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Thinking circular: Circular economy best practice in the industrial goods sector
Why do we need a circular economy?
Humanity is using nature 1.7 times faster than Earth’s biocapacity can regenerate. This is clearly unsustainable. We need to take urgent action to evolve our economic system from linear to circular.1
How many Earths would we need?2 Assuming everyone lived like a resident of -
Our current economic system is linear. We take materials from the Earth, use them to make products, and eventually throw them away as waste. In contrast, a circular economy seeks to keep resources in use for as long as possible and extract the maximum value from them. It is a regenerative approach which minimises waste, pollution, and the depletion of natural resources.
The following principles underpin the circular economy:
- Eliminate waste and pollution
- Design for durability, reuse, remanufacture and recycle
- Regenerate natural systems
For many products, the solution starts with design. By redesigning products, we can reduce the resources used during the manufacturing process, extend their lifespan, and enable them to be recycled at their end of life.
More information about the circular economy can be found on the Ellen MacArthur Foundation website.
Why did we tender research on industrial circularity?
We take a long-term approach to investment, often holding companies for over a decade. Over this extended period, sustainability issues like circularity are an inseparable component of how we assess risk and opportunity.
As a team of investment analysts who are generalists, we are not experts on every sustainability topic. Commissioning bespoke research from specialist subject matter experts supports our assessment of the sustainability positioning of the companies we own. It also helps us to engage constructively on issues that could impact risk and returns. We recently commissioned research on industrial circularity from Columbia Centre for Sustainable Investment because we believe this is a business-critical issue that will become increasingly relevant over the next decade. The purpose and scope of the research tender is set out here.
The transition to a more resource efficient economy will require companies to adopt circularity into their business models. Companies that integrate circular economy principles into their processes stand to benefit from:
- Reduced manufacturing costs from more efficient design.
- Closer, more recurring, relationships with customers who rely on repair, refurbishment, and recycling services.
- Reduced risk that the growing extended producer responsibility movement forces them to pay for large end of product life externalities (e.g. environmental damage).
We shared some of our thoughts on the circular economy in this article in 2017. We use Project Drawdown’s climate and biodiversity solutions as a framework to map the companies in our portfolios and share this on portfolio explorer. ‘Circular Economy & Industry’ is one of eight drawdown areas we use to group the climate solutions.
What are the key findings?
A shorter version of the research report is available on the Columbia Centre for Sustainable Investment (CCSI) website. This version excludes the detailed assessments of companies included in the original report we commissioned. The report, “Circular Economy in the Industrial Goods Sector: A Framework for Understanding Private Sector Progress and Innovation” defines a framework to assess a selection of companies relevant to us as investors and identifies examples of best practice across the different dimensions of circularity. It focuses on practical, replicable, and scalable examples rather than unproven concepts.
The report identifies five areas of focus:
1) Circular design and production: designing products for greater longevity, ease of repair, recycling, reducing the volume of materials needed for production, eliminating waste, or using recycled materials during production.
Example: Bosch developed a Design for Environment (DfE) standard. This has been applied across their products (including design, manufacture, packaging, transport, use, and end of life). The firm conducts life cycle assessments which evaluate product-specific environmental aspects e.g. use of materials, consumption of energy during manufacturing, use of recycled materials and remanufacturing at the end of the product’s life. By using recycled materials, Bosch’s latest cordless screwdriver lowered its through-life-cycle carbon footprint by 20%.
2) Facilitating life extension and recycling of products: facilitating the repair, refurbishment, reuse, or recycling of products by end users.
Example: WEG takes back used motors (damaged or with low efficiency levels) and provides a discount on the purchase of new high-efficiency motors. This promotes the use of more efficient motors and raises awareness of energy conservation, improving efficiency and reliability, and reducing operating costs.
3) Direct collaboration: collaborating with other firms to achieve circular economy gains or develop new circularity approaches.
Example: Lincoln Electric has piloted a programme which enables customers to return slag (a byproduct of the welding process) to be converted into new flux (a chemical substance used to remove impurities) which the customer can reuse.
4) Standard setting and policy engagement: contributing to wider, societal progress towards a more circular economy, including participating in multi-stakeholder collaborations or lobbying activities which aim to advance circularity goals.
Example: Mahindra & Mahindra speak at various forums such as the World Economic Forum and World Bank convenings to advocate for circular economy practices. In India, they helped lead a circular economy committee set-up by the Federation of Indian Chambers of Commerce and Industry, which aims to mainstream the circular economy as a concept.
5) Public reporting: publicly articulating concrete circularity goals and credibly measuring progress against targets in a transparent manner.
Example: Delta Electronics’ publicly available sustainability report lays out a clear approach to identifying and meeting their circularity goals. Their clear and coherent reporting provides a model for other companies.
CCSI found large variances in approach across the companies assessed. Some have barely considered circularity while others have fundamentally overhauled their practices.
Next steps
We hope that by sharing the report with companies and investors it can be a useful resource for anyone interested in evolving their approaches to the circular economy.
We will share the report and engage with portfolio companies, prioritising those that are early in their circularity journey. These companies should benefit more from an introduction to best practice than peers that have already embraced circular thinking.
Through the process of engagement, we hope to learn more about the practical aspects of implementing best practice. This will help us to better understand the risks and opportunities associated with putting the principles into practice which will enable us to evolve our approach to company selection and engagement.
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