The industrial revolution kicked off growth that brought significant improvements to living standards in many parts of the world. But it's increasingly clear that the take-make-waste model it is based on is no longer sustainable: extracting raw materials, manufacturing goods and disposing of by-products and end products in landfills, incinerators and the world's waters. Once we take the environmental costs into account, we can see that our economic success is founded on a fatal accounting error. A team at Leeds University in the UK recently calculated that no single country has met the basic needs of its residents without overconsuming natural resources for over 30 years.

But we can follow an alternative path – a path that leads toward a future that is prosperous without using up the Earth's supplies faster than they can safely be replenished. This is the concept behind the circular economy, which aims at a shift to conserve resources while also providing for our material needs.

From linear to circular

The circular economy was once a radical new idea. Today it has found its place in mainstream business thinking.

What if we stopped throwing things away? What if we treated everything as a potential resource; every output as a potential input to something else? What if we could design waste out of the system and keep materials in flow for as long as possible? These are the fundamental questions the circular economy concept addresses as a way to meet our needs sustainably, using the resources available on the planet. It is altogether different from the linear economy model and should not be confused with important yet isolated measures like recycling. The circular economy is not a slight adjustment – it is a radical shift. It requires taking a holistic view of value chains, from resource extraction, design, production, distribution, marketing and logistics to use and disposal.

At the most basic level, the "3 R's" model illustrates the concept of minimizing the environmental impact of our economy by reducing waste and reusing and recycling products and resources to keep them in the loop for as long as possible. More "Rs" can easily be added, starting with repair and refurbish as well as regenerating resources, to reactivate – referring to the idea of bringing back simpler technologies – and reward, encouraging good practices and creating incentives for good behavior.

The European Commission recently announced the establishment of a right to repair, a movement that has also been gaining ground in the US. Online portals already offer practical advice on how to repair clothes or electronics. Corporations like Philips have introduced refurbishing services for hi-tech equipment. Renewables can play an increasingly important role both in terms of energy consumption and new types of raw materials.

The concept of the circular economy is not new. Pioneering thinkers such as the English-born American economist Kenneth Boulding laid the foundations in the 1960s. Boulding recognized that the economy needs to work within the boundaries of the planet and its limited resources. In his seminal essay ‘The Economics of the Coming Spaceship Earth’, he introduced the idea of a "closed" economy in which resources remain in use as long as possible. Over the subsequent decades, his ideas inspired others and the concept was developed further [see timeline below]. In 1990, the environmental economists David W. Pearce and R. Kerry Turner coined the term circular economy in their book Economics of Natural Resources and the Environment in which they postulated that "everything is an input to everything else."

Around the same time, the question arose of how to measure the real ecological impact of products and services. To articulate the true cost of a product, German chemist and environmental researcher Friedrich Schmidt-Bleek introduced the MIPS concept (material input per service unit) in 1994. It measures the material input (MI) divided by service (S) over a product's lifespan – from cradle to grave.

The Ellen MacArthur Foundation, launched in 2010 by British solo long-distance sailor Dame Ellen MacArthur, bases the circular economy model on three pillars: eliminate waste and pollution, circulate products and materials and regenerate nature. MacArthur contemplated the fragility of our economic systems while sailing around the world solo in 2005. For 71 days, she managed only with the resources she had on her boat. "No experience in my life could have given me a better understanding of the word finite," she later recalled. Today, the foundation works closely with thought leaders and decision-makers in industry, government and academia with the objective of developing and promoting the circular economy.

The circular economy has developed into a sophisticated framework that provides a plan of action to escape from the dead end of the linear model – driven by technological progress and digitalization, better systemic understanding and financial support, as well as growing awareness and willingness to change on the part of stakeholders across the board. The opportunities are there for us to grasp.

The big opportunity

Huge environmental benefits aside, the circular economy holds a multibillion-dollar opportunity. Forward-looking businesses from all sectors are already tapping into the potential. Those hesitating to learn and adapt may pay a price.

When Ellen MacArthur Foundation CEO Andrew Morlet googled the term "circular economy" in 2013, it returned just 50 to 100 hits – today, it's millions. Large corporations such as Unilever, Ikea, Arup, Hewlett Packard Enterprise and Orange have taken up the idea and are integrating it into their businesses. Now, the Ellen MacArthur Foundation counts approximately 220 companies and organizations as affiliates.

Policymakers have adopted and are promoting the idea, too. In China, the circular economy model has been part of the political discussion since 2005 [ see article on China by downloading the complete magazine ]. The EU devised its action plan in 2015, then joining the UN Environment Programme and the UN Industrial Development Organization to create the Global Alliance on Circular Economy and Resource Efficiency (GACERE) in 2021.

