Sustainability strategies and the circular economy
I have just had the privilege of joining the “Circular Economy and Sustainability Strategies” 6-week on-line course run by Cambridge Judge Business School.
Here is a reflection of the course.
Having focused the previous 25 years of my career around thermoplastic composites targeted principally at automotive light-weighting for reduction of tail pipe emissions and associated CO2, I have been and now more than ever am motivated around using technology to combat climate change.
Background
This course gave an excellent overview of the wider picture and how not only technological innovation is needed to combat climate change but much more in that we need to change our economic model and ways of thinking towards a much more holistic systems-based approach looking towards multiple impact factors. We need to apply this, for example in how we develop the forthcoming generation of EVs, the lightweight materials used, the supply chains, and to make sure that this technology is developed from a circular rather than linear perspective. Automotive technology has progressed tremendously since the 1970’s, yet we use personal transportation much more offsetting the technological gains with societal increases, and we need to move further towards a circular business model, beyond recycling issues alone.
Sustainability can be defined as: "Avoiding the depletion of our natural resources in order to maintain a balanced ecosystem and preserve natural capital while meeting the needs of the present without compromising the ability of future generations to meet their own needs".
The challenge was given for economics (and society) to transform from a linear model, which since the industrial revolution has been a uni-directional approach of extract, make, use, and dispose, to a circular model. Linear models can be seen in economic terms as a market failure, that is we have not yet found and applied models where we as society can reflect the hidden environmental costs in market prices. Over consumption, over-production, and over-trading have caused significant impacts on the environment such that serious changes are needed.
Statistics around resource depletion
The statistics given around resource depletion and degradation were and are shocking. A key fact was that the Paris Agreement only goes half way towards meeting the seventeen UN 2030 sustainable development goals (SDG’s). The barriers to achieving the SDGs were economic, societal, technological, political, and institutional. For example, in the EU, 31% of food waste is lost in the value chain, 46% of fruit and vegetable still useful edible mass is lost, 60-75% of packaging is lost after the 1st use cycle (I have just eaten a half plastic half sushi lunch from the local Migros supermarket), 90% of the time our cars are idle, 60% of office space is not used during office hours. Fast fashion is responsible for 10% of global CO2 emissions. Agriculture uses 70% of global water consumption. If we start to grow feedstock for bio-fuels or bio-plastics on mass, this will increase and compete with other SDGs. 90BT of natural resources are extracted per year which will increase 2x by 2050 yet only 9% find their way back. 8 million T of plastic floods into the ocean each year. We are inefficient as a society and need to improve this. Many inefficiencies are money lying on the floor, which if we pick up will hugely benefit the environment.
Transportation is a key sector and contributes 21% of total global CO2 emissions. While covid-19 gave a 6% drop in greenhouse emissions, it was still short of the 7.6% annual reduction required to limit global warming to 1.5oC. Investment in fossil fuels is still higher than investments in climate activities. The market potential of circular economy strategies is 4.5T $ by 2030. We use the natural resource budget for the year by 29th July (2019). By 2030 we will need 2x planet earths, which we simply cannot conjure up. The top 1% of the planet’s population control 50% of global wealth and emit double the carbon emissions of the world’s poorest 50%. The biggest drivers are China, India, and the USA; however, we all need to work together, back to the prisoner’s dilemma.
Triple bottom line
Moving from the traditional ROI and financial metrics, we need to focus on the triple bottom line, the three P’s: People, Planet, Profit. We need to reduce the use of raw materials by 32-35% by 2030 and by 50% by 2050. PESTLE level thinking (political, economic, social, technological, legal, environmental) needs to starting to dominate over micro (internal company) or even meso economics (competitive framework) to the ESGs of Environment, Society, and the Economy. Thinking beyond the conventional bottom line (profit) to, once again, the triple bottom line (People, Planet, Profit).
A circular economy model is our current best option to approach this, together with other key enablers such as technology and societal and ultimately individual change. What we buy will drive what people produce. 72% of all economic activity is related to the end user. We need to move from the linear systems that we have been trained as engineers, scientists and business people to optimize to a circular model. Here we reuse, repurpose, remanufacture, recycle, regenerate. We avoid resource leakage in the system. We create durable products, we look at lease rather than buy. We need to design out waste and pollution, look for opportunities where our waste is someone else’s feedstock, we need to keep products and materials in use, and regenerate natural systems. The Ellen MacArthur foundation has many case studies of how this is starting to be applied. It is a journey and change cannot happen over-night, yet it can start and continue, and grow as it needs to on a more urgent imperative than we realize. We need to shift the system. Leading thinkers across a range of organizations were cited from Harvard to the boardroom. This is now accepted as a mainstream consensus and we need to build awareness and momentum across society.
