ESG In Conversation: How do Businesses, Governments and Investors Fit into the Circular Economy?

JG: So, a linear economy is an economy where we extract resources, we make products and use them. So yeah, so it's this very like extractive economy without thinking about like reusing resources. And if we look at the circular economy, then it really puts a very strong focus on design. The design of the project, what we call upstream, so that unnecessary materials are eliminated, or the product or packaging are designed to be reused.

We often use an analogy, actually, that: if you have water running down the top and flooding your bathroom, the first thing that you would do is not reaching out for the mop. You would first turn down the tap.  And this is similar for the circular economy. The first action that we should take is really to reduce the amount of part of materials being used.

So, yeah, so recycling can be part of the solution but should come as a resort.

CF: As investment and corporate leaders around the world continue to gain more sophisticated understanding of the impacts of climate change, many are eyeing circular business models as potential solutions to mitigate their impact.

In circular economy business models, organizations try to stop waste from being produced in their value chain from the very start, rather than attempting to simply recycle what they can at the very end of their products lifecycle. A true circular economy involves sharing, leasing, reusing, repairing and recycling existing materials and products for as long as possible. Proponents say that it comes with a lot of potential benefits. The Ellen MacArthur Foundation, for instance, says that by 2040, a circular economy has the potential to reduce greenhouse gas emissions by 25%, create 700,000 net additional jobs and generate savings of $200 billion U.S. per year.

With such promising upside, why then, has it been challenging for businesses to adopt circular business models?

WH: Where it starts to get really, really interesting. So, London is a city of around 9 million people, which is, you know, if you're sitting here, you think, well, how on earth are we going to change 9 million people? How are we going to reach all those people and make the changes that we need to happen? But interestingly, London has 600 or so high streets – shopping centers I suppose – 600.

And 90% of Londoners live within 15 minutes of those 600 locations. So, if we can deal with those 600 locations and not the 9 million individual Londoners by putting together partnerships of citizens, business, local government and civil society, then we can define a template approach that we can apply to those 600 neighborhoods. And we create circular neighborhoods, or low waste neighborhoods, or sustainable neighborhoods.

WH: A lot of this circular economy, sort of thought leadership, started with the big corporates. And it was big corporates in certain spaces. So, the likes of Renault or Unilever who, and there'll be others, you know, who are making stuff. They're looking into the future and seeing that there's going to be potential disruption there. By geopolitical events, by environmental events, by climate change, by just resource extraction making these materials rare, and therefore it becomes harder to get them, by government regulation, increasing regulation in the EU and elsewhere.

So, these big corporates and starts to think about the circular economy as a viable alternative, as a hedge against all those factors that I just mentioned. So, in a way, the corporates are both a part of the problem and part of the solution, because they're still churning out all this stuff fast fashion, plastics, packaging. All of that still churned out by these big corporates.

But they are, I am absolutely certain they are keenly interested in innovation and developing alternative business models. And desperate, I think, desperate for those business models to be successful and governments to increasingly support the development of those business models.  Because it's not in their interests to have a situation where their supply chains are disrupted that disrupts their business.

JK: I would maybe like to point to the example of an electronics company, which was part of our target set of engagement companies. So, it integrated a clear, strong and simple statement of integration of circularity into its strategy. Operationally it implemented various circularity measures. So, it sourced 1.7 million pounds of ocean bound plastics in all of the years under review and partnered with a third party on a certification scheme for ocean bound plastics to do with testing, inspection and certification.

And it was also able to point to the fact that 85% of a certain notable brand of products that it put out into the world contained post-consumer recycled contents. It was able to, over a period of 20 years, to use 125,000 tons of recycled plastic, including from its own products that it used in sort for the closed-knit fashion. So, there you can see like a real alignment between strategy, between sourcing, and the results in terms of the products that the company put out into the world, which would have had a significant cost saving in terms of sourcing materials. And also, given the success of this product line that we're talking about, would have made a notable contribution to its bottom line.

JL: So, in the business-to-business space, there's some demand because they're big buyers and they're super conscious about their responsibility or reputational risk. And they ask questions, critical questions, like: how is there not terrible labor conditions in the supply chain, or how is there not a lot of pollution in the mining? etc. But we're encouraging companies not to wait for customer demand because it's super important that they get this right. Because they are there to replace a problematic industry based on fossil fuels. But if they're not doing it right, they will end up defeating their own purpose and still ripping up the planet.

I think it's by now quite well known that by ditching fossil fuels we need a lot of metals to electrify the economy. And those metals need to be mined. So, we're finding ways to recycle metals forever, but because we're electrifying so many industrial processes, a lot of these metals are many different metals are needed, they need to be mined, refined and that takes disruption of local environments.

And it's very hard to do that in a responsible manner. But our engagements are definitely directed to address that as much as we can.

CF: That's it for this episode of ESG in Conversation. If you'd like more information about investor engagement on the circular economy or plastics, head over to the resource center at sustainalytics.com or reach out to our engagement teams. If you have any questions or suggestions for topics you'd like to learn more about. Email us at [email protected].

Thanks to Juliet, Wayne, Joris and Jonathan for joining me in providing their insights.