess whether policies are effective and to identify best practices. In 2023, the Commission revised the circular economy monitoring framework (CEMF), previously adopted in 2018. The CEMF supports the EU’s circular economy and climate neutrality ambitions under the European Green Deal, and the revision adds new indicators on:

  • Material footprint and resource productivity – to monitor material efficiency;
  • Consumption footprint – to monitor if EU consumption fits within planetary boundaries.

Besides the CEAP and the CEMF, it is necessary for firms to demonstrate compliance with the technical screening criteria (TSC) under the EU Taxonomy Regulation. When considering the circularity of a product, the design and production phases are key for ensuring durability and potential re-use of the product and its recyclability, with good waste management considered a critical building block of the circular economy. The TSC provisions don’t seem too onerous on the fact of it. According to Recital 11: “The technical screening criteria for determining under which conditions an economic activity qualifies as contributing substantially to the transition to a circular economy should therefore ensure that in the design and production phase, the operator takes into account the long-term value retention and waste reduction of the product over its lifecycle”. And the Annex 2 document describes the means to decide the substantial contribution thresholds for the various industry sectors.

Demonstrating compliance with the Corporate Social Responsibility Directive (CSRD, per ESRS standard E5) poses more granular challenges. CSRD covers general disclosures, impact/risk/opportunity (IRO) assessments, metrics and targets, and products and materials. The requisite data elements to be sourced cover upwards of 84 fields comprising narrative/semi-narrative texts, tables, monetary amounts, per-cent figures, masses and action plans. This is a fraction of the total CSRD requirement of 1,144, but the types of information to be drawn from various supply chains may be non-trivial. For example, the performance measurement criteria must include resource inflows and outflows, waste disclosures, resource use optimisation, evidence of circularity support, and finally, the financial effects from resource use and circular economy-related impacts, risks and opportunities.

Existential issues

The leading firms in this space (in alphabetical order) include asset managers such as BlackRock, Credit Agricole, HSBC AMG, LGIM, Lombard Odier, M&G, Macquarie. MetLife, Pictet, Robeco, Schroders and Wellington Investments. Some will be familiar with the scope of impact funds, and readily able to demonstrate factors such as the use of proceeds, additionality or the evidence for the theory of change. They’ve also invested in using satellite images linked to track-and-trace software and several happen to be the firms leading the charge in defining the art of the possible when it comes to Scope 4 emissions as well.

According to Schroders: “The transition to a circular economy will be one of the defining long-term growth trends of the coming decades. Overconsumption creates two existential issues facing the planet and the economy today – lack of resources and climate change. Demand for resources is exceeding supply. Our economy consumes resources today as if we had 1.7 planet Earths, and is on track to hit the need for three planets by 2050 as we push the planet into further natural capital deficits”.

Schroders has identified a Circular Score out of 100 for assessing each company bottom-up across its entire operations – from strategy to inputs/outputs – regardless of industry or geography. The firm argues that its proprietary framework will be critical in helping us identify future circular economy ‘winners‘, by focusing on the three domains of furthering the circular economy (60% weighting), alignment with the aims of the circular economy (30% weighting) and finally considering the externalities and risks (10% weighting), with only companies scoring above 50 being eligible for investment.

Meanwhile, Lombard Odier has published 10 principles of a circular economy, based on market forces and the economic principle of sharing and reusing as much as possible to minimise waste and the extraction and creation of virgin materials. The firm’s ’10 x R’ methodology for helping to identify the sustainable companies leading the change considers factors such as refuse, rethink, reduce, reuse, repair, refurbish, remanufacture, repurpose, recycle and recover. Lombard Odier argues that given only 9% of our used materials are recycled, they pose the existential question: “What if ‘waste’ isn’t waste?”.

There is ample room for suppliers to help architect the changes ahead. In ’Waste to Wealth – The Circular Economy Advantage’, Accenture estimated that: “…today’s business practices will contribute to a global gap of eight billion tons between the supply and demand of natural resources by 2030. This … translates to US$4.5 trillion of lost economic growth by 2030 and as much as US$25 trillion by 2050”. They identified five business models – employing shared platforms using digital technologies; deploying products-as-a-service tools to replace ownership-based models; product life extension; circular supply chains and finally, recovery and recycling approaches – that would help to drive the circular economy. EY has also provided important thought leadership in the energy and plastics sectors, in the financial bond markets, in the risk and regulation sector, and by suggesting the use of digital ledger technologies to help firms power ahead.

Arrest the decline

Looking forward, there’s substantial work left to do, because scaling up the circular economy still remains a significant challenge in the current geopolitical climate. According to Circle Economy’s 2023 ‘Circularity Gap’ report: “we live in an overshoot era … with the global situation … getting worse year on year — driven by rising material extraction and use”. Its report asserts that: “the world is only 7.2% ‘circular’, with more than 90% of raw materials used globally not yet cycled back into the economy”. This represents a negative trajectory since 2018 – with circularity rates declining from 9.1% in 2018, 8.6% in 2020 to 7.2% in 2023. Perhaps the opportunity for growth suggested at the start of this article can help arrest the decline – because it just as certainly needs to.

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