Role of Government Policy
We looked at the role of government policy which should not be fixing market failure, rather giving vision. It is key for governments and policies to help guide us towards a circular economy and to lubricate the system with funding. Government policy needs to be direct, traceable, and measurable. Incentives can include financial support, creation of opportunities, and to control depreciation. Government can initiate public and private partnerships where the public sector assumes risk while the private sector provides the technology focused on circularity. Governments can also make main-stream policy to achieve growth, create jobs, stabilize policy and to utilize a countries own resources (reducing imports). This has started yet the funding levels do not represent the challenge ahead.
Investors are reacting
Investors are now moving to favour sustainable enterprises where companies following this approach are seen as more attractive long term investment opportunities. There is already around 500B$ invested in impact investments. Naturally companies need to remain profitable and attractive, and critically it was shown how investing in sustainability is an attractive and rapidly growing opportunity, with a growth figure of 27% given as an example from one study. Double digit growth into a major mega trend with a trillion-dollar business opportunity with growing demand for such products and services. Impact investing requires intentionality, with a return’s expectation and a return on investment. This needs measuring with objectives, goals and intentions. Companies need to establish social and environmental objectives and to monitor and review them.
Along the way I jumped into an Ellen MacArthur foundation mini-summit on the same topic and leading companies presented their activities and thoughts. Some advanced level window dressing was evident (fresh sandwiches in the window, only bread inside, and undesirable effluent running out of the back door after hours), while some real progressive change to sustainable supply chains, products and processes was also seen. Others could really do far more than they currently are and pressure needs to be applied to combat global obesity epidemics and diabetes. Some excellent materials available on their web page.
It was emphasized how companies can keep running linear models while at the same time transferring to circular models. The need to redesign supply chains for agility was given and to see supply chains as a lattice rather than the metallic constructs used today, so onshore, near shore, off shore. It should not be a race to the bottom of the linear economy, with the risk of staying as you are seen with covid-19 and our vulnerable, fragmented, and fragile supply chains. Covid-19 has moved this thinking 5 years into the future.
We had zoom calls where the cohort could interact and exchange ideas. The energy within the over 400+ group was intoxicating, people with the same interest pulling together, bringing out the best in humanity. We need more of this.
Sustainable initiatives
We need to bring sustainability into the value proposition, from start-ups to transformation, diversification, and acquisitions. Circular economy business models close, slow, intensify and dematerialize: slowing looks at material and energy recycled within the system via reuse, refurbishment and recycling; slowing extends the use phase; intensifying makes sure the asset is used more via sharing; and dematerializing looks at virtual approaches to a physical asset. Key terms of a circular economy business model were: efficiency and productivity, economic and financial viability, recovery, recycling, building products, sharing platforms, extending the life of assets, being more sustainable, green growth, service vs. product. If the machine is turned off, the asset is not working for you.
Change management and influencing stakeholders
A week was then spent looking at change management and influencing stakeholders and helpful methods to apply to this challenge. Stakeholders include customers, suppliers, employees, financial / bankers / creditors, government, management, competitors, community, financial analysts, investors. Change management relates to financial, operational, and strategic (what the competition are doing). All businesses need sustainable business models, yet these need to incorporate socially and environmentally sustainable practices. We should also aim to produce something good, towards the SDGs, rather than contrary to these? Producing a product that is damaging to human health in a sustainable way could be improved by refocusing on the product portfolio and starting to transform it. The AIDA approach was presented: Attention (need to change), Interest (of stakeholders in the benefits), Desire (stakeholders need to desire the change … make them think it was their idea!), and Action. Raise awareness, information and education, include the supply chain, building capacity and train teams, inform stakeholders, competitive activities, impact analysis. Much of this is conventional business common sense.
Key enablers
Having painted a picture of the challenge, key enablers towards a circular economy were then reviewed: 1) Technology, 2) Finance and investment, 3) be consistent with the goal, 4) build infrastructure, 5) Government and policy. This does not happen over-night, it will require great effort, change is difficult, there are things we can do to make it easier, but change is inevitable.
