Can responding to resource scarcity help your business grow?

By

Mathew Nelson

EY Global Climate Change and Sustainability Services Leader

Leading a purpose-driven team that shares a common passion for creating positive impact. Workplace diversity and equality advocate. Engineer. Father of two boys. Australian Football League fan.

9 minute read 9 Aug 2019

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There is consensus on the economic potential of the concept of the circular economy among many policy-makers and industry leaders.

The circular economy is high on the agenda of many policy makers and industry leaders. There is consensus on the economic potential of the concept and new circular economy business models are arising in a wide range of markets and countries.

However, due to a lack of understanding and skills, many companies are still struggling to incorporate circular thinking in their strategy and day-to-day operations. This article discusses the circular economy’s definition, its potential impact on the supply chain and the business opportunities related to it.

What is a circular economy?

Despite regulatory pressure and optimization of manufacturing processes, our world has been unable so far to decouple economic growth and resource consumption. Economic growth is important in delivering a range of social and community benefits, but it also puts enormous stress on the availability of resources. Without drastic changes in consumption and production practices, global needs for resources could double from 2015 to 2050 according to the International Resource Panel1. The sharp increase in demand for materials can aggravate resource scarcity and may lead to unmanageable levels of waste. It can also generate unwanted side effects as the “war on plastic” is showing us.

Much of the need for economic growth is in emerging markets, where environmental regulation and practices are less mature. If the growth of production and consumption in these emerging markets follows a similar trajectory to the developed world, the health and environmental impacts will be higher than what most local ecosystems will be able to carry.

The good news is, there is significant room for improvement. Although resource efficiency has comparatively improved in emerging markets, there are still many inefficiencies along the supply chains of products. For example, the Food and Agricultural Organization of the United Nations (FAO)2 estimates that about one-third of all food produced globally is lost in the different segments of the supply chain. In order to cope with these challenges while increasing wealth and welfare in a sustainable way, the global economic model is required to evolve. The circular economy embodies the idea that the management of products and materials can be changed to make economic systems less reliant on the extraction of virgin materials, deliver more from the consumption of these materials and reuse resources where possible. The combined focus on resource efficiency, use of renewable resources, and economic growth has inspired many policy makers and industrial leaders to act.

The circular economy concept has a comprehensive scope and can be implemented across many sectors and countries, from product design to end of life. Unfortunately, its generic nature makes it less practical to implement at a company level. Therefore, prioritizing and focusing — at a very early stage — on elements with high materiality can be critical to success of the company.

What impact will the “war on plastic” have on business response?

The focus on resource scarcity is not new. The topic first came to prominence as a result of The Limits to Growth study3 in the 1970s. However, over the past 12 months, it has again been brought to prominence as the increasing plastic deposits in our oceans has gained attention in the mainstream media. This renewed focus is likely to have an impact on consumers and regulators with an expectation that business should be held more accountable for stewardship of their products even after they have been sold. A response to the issue of plastic waste should be a trigger for a broader assessment of other resource or waste risks in a company’s supply chain.

What is the impact of the circular economy on the supply chain?

A circular economy strategy aims to generate cost savings and business value by closing material loops in all stages of the supply chain. For example, changing a product’s design and business model can reduce the resources needed upstream. Or, leasing rather than selling, can be a way to upgrade clients to higher-end, more profitable and more durable products. In addition, take-back schemes for end-of-life products and materials can provide the resources needed for new products (e.g., by collecting them via reverse logistics or product stewardship schemes).

Circular economy opportunities supply chain flow chart

Since companies have their individual value proposition and structure, a tailored approach is required to assess business opportunities, key success factors and impacts across the supply chain.

What are the business opportunities?

The circular economy can offer business opportunities for the short, medium and long term:

  • Resource scarcity can lead to price volatility and high prices. Since the need for materials may grow rapidly in the coming decades, the impact on sourcing practices can be disruptive in material-intensive industries. A circular business model can help to better control and reduce sourcing costs.
  • Many governments worldwide are issuing new waste management and circular economy regulations (e.g., extended producer responsibility (EPR), take-back legislation, eco-taxes, product design and waste management laws). A proactive attitude can help companies to identify and address compliance risks in the countries of operation.
  • Consumers, employees and stakeholders are increasingly expecting companies to continue to embrace and expand their corporate social responsibility (CSR) efforts. By setting up a focused circular economy strategy, companies can fulfill the expectations and position themselves as leaders in their segment.
  • Changing consumption patterns, the rise of megacities with high population density and new IT-driven technologies are paving the way for business opportunities that focus on use and performance rather than on ownership. To leverage these megatrends, circular business models focus on pay-per-use, product-service systems, leasing and shared-value creation.
Circular economy wheel

How can you benefit from the circular economy?

Adopting a circular economy approach has benefits that can impact the entire business, including within the areas of operations, procurement, corporate affairs, strategy and growth, and legal and compliance.

Operations Procurement Corporate affairs Strategy and growth Legal and compliance
Reduce costs through more efficient use of materials     Reduce costs through better sourcing and more efficient use of materials  Fulfill the corporate responsibility expectations of consumers, employees and stakeholders       Develop new business models and services           

Meet emerging product and waste requirements 

    

Reduce costs from handling and disposal of waste materials 

Reduce the risk of supply chain disruption    

           

Engage proactively with partners and stakeholders

 

Increase participation in shared-value projects  Comply with EPR laws, product stewardship engagements and requirements for take-back systems

But where to start?  

Adopting a successful circular economy approach is not a straightforward task. Managers and entrepreneurs that launch circular economy initiatives may encounter many legal, financial, organizational and operational barriers. Solutions often require the collaboration of different actors and typically need knowledge across a wide range of domains.

EY Climate Change and Sustainability Services (CCaSS) teams can assist your organization to:

  • Better understand the waste and recycling markets, key actors and emerging opportunities of the circular economy
  • Analyze the risks and opportunities of new business models and better life cycle management of materials
  • Develop a practical and actionable road map to capture cost savings and business opportunities of the circular economy
  • Consider the financial, legal, organizational, operational and performance improvement support that is required to successfully implement the strategy
How ey teams can help circular economy

To identify and capture the opportunities, EY CCaSS teams have developed a structured approach that leverages the in-depth knowledge and experience of our professionals and relies on a wide range of tools: the EY international business network and multidisciplinary teams, market intelligence updates, risk matrices, data analytics tools, visualization tools, digital technologies, stakeholder mapping methods, state-of-the-art brainstorming facilities to track circular aspects throughout the supply chain, and methodologies to assess how circular the product portfolio is.

Certain services and tools may be restricted for EY audit clients and their affiliates to comply with applicable independence standards. Please ask your EY contact for further information.

Summary

Many companies are struggling to incorporate circular thinking into their strategy and day-to-day operations. This article discusses the definition of the circular economy, its potential impact on the supply chain and the business opportunities related to it. 

About this article

By

Mathew Nelson

EY Global Climate Change and Sustainability Services Leader

Leading a purpose-driven team that shares a common passion for creating positive impact. Workplace diversity and equality advocate. Engineer. Father of two boys. Australian Football League fan.