The movement toward the circular economy is clearly gaining momentum. "A circular economy gives us the power and the tools to tackle the root causes of global challenges such as climate change, biodiversity loss, waste and pollution," says Morlet. "It's a bigger idea that can scale fast across industries to create value and jobs, while increasing the resilience of supply chains and delivering massive economic growth potential."

But how are consumers adapting to the trend? This may be altogether the wrong question. Because people are waking up to the urgency of the environmental challenges we face and are increasingly demanding greener products, services and jobs that safeguard the planet's ecological boundaries and the survival of future generations. According to a study conducted by First Insight in 2019, in the US almost two-thirds of Generation Z and millennial respondents prefer to spend money with a sustainable brand.

With millennials and Gen Zs now representing a growing share of consumer demographics, the need for companies to act is becoming even more pressing. These consumers simply expect businesses to make sustainability part of their value proposition. "Businesses that do not recognize the reality of our situation, the reality of our climate context, will be forced into change rather than choosing to change," says Barent Roth, New York-based sustainable designer, academic and entrepreneur. "The companies that respond proactively are going to benefit from the ability to choose their directions." [ See interview with Barent Roth by downloading the full magazine ]

Investors, too, are recognizing the opportunities and are focusing more and more on environmentally and socially sound businesses. According to Bloomberg Intelligence, such environmental, social and governance (ESG) assets grew to $30.6 trillion in 2018 and are projected to exceed $50 trillion by 2025. BlackRock's circular economy public equity fund, which was launched in 2019, topped $2 billion in 2021.

Circulate Capital, an emerging market investment management firm which focuses on plastic waste in developing countries, identified a worthy and lucrative niche early on. "Plastic waste inherently has value. If you collect it, sort it and recycle it properly, the economic value of the material can be captured," says April Crow, the firms' vice president of investor relations and external affairs. Circulate Capital believes that investors have an opportunity to help solve the plastic waste issue, and to do so while fighting climate change as well as opening up new investment avenues.

The novel approach also unlocks entirely new opportunities in many industry sectors. "Research revealed that by maximizing the potential of economic and environmental impacts, circular business models in sectors such as rental, resale, remake and repair have the potential to claim 23% of the global fashion market by 2030 and grasp a $700 billion opportunity," says Morlet.

Leading the way

From innovation to new levels of collaboration and partnering to novel business models, some companies are already contributing to the circular economy.

Forward-thinking companies are creating a new role to drive business, tackle challenges and grasp opportunities. Heads of circular economy are appearing in industries as diverse as furniture, food and fashion, chemicals, computers and construction. There may be no one-size-fits-all solution but, given that collaboration and cross-sector thinking are the motors of this evolution, it pays to look around for ideas and inspiration for novel approaches.

We have seen a revolution in consumers' attitudes to furniture: Today it turns round in people's homes like the fast fashion in their wardrobes. In the US alone, furniture accounted for 12.1 million tons of waste in 2018, up from 2.2 million tons in 1960. Much of it ends up in landfills. Ikea is, arguably, one of the companies that has driven the boom in what could be called "fast furniture." However, it has now committed to transforming itself into a circular business by 2030. As part of the strategy, the company assessed 9,500 of its products and set itself goals that include designing circular products, using renewable or recycled materials and offering circular services for customers such as renting furniture. It's also joining forces with suppliers, business partners, NGOs and engaging with communities and stakeholders around the globe. Ikea consciously chose to involve stakeholders from many touchpoints. The move shows that the company understands collaboration is essential in achieving circularity. Even a global multibillion business can't walk it alone.

Despite green investment pointing upward, many smaller innovative companies find funding through traditional channels difficult because they lack the track record to prove financial viability. Partnering with larger companies helps unlock these opportunities. Circulate Capital, for example, pairs corporates like PepsiCo, Danone, Chanel, Unilever and Dow, who bring their business and technical expertise and local and global supply chain knowledge, with promising circular economy startups. Recykal, a digital waste management platform based in India that facilitates material flows along the entire value chain, demonstrates how this approach works. In addition to Circulate Capital's investment, it raised $22 million from Morgan Stanley's India Infrastructure fund.

Digitalization helps drive the shift to a circular economy by providing tracking across vast datasets. This is needed to bring resources back into the value chain at the optimum point. But producing and running the hardware – laptops, servers, mobile phones – is resource-intensive and life spans of such technology have become ever shorter. According to the Global E-Waste Statistics Partnership, humankind discarded a staggering 53.6 million tons of e-waste in 2019, an increase of 21% within five years.

