Implement circularity in value chains to reduce emissions

Despite the increasing awareness of global resource constraints and the need for a more circular economy, the global economy is only 7.2% circular (where inputs into global value chains are secondary/used materials rather than virgin), which is below the 2018 level of 9.1% (1). Linear economies based on take-make-waste still dominate, extracting both non-renewable resources, such as minerals and fossil fuels, as well as renewable resources such as wood (2). This leads to over-exploitation of resources, waste generation, and increasing GHG emissions.

However, there are significant tailwinds to the circular economy. A substantial proportion of glass, paper, plastics, and metals are already being recycled in many markets, like Germany and South Korea. COVID-19 may have caused a consumer resurgence in circularity applications (3). Leading global companies are setting big goals to increase the use of recycled materials in their manufacturing. Across industries, 97% of managers believe that circularity drives innovation and competitiveness (4). It’s been estimated that the transition to the circular economy could unlock $4.5 trillion of GDP growth worldwide by 2030 (5). Overall, investment in improving circularity can reduce CO2 emissions by 40-50 billion tons cumulatively over the next 20 years.

Circularity challenges the traditional take-make-waste economic model and envisions a new model that is sustainable by design. Not only does it reduce emissions and waste, it also creates cost efficiencies and revenue opportunities. To effectively pursue circularity, companies must address three broad business areas: process innovation, product innovation, and business model innovation, each of which links to steps in the circular value cycle (see figure below).

Figure 1: Circular economy activities along the value cycle (Percentages below show the share of surveyed companies that are active and successful in each area)

Source: WBCSD, BCG. The New Big Circle (6)

Process innovation

Process innovation involves the development and implementation of new or significantly improved production, logistics, or recycling methods, and typically includes the recycle/new input, produce and collect steps of the value cycle. Process innovation is within the direct control of the business, as it entails directly changing the supply chain. It is the easiest to implement, as employees are usually familiar with adjusting to new production processes. An example of process innovation is altering the production process to recycle industrial waste materials (e.g., wastewater, chemicals, scraps) to become more material efficient.

Product innovation

Product innovation involves the development and introduction of new or significantly improved goods or services that embed circularity principles, and could include the recycle/new input, design, and use stages of the value cycle. This requires changes across procurement, product development, product use, and the collection/recycling of finished goods. An example is introducing new design principles that extend product life, and creating products that can be repurposed, repaired, reused, resold, and recycled, especially in industries such as apparel. Product innovation could include redesigning products to require less material in construction and incorporating innovations such as the use of new materials like plant-based, biodegradable packaging in products.

Business model innovation

The most fundamental change involves the creation of a new mechanism by which a company generates value, and could include the distribute, use, and collect steps of the value cycle. This means changing what is being monetized. An example is selling products “as-a-service" (e.g., commercial trucks charged based on the number of kilometers travelled on a set of tires, as opposed to selling a vehicle) (7). Business model changes affect the entire value chain, with innovation to incumbent business models being arguably the most challenging to implement. It also often touches on how a product is consumed, which entails dedicating time and resources to educating customers to change their ingrained consumption habits. However, if successful, these innovations can open new opportunities and revenue-generating models for businesses. For example, sharing assets as opposed to solely buying or renting can lower costs through cost-sharing and result in more efficient use of otherwise idle assets.

Circular principles can be applied at each of the six different points in the value cycle, as depicted in the graphic above.

1) Recycle/new input

Companies can pursue circularity by decreasing their use of disposable, non-degradable raw materials in favor of buying/re-using secondary materials or materials that are circular. This can include switching to infinitely recyclable or more durable materials, such as procuring plant-based, biodegradable packaging, or recycling previously used materials. Securing supply of these materials may require finding new suppliers or forging new partnerships.

• Construction: CEMEX launched Regenera, a set of circularity solutions to extend product and material lifecycles by using waste and industrial byproducts as sustainable substitutes for fossil fuels and natural raw materials, including processing waste into cement (8)

2) Design

Companies can also pursue circularity by designing their products to be easily recycled and reused. This often requires educating and training employees about circular principles and practices so they can effectively redesign existing products and/or design new ones.

• CPG packaging: Nestlé has focused on redesigning its packaging to reduce plastic waste with the goal of having 95% of its plastic packaging be recyclable by 2025. It has successfully redesigned over 80% of plastic packaging for recycling and reduced virgin plastic use in its packaging by over 10% since 2018 (9)

3) Produce

Taking a circular approach to production involves having a process that is as waste-free and energy-efficient as possible, while using clean sources of energy. This approach largely involves redesigning production sites and training production workers.

• Apparel: Hirdaramani built a new plant in 2008 with the goal of reducing energy and water consumption, and waste, as well as improving biodiversity. By installing low energy ventilation systems, rainwater harvesting, and wastewater recycling, among other changes, they built a plant that[GU2] consumes 48% less energy and 70% less water than conventional apparel plants (10)

4) Distribute

Circularity can also be implemented into a company’s distribution strategy by selling access to products or implementing a leasing or sharing model rather than a conventional ownership model. This often requires a large time and resource commitment to educate customers and change deeply ingrained consumption habits.

