5 minute read 1 Dec 2022
group session join hands

How will circularity enable a 360° approach?

Authors
Marc Hetzer

Sustainable Supply Chain & Circular Economy Lead, EY Switzerland

Sustainable Supply Chain enthusiast | Circular Economy advocate | Circuneer | DIY and Re-Purpose fan

Stephan Hirschi

Partner, EY Sustainability | Switzerland

Dedication and systems thinking is what is needed to combine business impact with the needs of a sustainable future.

5 minute read 1 Dec 2022
Related topics Sustainability

Swiss companies should adopt circular business models to cope with risk factors, address sustainability and meet diverse stakeholder needs.

In brief
  • In a volatile, complex and uncertain macroeconomic environment, companies recognize the benefits of the circular economy for more stability and resilience.
  • Stakeholders like investors, regulators, employees and consumers are also demanding more sustainable products – and they want transparency to make decisions.
  • We propose six guiding stars to help organizations navigate the first steps on their circularity journey.

Nowadays, companies are under pressure from a cocktail of risk factors and mega trends. As a result, organizations need to consider demands of key stakeholders from various spheres to arrive at informed business decisions. If the landscape of external influencing factors is analyzed, this process occurs to be complex since the depth of spheres and often contradicting stakeholder demands enlarged throughout recent years.

A good starting point to analyze the external impacts on companies are geopolitical frictions accelerated by the Ukraine invasion, which have led to immediate negative consequences for the global economy. Against this background commodity and energy supply restrictions, as well as associated price increases occurred and companies as well as nations were forced to adapt their strategies. For example, non-sustainable, fossil energy sources are back on the political agenda to meet short-term energy demand.

Taking a supply chain perspective, companies are confronted with massive disruptions, leading to delays or even non-delivery of products or services. On this note it is important to mention China’s ongoing zero-tolerance COVID-19 policy, which exacerbates the supply chain challenges. In combination with the current restrictive monetary policy, we see a rise of negative investor and consumer sentiment, which is triggering a withdrawal of capital from the market. 

Living beyond our means

2.8

The number of planets needed to support Swiss consumption levels on a global scale.

Even though the mentioned geopolitical tensions seem to be most pressing, global warming and its severe consequences on the societal and business environment have not lost their gravity. Therefore, the urgency of developing even more sustainable strategies is of utmost importance. Pressure to become more sustainable in Switzerland really comes into focus if one considers that we would need 2.8 planets to survive if every person in the world were to consume as much as an average person in Switzerland. [1]

Parents with children exchanging electronic waste at recycling center
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1

Chapter 1

Push factors for the circular economy

How the circular economy responds to regulators, consumers and other stakeholders’ needs

The European and Swiss regulators are developing various legislation and directives to ensure carbon neutrality goals are achieved. They essentially require companies to increasingly build – and report transparently on – ESG-related structures and strategies. One example is the recently published, mandatory reporting requirements for Swiss companies from 2024 onwards.[7] This not only implies that companies are forced to redesign processes, but that stakeholders are gaining greater visibility on the activities of companies. It also means that the latter have more information to decide whether or not a company is worthy of their continued support. In other words: If organizations do not adapt, they will face a serious risk of losing financial, supply, collaborative, investment and consumption “support” across different stakeholder groups.

In this regard, it is important to add that these requirements do not focus solely on large companies, but SMEs as well. On the one hand, the regulator is taking a holistic approach and includes smaller companies in its regulations. On the other, SMEs face indirect pressure, especially when selling goods and services to large cap companies. 

Shift in focus

56%

Percentage of consumers paying attention to environmental impacts of their consumer behavior

A further ingredient in the cocktail of negative external factors affecting companies is the changing behavior and demands of customers. EY’s future consumer index indicates that 56% percent of 18,000 consumers surveyed are paying attention to environmental impacts they are causing with their consuming behavior[2]. Meanwhile, inflation and the correlating loss of purchasing power leads to people buying cheaper alternatives. Consumers are re-focusing on essential products and services. Considering these aspects, a potential field of tension occurs, since to date, sustainable products are mostly more expensive than less-sustainable alternatives. Therefore, companies need to decide which alternatives to offer in the short term.

