Circular Business: Increasingly Interesting

Four principles
To prevent that collapse, we need to create a society that is sustainable. An alternative to the linear economy, which is characterized by extracting raw materials, is to process these materials into finished products and not discard them as waste after use. This alternative to this take-make-waste economy exists: the circular economy. Implementing it could result in us having to extract 30 percent fewer materials from the earth. With this, we can get back within the planetary boundaries of the earth, including limiting climate change to no more than 2 degrees. A circular economy is characterized by four principles:

1. Striving for reduced resource use.
   Waste is reduced as much as possible, whether by saving on fossil energy or by putting a stop to the proliferation of standards for plugs.
2. Longer use and reuse of products and components.
   For example, through a second-hand market and through repair. This keeps raw materials in the chain for longer in a high-quality manner.
3. Regeneration and purification
   Consider regenerative agriculture and replacing materials with alternatives with less toxicity, or electrifying equipment in combination with green electricity.
4. Recycling of raw materials.
   This is necessary to completely close the chain and avoid destroying raw materials.

At the core it is about use less, use longer, make clean and use again, as these four points are referred to in the report.

Sector- and country-specific approach
According to the report, the transition to a circular system should be prioritized in four sectors, as that is where change will be most effective and make a significant contribution to people's well-being. These are Agrifood, Mobility & Transport, Manufactured Goods & Consumer Goods, and the Built Environment. In addition, the report distinguishes between countries that are still in the construction phase, experiencing a growth phase and the most prosperous countries.
Solutions differ per sector and per type of country; there is no one size fits all. The Netherlands is among the shift countries: the report's term for an affluent group of countries that consume most of the world's materials and have an extremely large ecological footprint. These countries will need to focus heavily on reducing material extraction and use to reduce their high environmental impact.

Of interest to business
Circularity is of interest to business owners. Especially given the Dutch goal of being fully circular by 2050 and already using 50 percent less primary raw materials by 2030. There are plenty of opportunities. Circularity starts with the design of products mindful of extending the life of products and raw materials. Consider here standardization across various products (for example, the same chargers), increasing repairability (easier to repair by replacing modules or components) and ensuring that all raw materials can be recovered (colorless plastic is easier to recycle).
One step further is to close complete material cycles, just as in a natural ecosystem. In regenerative agriculture this has, of course, been happening since time immemorial. Another example is timber frame construction for buildings.
Even more effective is to set up the entire business model in a non-linear way. As in as-a-service product-service systems. Here, a product is not sold to the customer, but the producer retains ownership and the user gets it on loan. This, of course, for a fee on a subscription basis or depending on usage. In this model, the producer has an incentive to produce the products as sustainably as possible and to keep the products in use as long as possible. Similarly, with sharing platforms - think car sharing platforms or tool sharing platforms - the business model is nonlinear. These models help ensure that available resources are fully utilized. This is another way to reduce waste.

Financial incentives
Circular business can already be attractive because customers, employees and other stakeholders of the company will appreciate it. But also, because circular products can be profitable through, for example, less resource use, and long-term revenue from as-a-service models, or because circular products can be less dependent on supply chain volatility. And, of course, also because the negative consequences - just think of the reputational damage of violating environmental laws - can be avoided.
The circular economy offers around $4.5 trillion in opportunities for growth by 2030. A major hurdle however is that the financial incentives to do circular business are rather weak. Impacts on climate, environment and people, so-called externalities, are often not or hardly included in the price of products. As a result, the incentive to produce and consume sustainably is lacking. Sustainable, green energy, for example, could in many cases be cheaper than gray energy if the environmental damage was priced in.

The CFO Needs to Step up to the Plate
Nevertheless, the call to get into the circular economy is growing stronger. For example, laws and regulations are constantly being tightened to enforce circular business. Consider the introduction of the CSRD directive, which requires companies to produce extensive ESG reports. Or the advance of carbon pricing. True pricing, or prices including externalities for products, seems to be a next step. Understanding the company's true value creation, and not just its financial performance, too. If companies and officials are judged on that, the incentive will be all the more imperative.This is the current development. The trend is clear: companies increasingly need to show their impact on the environment and society and relate it to value creation. Companies’ own reporting already encourages them to become more sustainable and more circular. The CFO, as a Board member and primarily responsible for corporate reporting, should take the lead. Especially the CFO who has the future-proofing of the company at heart. The implication of the above for the CFO is that he or she must consciously and at all times consider how to integrate circular strategies into the corporate strategy. This in order to make green growth possible, and to enable the company to create maximum value with a minimal ecological footprint. The CFO, too, have to step up to the plate.

This article is published in Management Scope 02 2023.