Innovation
Innovation needs to address the problem of over-consumption and over-production which places stress on our natural resources. Innovation is needed in the business model (circular vs. linear), the supply chain, recovery & recycling, durable products, service models, etc. Innovation needs to occur in a) Government policies, b) in Businesses and how products are delivered, c) Consumers (how they dispose of products). The Henderson – Clark innovation model was introduced. A summary was given of the following four innovation quadrants as keys to move towards sustainable solutions: 1) Incremental (existing concepts of technology that enhance value to the customer via improved features and design changes), 2) Architectural (Apply lessons and skills to a different market), 3) Disruptive (stealth innovation, applying new technology or processes to the companies current market and 4) Radical (giving birth to a new industry, new product or a revolutionary technology. Innovation needs to find restorative and regenerative solutions that affect research (imagination, creativity, design, product, process), teamwork, communication, management drive and interest together with a commitment for results.
The internet of things and Ind4.0
The role of innovation was discussed with the involvement of IoT, Ind4.0 and miniaturized sensors as one example, cloud technology, satellite imaging of methane hot spots, and additive manufacturing amongst others. There are 50 billion connected devices in 2021. We need to avoid redundant cloud data. Digital transformation can reduce the CO2 footprint by reducing waste, reducing commuting times, and improving air quality. Digital transformation was considered low hanging fruit. The IoTs is an enabler, with embedded sensors in devices and equipment that are used on a daily basis which emit data and indicate if the device is functioning and if it needs service to avoid failure; data is shared over a common platform and is analysed and extracted to help in decision making related to input, operational output, distribution, consumption and utilization. Knowing the current condition of an asset helps in decision making around repair / reuse / recycle (utilization and life time prediction). This can help towards demand driven business models. Disruptive innovation is needed, and we need to move from pilot to scale and cannot be timid.
One example I found interesting and relevant was Rheaply who have a platform that organizations use to share equipment inside R&D labs where different groups have separate budgets yet do not have a database of what other groups have and may not be using, resulting in unused assets in one group, and a different group inside the same organization purchasing a similar item. I can see this makes real sense!
Circular design guide
The circular design guide was examined which was an excellent resource and much more time was needed to explore this. It should be noted that recycling, as the tail end of a best case linear economic model, is amongst the least efficient circular strategies. We need to design with circularity in mind. We need to move beyond recycling and waste management towards a fundamental change in production and consumption systems; beyond recycling into reuse, repair, redistribute, remanufacture, refurbish, cradle to cradle products. Servitisation. An example was given of the clothing industry where <1% of the material used to make clothing is recycled back into new clothing with a resulting loss of 100B$/yr. MUD jeans now offer a subscription basis.
Mini summit on University Education and S&CE
I also jumped into another Ellen MacArthur zoom summit looking at the role of University Education in S&CE where New York Universities had collaborated with London. John Holm presented the Bard Graduate MBA Program in Sustainability where he argued for a holistic solution, interdisciplinary (rather than super specialized like master’s levels courses in engineering or science in many universities today). The book “Green Swans, the coming boom in regenerative capitalism” by John Elkington was recommended, also “The circular economy handbook”. His courses are practitioner focused with guest speakers from both the board room and organizations such as green peace. Students build real life case studies in real time. Workshops and external engagements form much of the work load. This is all very different to the traditional Engineering degrees. Polling during the zoom call showed that 2/3rds of participants (University Professors and Educators) thought that S&CE should be part of the general curriculum for all majors; while 7 out 8 thought that Universities needed to model this via campus and building improvements. S&CE could be taught either via specific courses, or the theme could be integrated into existing courses. Bureaucratic approval was seen as the major barrier to entry; also, the need to move from theoretical to applied. The average score given to their own institutions circular economy offering was 2.4/5. Cooperation between Universities is key, as is interdisciplinary versus the conventional focused approach. Education is key to equip future generations.
Life cycle analysis fitting into sustainability?
We did touch briefly on life cycle analysis (LCA) which was of personal interest to me having used these approaches previously to argue suitability preferences of certain light-weighting solutions for automotive. How does this fit into sustainability? LCA is an excellent tool that can also be miss-used especially where the functional unit is not sufficiently defined or the input data contains high impact historical assumptions when alternative lower impact solutions are now available. Much of this can be cleaned out using sensitivity studies followed by independent peer review. That said, the LCA framework does not currently map to all of the SDGs, especially the social themes, so by itself LCA does not necessarily show the most sustainable solution or alternative. The UN is proposing ELCA methods to link the sustainable development goals to life cycle impact frameworks and more work is needed here; also coupling to cost and business models.