In the longer run, however, with ESG-related regulation coming into force, inflation returning to lower levels, and an increased supply of renewable energy which is cheaper than fossil fuels due to scaled technology and infrastructure the pressure to offer sustainable products will force companies to change strategies. Taking a broader view, the demands of employees as well as investors and suppliers support the longer-term, sustainable strategy. Incorporating the complexity of today’s business environment and underlying decision making-processes, organizations need to initiate change processes today, since organizational roadmaps are not changed overnight. This means that the short-term strategy should be a sustainable one as well. Embracing the circular economy is one-way organizations can start their strategic shift now.

recycling box
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Chapter 2

Spotlight on circular

What the circular economy means and how companies can embrace new opportunities

We observe a current megatrend toward the circular economy, offering far-reaching opportunities for companies, the economy and society as a whole. This type of business or ecosystem model allows companies, and its supply chain partners to create circular processes, therefore abandoning the disadvantageous take-make-waste approach. The key factor to consider is that circular models allow companies to financially benefit while introducing sustainable approaches to their operations. We outline opportunities to economically benefit from circular principles in chapter 3. 

The figure above depicts the process of closing the supply chain loop. An analysis of differences between a conventional and circular supply chain reveals enormous environmental and economic implications when embracing the new reality.

Primarily, advantages within the environmental sphere of a company occur. Closing the loop requires supply chain partners to maximize the possibilities of repairing, refurbishing, up- or recycling products and materials to decrease the use of raw-materials, reduce waste and decrease CO2 emissions[3]. Considering the fact that within Switzerland 80-90 million tons of waste is generated every year, circular business models could radically reduce these figures[4].

Alongside the sustainable aspects of a circular economy, there’s also a huge opportunity for companies to increase profits in the long run.

  • Cost efficiency

    By keeping materials in the loop and decreasing the inflow of virgin raw materials, overall purchasing costs can be lowered which will outweigh initial investment costs.

  • New revenue streams

    Companies may discover recover opportunities of resources as well as products and can re-sell certain products or materials.

  • New business models

    New business models can, for example, introduce the system of “paying for using” instead of “paying for owning”, which can be leveraged to increase the number of sales.

Next to these aspects, the probability of fulfilling orders is enhanced, which boosts customer satisfaction. This is based on the fact that a decreased amount of virgin raw materials is required, lowering dependency on global supply chains and enabling scarce resources to be managed more efficiently.  In turn, this may lead to long-term, highly profitable customer relationships and increased margins. 

zero waste shop
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3

Chapter 3

Mitigating negative impact factors

How circular business models address some of today’s big challenges

fRevising the negative impact factors on companies discussed at the beginning of this article, circular business strategies provide an attractive opportunity for companies to ease or even circumvent potential pressures – and further increase their profit potential.

With respect to geopolitical frictions and the problems of the global economy in particular, we see that companies adopting circular pathways benefit from growing deglobalization and better supply chain resilience. By keeping materials in the loop and leveraging “local” suppliers, companies are less dependent on foreign sources, which may be subject to further, negative geopolitical tensions such as invasions, trade wars, pandemic policies or unexpected events such as the Fukushima nuclear crisis or the blockage of the Suez Canal. Organizations can decrease raw material usage, increase stability of their product offerings and meet customer demand for locally sourced, sustainable products. It’s a win-win situation: Companies mitigate volatility of material supplies, increase customer satisfaction and improve margins. 

Building on this, incoming ESG regulation and disclosures play to the advantage of companies. By implementing circular business models, companies are already well placed to comply with laws such as the ongoing partial revision of the Swiss environmental protection act which reinforces the circular economy and disclosures such as the counterproposal to the Responsible Business Initiative. Seen from this perspective, sustainability reports, product labels and marketing requirements are not a necessary evil but a preferred tool to communicate organizational activities. Especially where competitors fail to adopt circular, more sustainable business strategies, an organization can secure a unique, leading position. Further, there is no need of coming up with ideas on how to position the company well in such disclosures, which is by the way called green washing, but companies just must report on what they are doing while also considering goals set by countries or federation of states. 

A fisherman at sunset on Inle Lake
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Chapter 4

Six guiding stars

How companies can start to incorporate circularity into their business model

In Switzerland, 12% of companies already have circular activities within their business model.[5] Most are about cutting material requirements, reducing negative environmental impacts from production processes and extending the useful life of internal production infrastructure.[6]

Switching to a circular business model requires a change of the whole company: new corporate strategies, amended target operating models, extended data management, new performance measurement models, revised supply chains as well as logistics functions and talent hiring processes. To successfully implement circularity, there is no one-size-fits-all solution. However, some aspects can serve as guiding stars. We propose six starting points to get your organization thinking about what circularity could do for your business:

  • Identify overlap between circularity and corporate strategy

    In today’s world, sustainability and in particular the topic of circular economy are rising to the top of corporate agendas. Companies implementing a sustainability strategy as part of their corporate strategy benefit from a competitive advantage through improved reputation, reduced resource consumption and financial benefits.

    Any change in the business model often goes hand in hand with a change in the corporate strategy. Since the circular economy is applicable to all functions within a company, from supply chain and operations to finance or talent management, it cannot stay within the sphere of the Chief Sustainability Officer. Rather, circular economy needs to be integrated into every single business function.