But waste can be reduced, and value unlocked. At Hewlett Packard Enterprise (HPE), the multinational enterprise information technology company, waste reduction and upcycling are everyday business. The company aims to create sustainable solutions to accelerate digital transformation by focusing on product and software solutions as a service." Every company is an IT company now," says Paul Sheeran, a managing director at HPE Financial Services. "But more digital means more e-waste, only 17% of which gets recycled. It's not something we can turn a blind eye to. But there is also a business opportunity for us and our customers."

One key challenge that HPE addresses is overprovisioning. "In a typical data center, on average around 25% of IT resources are not serving a useful purpose," says Sheeran. HPE's "as a service" offering means that customers deploy only the technology they need, reducing energy costs and enabling easier upgrades.  HPE also taps into the value of retired IT equipment. "It is amazing how many companies do not realize the value that's tied up in their old IT assets. We help our customers unlock that value," says Sheeran. Refurbishment is, indeed, an important component in the company's business. In the fiscal year 2021, HPE Technology Renewal Centers processed over 3 million IT systems. More than 85% of these systems were remarketed and returned to active service. HPE says that its refurbishment activities saved the equivalent of 703,000 MWh of energy and 194,000 tons of CO₂.

The transformation from offering financing solutions to the efficient management of IT assets within a circular economy did not happen overnight, but the company recognized the opportunities early on and made the necessary investments. "I find it uplifting that circularity and sustainability are now higher up the agenda of most of our customers," says Sheeran. "While there is a tremendous amount of work still to be done, we like to feel that we're out there leading the conversation."

Measuring success

The circular economy is developing into a robust framework. But how do we define and measure success?

There are some obvious steps to take on the road to greater sustainability in business, such as reducing the use of nonessential single-use plastics. However, after that, working out what the next step is can be complicated. Is paper packaging always better than plastic, or no packaging? What are the environmental costs of retrieving parts and refurbishing machines? Does it make sense to use old, less efficient technology for as long as possible? No one wants to be accused of greenwashing, so science-based solutions are required, including finding ways to measure whether the changes made really have a net positive impact on the environment.

A recent study of eBay's reused car parts business in the United Kingdom, for example, showed positive results in product and plastics reuse, resource conservation and reduction of energy use and carbon emissions. But if the calculus used is too narrow, it can produce answers that are unhelpful – when all the process steps are taken into account, such as collecting, sorting and manufacturing, purely in terms of carbon, plastic recycling can produce more emissions than using virgin fossil fuels. Yet that clearly fails to take into account the cost of extracting more nonrenewable resources to meet our ever-growing needs.

The search for a sure method of measuring the impact of products and services on the environment and circular progress is ongoing. One of the first methods was the "rucksack" concept developed by the late environmental scientist Friedrich Schmidt-Bleek. It is based on the idea of providing the environmental equivalent of the market price of products. Schmidt-Bleek developed this into MIPS: material input (MI) from cradle to grave divided by service (S) over a product's lifespan. Today, we have more tools. Circulytics, developed by the Ellen MacArthur Foundation (EMF), for example, is a "free, company-level measuring tool that reveals the extent to which a company has achieved circularity across its entire operations, and where they can unlock more benefits for their business, the environment and society," says EMF head Andrew Morlet.

Measuring impact and success is essential, but we also need to understand that no single business or industry can achieve circularity alone. It's not just cross-industry collaboration and partnerships that are required; there is also a need for cross-industry regulations, infrastructure and standards. All the actors across value chains need to work together: Companies have to bring together the experts at material level with the experts at product level to devise better solutions, but they also need to collaborate with other stakeholders. In plastics, for example, it takes the collaboration of polymer manufacturers, packaging manufacturers, brands, retailers and those responsible for the collecting, sorting and recycling infrastructure to truly succeed.

Business may be just one of the players in this complex network, but its role is essential. "The role of all businesses, regardless of size, is vital if we are to find new, circular ways of creating, delivering and capturing value that also benefits society and the environment," says Morlet. "Shifting from our take-make-waste economy to one that eliminates waste, circulates products and materials and regenerates nature is a big challenge. It is crucial that we focus upstream to prevent waste before it is created and concentrate on redesigning not just our products and services, but the whole system that surrounds them." The circular economy concept may still be unclear in some places and certainly challenging to implement, but we have also seen that it can make all the difference for the environment and business.