What Are the Business Models And Strategies Of The Circular Economy?

Key takeaways

Our current linear economy is unsustainable as it depletes the earth of its resources and creates too much pollution.

There are four main business models in which companies can enable circularity: circular design, optimal use, value recovery and circular support.

The Ellen Macarthur Foundation’s Nine ‘R’ Strategies hierarchy further details the impact of circular strategies in driving effective transition.

We hear a lot these days about the importance of moving to a more circular economy as a key response to the intensifying global climate and environmental crisis, but what does a circular economy actually look like?

The basic aim is to minimise waste – and eventually to disrupt the concept of ‘waste’ itself – by keeping resources in use for as long as possible, circumventing the need to extract virgin raw materials. The more resource value can be recovered by reusing, refurbishing or recycling, the more ‘closed-loop’ the circular system becomes and the lower the impact on the environment.

For a clearer sense of what this means in practice, it’s useful to look at the limitations of the current ‘linear’ approach and how the circular economy differs, as well as the different ways that businesses can enable circularity and what that means to us as investors.

The limitations of the linear economy

Since the Industrial Revolution, developed economies have operated on a linear basis, whereby resources are extracted from the ground and used to make products that are sold and used – often not to their full potential – and then thrown away when we don’t want or need them anymore.

In the process, of course, millions have enjoyed higher living standards, better health and longer life expectancy. But as catastrophic climate change and threats to biodiversity have risen up the global agenda over the past decade, it has become increasingly clear that the linear model is not sustainable going forward.

Not only is the supply of raw materials and fossil fuels finite and dwindling, but conventional solutions to waste disposal, typically incineration or landfill, are also degrading the planet.

plastic bottle on the beach, environment

Over the last 50 years, the scale of environmental challenges created by the linear approach has risen exponentially.

For instance, the World Bank reports that 635 million tonnes of waste was generated globally in 1965; that had tripled to almost two billion tonnes today, driven by growing consumption of everything from food and fast fashion to electronics.¹

Over the same period, global energy consumption also skyrocketed, up by almost 150% since 1971 according to the International Energy Agency.²

Meanwhile, land use change has affected almost a third (32%) of the global land area in just the past 6 decades, according to the scientific journal, Nature.³ Yet a third of the food we produce is wasted.⁴

The bottom line is that the current economic model is a one-way street. According to the 2022 Circularity Gap Report produced by Circle Economy, a Dutch research organisation, more than 90% of what we take from the earth to fulfil our wants and needs goes to waste.⁵

That’s a staggering figure, but it reflects the fact that most products are actually not built to be reused. The European Commission has estimated that more than 80% of the environmental impacts of a product are determined right at the start of its life, when it is designed.⁶

scenic picture, circular economy, environment

The business models enabling a more circular economy

A more circular approach, therefore, is closely bound up with product design. That means thinking from the outset about issues such as what the product is made of, its durability and how it can be reused (for instance, through easy disassembly or modularity), rather than having to tackle them as problems when it is discarded.

But this is not the only way in which companies may play an active role in the transition to circularity. The Value Hill Business Model tool created by Circle Economy identifies four basic business models.

In the circular design model, the company incorporates circularity into the heart of product design, as mentioned above. One example in the portfolio is the carbon-negative materials company Origin Materials, which converts sustainable biomass (for instance agricultural or wood waste) into products usually made from fossil fuels.
The optimal use business model focuses on improving the use and lifespan of products or technologies. AutoTrader, which facilitates used car sales and purchases, is a good example here.
Businesses following the value recovery model are recapturing value and pulling it back into the system, an example in the portfolio being Steel Dynamics, which processes scrap metal to make new steel products.
Finally, circular support companies are focused on activities that support those of the other three models. US business Badger Meter, for instance, produces flow measurement and control tools to help customers monitor and optimise their use of water and other resources.

the 4 circular support models

This classification tool is really valuable as we seek out the ‘enablers’ that are actively making transition happen. Importantly, it also helps us differentiate such businesses from ‘practitioners’, those that are merely integrating elements of circularity into their basically linear business models.

For example, while Nike incorporates some recycled rubber in the trainers it makes, it does not make it an ‘enabler’. Even Coca-Cola, the world’s largest plastic polluter, or leading greenwash proponent, Unilever, can point to some circular principles (and will flag them as evidence of their green credentials) – but they would clearly not make the cut as circularity enablers.

Clearly, these four business models encompass a broad range of circularity strategies; however, not all are equally powerful in terms of their impact in driving transition.

The Nine ‘R’ Strategies

Therefore, the Ellen Macarthur Foundation’s Nine ‘R’ Strategies hierarchy is also a useful guide. This ranks companies’ various approaches to circularity, from Rethink, Reduce and Reuse near the top of the list to Recycle at the bottom (because it is addressing the question of what can be done with a product once it has already effectively become waste, rather than tackling the issue at an earlier stage).

9Rs in Circular Support Models

The drive to a more circular economy is becoming ever more urgent; we believe the businesses enabling transition are well placed to reap benefits as circularity moves centre-stage in the coming years and warrant a much closer look from investors.

References

World Bank, “What a Waste: An Updated Look into the Future of Solid Waste Management”, September 2018. Available at: https://www.worldbank.org/en/news/immersive-story/2018/09/20/what-a-waste-an-updated-look-into-the-future-of-solid-waste-management

International Energy Agency, “World total final consumption by source “, 2021. Available at: https://www.iea.org/reports/key-world-energy-statistics-2021/final-consumption

Nature, “Global land use changes are four times greater than previously estimated”, May 2021. Available at: https://www.nature.com/articles/s41467-021-22702-2

National Geographic, “TIL: We Waste One-Third of Food Worldwide”, 2023. Available at: https://education.nationalgeographic.org/resource/til-we-waste-one-third-food-worldwide/

Circle Economy: Circularity Gap Report 2023, “Our world is now only 8.6% circular”, 2023. Available at: https://www.circularity-gap.world/updates-collection/circle-economy-launches-cgr2020-in-davos

Ellen Macarthur Foundation, “An introduction to circular design”, June 2022. Available at: https://ellenmacarthurfoundation.org/news/an-introduction-to-circular-design#:~:text=Decisions%20made%20at%20the%20design,made%20at%20the%20design%20stage

Key takeaways

The limitations of the linear economy

The business models enabling a more circular economy

The Nine ‘R’ Strategies

References

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