• Auto: Michelin has started selling tires as a service to trucking, airline, and mining companies, charging clients based on use. This service helps reduce waste and distribution-related emissions over the tires’ lifecycle while creating a new revenue stream, as Michelin now manages the tires of hundreds of thousands of trucks and other vehicles (11)

5) Use

Companies can increase circularity by encouraging customers to use products responsibly, take care of them in ways that extend their lifespans, and not discard them prematurely. Customer education and empowerment are critical enablers for this step.

• Apparel: Patagonia’s Worn Wear program provides tools for consumers to responsibly care for and extend the lives of their products. This includes a repair service, a DIY repair guide, and a trade-in program. The program has kept more than 583,000 items out of landfills as of August 2023 (12)

6) Collect

By collecting and recycling products and materials at the end of their current lives, companies can ensure greater circularity by incorporating them as second-use products or as inputs into newly made products. The difficulty of collecting and recycling varies greatly across industries, and depends on the customer behavior and available recycling technologies.

• Textiles: For Days has innovated a collection program whereby customers can exchange used garments for another product at a discount. For Days then works with post-consumer recycling partners to make sure all returned materials are recycled into new fabrics and products (13)

Climate impact

Targeted emissions sources

Scope 1 (for manufacturers):

• Manufacturing products efficiently and with clean energy can reduce direct emissions

• Collecting and recycling can reduce the amount of virgin material input required, thus reducing associated processing emissions

• Reducing distribution of products and raw materials via recycling and reuse can lower emissions

Scope 2 (for manufacturers): Similar emission reduction drivers as Scope 1, particularly from producing, collecting, and recycling (above).

Scope 3 (of most downstream purchasers of manufacturers): Conceptually, maximizing activities “in the loop” and centered around use and re-use would address upstream emissions, as fewer virgin materials are needed, and it can help reduce downstream emissions from steps such as degradation. In this context, emissions can be improved by recycling/using sustainable materials, designing products to be reusable/recyclable, optimizing distribution based on reuse and recycling, and customers using products responsibly for longer.

• Category 1 (Purchased goods and services)

• Category 2 (Capital goods)

• Category 3 (Fuel- and energy-related activities not included in S1 or S2)

• Category 5 (Waste generated in operations)

• Category 9 (Use of sold products)

• Category 12 (End-of-life treatment of sold products)

Decarbonization impact

The emissions impact of circularity levers varies by company. For example, a manufacturer of aluminum laptop covers achieved a 15% reduction in emissions by increasing to 100% recycled material content (average was 60% recycled) (14). On the other hand, companies that manufacture PET plastic packaging can achieve a 44% reduction in emissions by switching to 100% recycled content (from 5%) (15).

Business impact

Benefits

• Input resilience: Stable material input reduces the risks and associated costs related to abrupt raw material scarcities and gaps that might occur.

• Revenue innovation: Multiple revenue opportunities are possible for a variety of value chain players. For example:

  • Reuse: By increasing reuse of a product (e.g., electronics, apparel) the manufacturer and retailer may be able to extract more revenue, possibly at greater profitability. Product-as-a-service models can maximize the realization of inherent value potential from a product

  • Repair: Despite the repair of products becoming less favored in developed economies over time, a revival of repairs can create revenue potential for business (e.g., Patagonia strengthened its sustainability image and increased sales through programs like garment repair) (16)

  • Recycling: There is high potential for new revenue opportunities for current recycling players or new specialized players by industry (e.g., fashion companies can increase revenue by ~10% from circular fashion market and recycling) (i). However, to go from a linear take-make-waste model to a circular model entails a significant transformation to collect used products, sort and process them, and redirect them back into the value chain

• Enhanced brand perception: Preempt consumer backlash amid growing sustainability pressures (especially for high-polluting industries), and even create new products that meet evolving consumer needs

• Customer loyalty: Publicizing circularity efforts and involving customers in these measures can lead to improved brand loyalty

Costs

• Operational and cost efficiency: The specifics of these efficiencies will depend on the industry, but using recycled inputs can eliminate the need to extract and process raw materials, leading to net cost savings. Moreover, if products are designed with sustainability in mind, it is possible to reduce the amount of raw material used (e.g., Nestle reducing virgin plastic). Designing products for easy disassembly or using mono-materials increases the likelihood and value from recycling these (e.g., For Days using organic cotton)

• Investment required: Investments will be required for new assets. For example, in the fashion industry, equipment and facilities may need to be built for automated recycling and processing of garments, and for the recycling of fabric. Similar investments in processing and refabrication facilities may be needed in the electronics industry. At scale, these investments can be expected to have payback based on avoided cost of (virgin) raw material input

• Sequencing and funding of circularity initiatives: Making heavy investments before the demand for circular products exists could strain company finances, but successful companies have found ways to grow step-by-step and use this largely as a self-funding engine. For example, companies can redesign products to use less raw material, thereby reducing costs, and then invest those savings in initiatives that may need upfront investment

• Short-term revenue loss potential: While it may be possible to self-fund circularity, companies should be prepared for net increased costs at the outset. However, over the medium to long term, revenue and profit potential from circular business models can substitute and improve upon today’s linear model profit drivers through sustained and strategic business model innovation

• Eventual subsidies used: Regional and country-specific subsidies (e.g., the EU is providing several funding programs, such as the European Structural and Investment Funds, Horizon 2020, and the LIFE program) (17)

• Relevant dependencies: Required public support and regulation may be insufficient currently, hence momentum on circularity would depend on policy adoption. For example, the presence of extended producer responsibility (EPR) systems, which charge companies based on the cost of packaging disposal, as well as regional regulatory bans, may motivate the adoption of circularity.