ReSOLVE framework
A deeper dive was then taken to look at the McKinsey & Co. ReSOLVE framework. This consists of a) Regenerate (natural capital), b) Share, c) optimize, d) loop, e) virtualize, f) exchange. The Ellen Macarthur foundation has a good description of this, which is given here as an edited summary:
Finance ... and ethics
The last week of the program covered finance and also started to dive into more ethical issues and the conversations became more intense, focused, and where the rubber ultimately hits the road. Many passionate and intelligent people working towards a common goal is an enriching experience.
A big issue in the industrial world is entrenched investments, for example in automotive production or plastics polymerization, where significant assets are in place with long payback period and it is difficult to change course. Figuratively speaking , while such ‘large container vessels’ do take time to make course corrections, yet when a decision is taken to do this, a large amount of ‘cargo’ is then taken on a different journey.
Finance was examined to show how sustainability approaches reduce COGS and can increase GM, while also acknowledging that sustainable feedstocks can be more costly. It was also discussed that to increase the focus on sustainability the earnings retention ratio will ultimately need to be altered such that less is paid as dividend and more is reinvested (into S&CE approaches). It was argued that sustainability approaches can increase EBITDA (earnings before depreciation and amortization) by reducing COGS (cost of goods sold) via efficiency gains and waste management and reducing OPEX (operating expenses) via sharing leasing and service approaches, while at the same time increasing revenue via more desirable products which customers sensitive to sustainability issues will demand. Different financial metrics were presented mathematically including SROI (social return on investment), CEA (cost-effectiveness analysis), CBA (cost-benefit analysis), BACO (best available charitable option), and also B-corps certification. This was personally interesting having cost modelled many manufacturing processes over the years and to start to think of how S&CE issues could be included.
Sustainable finance covers capital budgeting including the i) structure (where capital is sourced from, equity from shareholders and owners and debt from banks and bond holders) and ii) working capital (cash in [sales, inventory, pre-paid expenses] and out flows [pay suppliers, salaries, interest, tax]). Sustainable practices include payment terms, supplier conditions, and salaries.
SROI: Sustainable return on investment
Traditional financial approaches including RONA (return on net assets) were then summarized as a framework which does not include sustainability concerns onto which SROI methodologies could be presented. SROI is intended to not just optimize for profit, but also to consider people and the planet: People (social impact of investment, fair wage, people’s life quality, healthcare, sustainable employment); Planet (environmental, CO2, energy, transportation, built environment etc). The impact investing world has several standards to capture non-financial aspects: 1) IRIS+ (impact report and investing standards), 2) GIIPRS (global impact investing rating system), 3) SASB (Sustainability accounting standard board). There is also B-corps certification with Patagonia as an excellent example.
While SROI aims to quantify both financial and non-financial benefits versus cost in monetary terms and is a good first step towards quantifiable relative investment assessment, it still needs to move further towards monetizing the value of people and the planet. One approach that I came across a few years ago from the Rocky Mountain Institute is natural capitalism solutions. Natural Capitalism Solutions Home - Natural Capitalism Solutions (natcapsolutions.org).
In my opinion, multi-objective optimization is needed, which is complex, yet the SROI needs to optimize around not only "clean" profit, but to see the true impact of what we do to people and to the planet, what these are worth especially in terms of how much we are going to have to invest in the next 10, 30, 50 years to live on our planet in a way that can be maintained for everyone rather than carving out a niche way of living at the expense of others. We do not truly understand the challenge and change needed IMHO.
Some questions
This week of the course raised the following questions in my mind.
Personal ethics and the board room ... Prof. Henderson
We then moved onto personal ethics with an excellent article by Prof. Henderson of Stanford, and the following is a reflection of this where she urges leaders to bring what they believe into the board room. Well worth reading.
Having previously worked for a large American Corporation for 10 years in strategy, technology, and M&A, I have a snapshot of this big business perspective and the internal politics versus external realities.
As Henderson describes, we are emotional people who have values and personal ethics. This is part of us. We cannot deny it or we are not true to ourselves. We should not let this part of us be extinguished by cold numerical logic. We are not robots but human. The sooner we realize this and allow it to enter our working worlds, the faster this change can be. It comes with a risk. For me it was a severe burnout at the above company pushing a (sustainability focused) technology project I believed in and fought (too) hard for. Yet without it change cannot be catalysed as the wisdom in Henderson’s article is what will make the phase change occur in the ethical framework of capitalism.