    Changes can initially trigger fear among company’s stakeholders, especially since the circular economy is associated with complexity. Also, strategic changes are often bound to certain time periods (e.g., three to five years). Timing may be key in reducing the stress of having to implement everything at once.

  • Align on your circular vision

    Internal alignment between various stakeholders within a company is key for the implementation of a holistic Circular Transition. Without a clear vision and the involvement of stakeholders in the circularity innovation process, misunderstandings can be the result. Therefore, a vision that is understood and supported by stakeholders and that has a clear economic, environmental, and social benefit as well as impact is key.

    Further, long-term goals are more difficult to grasp for stakeholders than short-term targets that trigger a sense of achievement. When starting the circularity journey, setting milestones is vital to track progress and to keep the motivation for achievement up.

  • Get transparency and traceability of supply chain and operations

    It is vital to have transparency and traceability within the company’s own operations and supply chains. Implementing a circular economy means structuring circular supply chains in line with ESG criteria. Today, supply chains are highly complex and dispersed around the world, making it difficult for companies to identify where sub-components of products are coming from. Circular supply chains however, need to be transparent, and goods need to be traceable.

    Transparency and traceability foster sustainable value creation because they enable the source of materials and products to be captured, and in turn the value that would otherwise be lost. Furthermore, this approach reveals where potential ESG risks might occur along supply chains, allowing companies to trigger mitigation actions.

    To realize transparency and traceability, supportive technologies are required. So far, it is difficult to manage circularity through existing ERP systems since they are not built to enable a simple analytical breakdown of circular business models. Furthermore, today’s accounting and operating schemes were constructed based on the demands of a linear economy. With supportive technologies such as the blockchain or digital twins, necessary information needs to be sourced and the mentioned processes adapted to the requirements of a circular economy. 

  • Investigate profitable business models, considering stakeholders

    It is very clear that circular business models have strong positive environmental side effects such as reduced need for extraction of natural resources and the disposal of waste. However, the circular economy is also profitable.

    By saving on their own waste, companies contribute positively to needs of municipalities. The public sector needs to spend less because less waste needs to be handled.

    Looking at another economic component of the circular economy, product-as-a-service models may be interesting to explore. By retaining ownership of products and just leasing them, the manufacturer can take back the manufactured raw materials at the end of the product’s useful life. The lifetime can thus be further enhanced, which also results in higher economic turnover if the product can be leased for longer.

    The needs of stakeholders also need to be considered through customer centricity. This is especially the case when it comes to consumers’ product usage, and how behavioral changes can be initiated where consumers are not willing to change. Focus should be put on educating consumers that products (and thus materials) are not waste at the end of use, but valuable resources that should be transformed. This should be done in cooperation with regulators.

  • Run circular economy pilots

    A good starting point for the implementation of the circular economy is to establish pilot projects. This enables a business case, which can be based on financial calculations, e.g., the NPV, payback periods, resources, or costs. Having a positive profitable aspect to the circular economy often helps to convince certain stakeholders.

    Circular economy pilot projects could include the redesign of one specific key product and establishment of a new business model. Further, it could also include the analysis of waste streams and the selection of one to redirect it as a resource for other local players.

  • Scale up through suitable partnerships and collaboration

    To bring the circular transformation to the next level, efforts need to be scaled up. The most effective and efficient way to do that is to collaborate with partners along the value chains: upstream and downstream suppliers, distributors, research institutes, startup accelerators, governmental bodies, industry communities, as well as technology providers.

    Teaming up and building a suitable ecosystem is key for enabling the circular transformation. New stakeholders can contribute but at the same time also benefit from the transformation.

Summary

In a world that remains uncertain and subject to pressures from all angles, organizations need to seek new, sustainable ways to remain resilient and profitable. The circular economy allows companies to mitigate risks by aligning economic demands with sustainable requirements.  Embracing the circular economy will also be an important contribution to society’s efforts to tackle urgent climate change challenges. Swiss companies should start preparing to implement a circular strategy – for better business, easier ESG compliance and happier stakeholders.

Acknowledgments

We thank Vincent Metzler and Gloria Flik for their valuable contributions to this article.

About this article

Authors
Marc Hetzer

Sustainable Supply Chain & Circular Economy Lead, EY Switzerland

Sustainable Supply Chain enthusiast | Circular Economy advocate | Circuneer | DIY and Re-Purpose fan

Stephan Hirschi

Partner, EY Sustainability | Switzerland

Dedication and systems thinking is what is needed to combine business impact with the needs of a sustainable future.

Related topics Sustainability