Indicative abatement costs

Table 1: Indicative relative abatement costs from circularity levers for different commodities, projected to 2040

Relative Marginal Abatement Costs ($/tCO2e)

Source: A “Paris Agreement” for recycling the Earth’s resources - WBCSD & BCG (2022) (18)

Impact beyond climate and business

Co-benefits

• Job creation: Increased employment throughout the value chain(e.g., new product designers, new store personnel to support resale, collections and recycling employees) compared to the linear model

• Land-use change reduction: Improved use of existing natural resources, such as biomass, and sustainable sourcing of new resources, leading to less deforestation for farmland (though biobased materials may have some exceptions due to the need for natural resources to serve as inputs)

• Resource scarcity mitigation: Reduced strain on virgin inputs from sustainable sourcing of inputs given continuous cycling of existing resources in closed loops

Potential side-effects:

There can be initial tradeoffs between protecting nature, waste generation, and reducing emissions, etc. Improving circularity, especially through industrial processes like recycling, can lead to an increase in emissions in the short term while non-renewable energy is used. However, reducing the use of virgin materials and minimizing waste through recycling can have a significant positive effect on biodiversity. On the other hand, replacing glass and metal packaging with plastic may reduce emissions initially, but single-use plastics are a key driver of the growing microplastics pollution in regions without sufficient waste management systems (19)

Typical business profile

Circular economy approaches are relevant to all companies and industries.

Stakeholders involved

An array of internal stakeholders must be brought along and contribute to circularity initiatives. For example:

• Executive Management: To prioritize circular business models and decide to invest in new technologies, as well as work with regulators and investors

• Finance & Procurement: To ensure budget availability, as new value chain complexity can be capital-intensive, temporarily affect profits, or involve other financial trade-offs in the short term

• Product Design and Research & Development: To redesign products around circularity

• Distribution network: To implement new roadmaps and plans for collecting end-of-life products

• Marketing & Sales: To develop a sales strategy that targets customers’ willingness to pay for circular products

Key parameters to consider

Solution maturity

Circular economy enablement will depend on important ecosystem drivers specific to geography and industry. For example:

• Recycling rates: High consumer recycling rates are needed to effectively address end-of-life emissions; this is not currently the case for most materials (e.g., electronics)

• Local recycling capabilities: Some geographies may not be equipped to recycle certain materials (e.g., Polypropylene is considered “recyclable” in the US; however, there are very few municipalities that accept polypropylene in curbside recycling); additionally, many parts of the world still do not have meaningful recycling systems and collection

• Regulatory support: Policymakers may need to introduce regulatory measures to increase returns and recycling of used products

• Technological advances: For some value chains, technological advances are still required to enable circular solutions (e.g., new solutions for low-carbon cement)

Eventual subsidies used

Regional and country-specific subsidies apply based on use, sale, and disposal location.

Implementation and operations tips

Below are some typical steps (20) that a company aiming to implement circularity solutions can engage in:

• Identify circularity focus: Identify materials and processes in your value chain that could be targeted for circularity initiatives

• Provide top management support: Clearly define what circularity means across the company, both strategically and operationally, and deploy the necessary financial and human resources to build momentum around circularity initiatives. Circularity can mean simpler process innovation with cost savings potential to start with, but can evolve into grander business model innovation with enormous revenue and profit potential.

• Develop a business case: Build the business case and define KPIs around various circularity interventions (e.g., acquiring new customers, strengthening existing customer relationships, or opening new markets to support the higher costs that may be associated with circular activities)

• Educate employees: Equip employees to potentially implement circularity in various parts of the company (e.g., dematerialization education in manufacturing). Ensure that sustainability teams involve the business units early on to implement and scale initiatives

• Start with targeted efforts and build: Strategically prioritize and sequence circularity initiatives, noting that the transition to circular business models will occur in steps and take time – a reasonable approach would be to start with process innovation, followed by product innovation, and then deeper business model enhancements. The WBCSD Circular Transition Indicators can help companies prioritize initiatives, set targets, and develop action roadmaps for achieving circularity goals (21). This will help generate quick wins, build momentum, potentially generate savings for future investments, and allow time for the organization to align around the circular vision

• Advocate and communicate: Implementing advocacy programs can get policymakers to act to increase recycling rates and partner with suppliers, trade groups, research institutions, and NGOs to share information about circular initiatives

Footnotes:

(i) Note: Based on BCG financial scenario modeling of sample fashion company