As Henderson says, there is money lying on the floor to be recovered from operational efficiencies. We need to redefine the box by which we are assessed beyond the bottom line and bring our convictions into the work place. A commitment to prosperity and freedom is wider than we think. If we take risks in decision making then we can choose to do this for what we really believe in. We need to introduce true pricing of externalities (waste / emissions / etc) and these need to become definers for success and promotion, really not just in theory.
As Henderson again says, we need to reinvent capitalism as the old model did not efficiently apply scare resources and we are overheating the system, AND its people. We need to shift the ethical framework of capitalism, and our own behaviour and buying decisions, which is what the economy runs on at the end of the day.
Human needs and some psychology
Ultimately, we as humans look to fulfil our needs. Expanding beyond the program, Maslow’s hierarchy of human needs makes for an interesting discussion. As we in the west look to self-actualize, and are hence prepared to pay more for an ecological / bio-based / premium product, many others across the world are still trying to meet their basic human needs of food, water, and shelter and this need is so pressing that they do not have the head space to consider the impact on future generations as they are trying to survive and just feed their children. Meanwhile, as I stand-up paddle along the side of Lake Geneva at the weekends, I see huge houses standing empty for tax reasons.
As mentioned previously, the drive and interest of the cohort in this course was impressive. This gives hope. We need to choose hope, respect, collaboration, compassion and mercy as we go forward rather than selfish ambition at the global expense. We need to love our neighbor as ourselves. I would suggest that only when these most desirable of human characteristics come to the fore can we truly embrace this challenge. Otherwise, all of us, in varying degrees, will ultimately face challenges to our more basic human needs as the effects of climate change become stronger. We will also see the beautiful and unique world on which we live degraded ending up like a used coat, torn, faded, and frayed. Maybe mostly affecting those with the least capital and least education.
We all need to make commitments, big or small. My commitments are to work these themes into a composite materials master’s course at EPFL. Also, to switch our home electricity supply to a 100% renewable contract, more expensive, yet if we all do something, starting with steps we can manage, we can change.
Shifting baseline syndrome
We need to remap our neural networks and decision-making criteria to mitigate a threat that is looming, yet mostly unseen. This is the shifting baseline syndrome where, “A gradual change in the accepted norms for the condition of the natural environment due to a lack of experience, memory and/or knowledge of its past condition”. In other words, “What we consider to be a healthy environment now, past generations would consider to be degraded, and what we judge to be degraded now, the next generation will consider to be healthy or normal”.
When we are sitting at our desks on a zoom call we are not immediately aware of extreme temperatures in Canada or Russia, yet it will start to release methane that has 80 times more global warming potential than CO2. The cause of this is a moving societal baseline, the CO2 emitted from the industrial revolution through the great acceleration until today by ourselves and our past generations, and not an existential threat like extreme volcanic activity.
Holocene to Anthropocene?
Sir David Attenborough describes in his book, “A Life on Our Planet: My Witness Statement and a Vision for the Future“, that we have come to the end of the Holocene which is the stable geological epoch in the earth history that has lead to our blue and green planet. Rather, we are leaving indelible markers in the very geography around us and have created the as yet unofficial Anthropocene as we have terraformed our planet and left radioactive tracers in our geology.
We need to act on a threat that our human senses are not detecting as an immediate and present danger, yet due to the hysteresis in the earth’s climate and potential tipping points we need to act now to avoid ourselves becoming a character in one of Kim Stanely Roberston’s novels, “New York 2140” or the trilogy “Forty signs of rain, Fifty below zero, and Sixty days and counting”.
This course has wrapped this argument in an intelligent, multi-faceted, business focused package that will help to inform, motivate and energize many in leadership positions towards change and help educators to modify focus. This is to be commended and I look forward to continuing the journey.
Thank you for your interest.
Martyn
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Projects Director, PEG Projects Ltd
1yThanks Martyn for sharing. Hope to link up with u directly for some more insights n guidance. Cheers!
Thanks for this deep insight! Such an important topic.
Helping Pharma & Chemical Companies Reduce Scale-Up Risks & Costs | Process Technology Transfer | VisiMix Mixing Simulation Expert
3yMartyn, thanks for sharing!
Researcher/Technical & Scientific Writer/Data Analyst
3y👍