The Business Case for Sustainability: Financial Benefits of Circular Practices

One of the arguments against adopting circular solutions has been cost. It is assumed that sustainable efforts are expensive. There is ample evidence to prove that circular practices are not only cost-effective but also profitable. And it is time we put the ‘sustainability versus profitability’ debate to rest. The question shouldn’t be: “Can we afford sustainable businesses?” Rather, it should be “Can we afford not to?”?

The linear model has been the driving force behind economic growth thus far but it creates numerous issues, such as resource depletion, pollution and the accumulation of waste in landfills and in short damages the planet. The take-make-waste model is no longer sustainable. On the contrary, switching to circular business models – including resale, rental, repair and refurbishment – would contribute to the regeneration of Nature.?

Mind you, the benefits of a circular economy aren’t just about the environment. It also brings financial savings as businesses use less resources and require less waste disposal services. It creates jobs, drives innovation and offers companies a way to gain competitive advantage at significant scale, while addressing important social needs.?

The PACE's Circular Economy Action Agenda , put together by more than 200 experts from 100 businesses, governments and civil society organizations from across the globe, identifies economic growth and job creation as two of the financial benefits of a circular economy. The study analyzed the potential impact and called for action across five key sectors: plastics, textiles, electronics, food and capital equipment (machinery and equipment) and came up with five opportunities associated with the shift to a circular economy. They are 1) Make better use of finite resources; 2) Reduce emission; 3) Protect human health and biodiversity; 4) Boost economies and 5) Create more and better jobs.

Growing evidence

Widespread adoption of the circular economy results in increased Gross Domestic Product (GDP)—with a reported $4.5 trillion in economic benefits until 2030, according to a study by Accenture. The Accenture Strategy research, Waste to Wealth, finds that today’s business practices will contribute to a global gap of eight billion tons between the supply and demand of natural resources by 2030. This translates to $4.5 trillion of lost economic growth by 2030 and as much as $25 trillion by 2050.

According to a 2015 study by McKinsey and? Ellen MacArthur Foundation, a circular approach could boost Europe’s resource productivity by 3% by 2030, generating cost savings of €600 billion a year and €1.8 trillion more in other economic benefits. This report also notes that such a practice could generate additional annual growth of 0.6 %, and 48% reduction of CO2 emissions by 2030.?

According to a study published in Journal of Business Ethics, between 2006 and 2010, the top 100 sustainable global companies experienced significantly higher mean sales growth, return on assets, profit before taxation, and cash flows from operations in some sectors compared to control companies.?

Cost savings?

Companies can also realize significant cost reductions as a result of improving operational efficiency through better management of natural resources like water and energy, as well as minimizing waste. One study estimated that companies experience an average internal rate of return of 27% to 80% on their low carbon investments.?

Dow Chemical, for example, reported that it invested about $2 billion since 1994 in improving its resource efficiency and by 2011 it saved more than $9.8 billion from reduced energy consumption and water waste in its manufacturing processes. Moreover, environment-friendly practices will attract investors, who are now able to track the high performers on ESG factors.?

The Global Waste Management Outlook 2024 , published by the United Nations Environment Programme (UNEP) and the International Solid Waste Association (ISWA),? finds that a circular economy approach to the management of municipal solid waste would also bring significant cost savings. The current waste management practices would cost more than $417 billion a year by 2050 – a rise of $165 billion from 2020 costs. In the circular economy scenario the estimated costs would be less than $255 billion a year.?

Job creation

There is a fear that jobs may be lost when the circular shift happens. While this is true, one should recognise that new jobs will be created in fields such as recycling, services like repair and rental, or in new enterprises that take measures to make innovative use of secondary materials.?

The International Labour Organization projects the net creation of 18 million jobs directly associated with the circular economy by 2030, while the Global Climate Action Summit estimated the creation of over 65 million new low-carbon jobs in 2030 (Global Commission on the Economy and Climate, 2018).

According to the World Employment and Social Outlook 2018: Greening with Jobs , action to limit global warming to 2 degrees Celsius will result in sufficient job creation to more than offset job losses of 6 million elsewhere.

What needs to be done??

Undoubtedly, many of these economic benefits and opportunities are long-term, indirect and require significant investment. While financial benefits will be reaped once the system is fully implemented, the challenges of high initial investment in new processes and technologies could be considered a deterrent. The way forward is for economies to come up with policies that create more immediate financial incentives for businesses to develop innovative new business models and enable the efficient flow of reused and recycled materials across global value chains. A long-term view and short-term incentives are the need of the hour.?

For the businesses looking to make the first move, Accenture’s Waste to Wealth book recommends implementing the following capabilities to support their circular economy models:

• Manage complex circular networks in which suppliers and partners collaborate to gain value from waste
• Design products fit for multiple lifecycles and develop services based on the re-use of products. This requires closer links between product design and after sales services.
• Secure circular supplies through redesigning the role of procurement and ensuring manufacturing processes can make use of repurposed materials.
• Invest in continuous customer engagement to create a receptive market for re-purposed products and to compete effectively in the shared economy.
• Create ‘return chains’ with partners and suppliers to boost the quality and reliability of recycled and remanufactured materials.