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The geometry of sustainability: progressing from linear to circular economies
19/08/21
The global pandemic has made it clear that the challenges of tomorrow are rooted in sustainability. A growing number of countries are declaring their commitment to driving sustainable development and tackling climate change. With change instituted at the level of governments and multinational corporations, an avenue for great impact could take the form of an economic system that is built with sustainability at its core, for a true trickle-down effect to benefit businesses, society, and the environment.
The circular economy could be the way forward. It is fast becoming a part of the conversation on sustainability, and is expected to help meet global climate targets by transforming the way we produce and use goods. Currently, the global economy is only 8.6% circular. According to the World Economic Forum (WEF), the economic benefit of transitioning to this new business model is estimated to be worth more than US$1 trillion in material savings, with huge potential for innovation, job creation and economic growth.
What is the circular economy?
The circular economy is a systematic approach to economic development that is regenerative and restorative by design. In contrast to the ‘take-make-waste’ linear economic model, a circular economy aims to gradually decouple growth from the consumption of finite resources. This is based on three principles:
- Design out waste and pollution
- Keep products and materials in use
- Regenerate natural systems
The impact on emissions and climate change can be massive. In research published by the Ellen MacArthur Foundation, relying solely on energy efficiency and switching to renewable energy will only address 55% of global greenhouse gas (GHG) emissions. By adopting circular practices, we can reduce a significant proportion of the remaining 45%.
By virtue of being circular, inclusivity is built in, as stakeholders, from consumers to corporations, manufacturers, civil society groups and the public sector, will need to play their role at each stage of the product or service lifecycle. It eliminates much of the ambivalence around accountability that occurs between consumers and corporations around sustainability, and more specifically, recycling.
Despite its growing popularity, the circular economy faces challenges in getting off the ground. For one, there is a lack of specific criteria on how to implement the circular economy for products and industries, and a gap in the availability of internationally recognised standards, for example, ISO certifications. There’s also the inertia experienced by businesses whose current business models, corporate culture or risk appetite may not be geared towards circularity. This makes it hard for knowledge barriers to be overcome, considering that even when the mind is willing, there may not be sufficient infrastructure or understanding to redesign operations to become more resource efficient, not to mention the high upfront cost required for transformation.
In our opinion, for circularity to truly take root, we as businesses need to rethink what this means in the eyes of society in terms of production and consumption in particular, leverage technology to transform business models, and also consider how we can support through financial resources and policies. In this blog, we’ll take a look at two important drivers of the circular economy - innovation and investment.
Innovating for the circular economy
Innovation will play a key role in shaping a more circular future, and entrepreneurs are a good bet for bringing novel technologies and disruptive approaches to industry. The development of Fourth Industrial Revolution (4IR) technologies such as Internet of Things (IoT), data analytics, robotics and additive manufacturing or 3D printing has the power to support the transition to a circular economy by radically increasing virtualisation, dematerialisation, transparency, and feedback-driven intelligence. An area with great potential for Industry 4.0 application is climate technology, which aims to decarbonise the global economy and achieve net zero emission - PwC analysis finds this segment has grown over 3,750% in absolute terms since 2013.
The principles of circularity also raises questions on the necessity of owning products, and tests the existing ideas we have of our relationships with material items. Fewer products will be required if businesses can make them shareable, last longer or use materials multiple times. So it’s no longer about ownership, but having access to products and services. This opens up opportunities for new business models and strategies, for example, if products can be designed to be disassembled and parts recycled or reused to form new products. If we think more broadly around end-of-life products and secondary raw materials, how do we capture value from them?
In South East Asia, the afterlife of plastics presents a challenge, and an opportunity for economic growth. We can observe this from the recent Plastic Free July which has witnessed encouraging participation in the movement among the public, businesses and entrepreneurs globally since its inception in 2011. The World Bank released a series of studies in March 2021 which found that less than a quarter of plastics used in Malaysia, the Philippines and Thailand are being recycled, and more than 75% of the value of the plastics is lost — amounting to US$6 billion per year across the three countries.
Packaging constitutes 48% of the revenue of all plastics consumed in Malaysia. Without fundamental redesign and innovation, about 30% of plastic packaging will never be reused or recycled. There are opportunities to increase efficiency at the post-consumer stage including digitalising the collection of recyclables to increase transparency in value chain, making “design for recycling” standards mandatory for all plastics, and providing inclusion opportunities for agents that process post-consumer plastics, from microenterprises supported by non-governmental organisations and independent waste banks, to strengthen demand for post-consumer plastic processing.
Financing the circular economy
The commercial viability of new technologies and business models, and the availability of finance, will impact the success of the transition to a greener, more sustainable economic model. According to the Asian Development Bank, the five green growth opportunities (including circular economy models) will require US$172 billion in capital investment to be leveraged fully.
However, sentiments of business leaders point to a bigger issue at hand. A 2020 Zeronomics survey of large companies and investment specialists on financing a net zero world found that, globally, 67% of business leaders believe that a lack of capital is the biggest barrier to corporate net zero transition. How can financial institutions play their part to encourage investments?
Many financial institutions in the South East Asian region are still in the early stages of their sustainability response. Much of their focus currently is in looking at areas of climate risk and protecting their balance sheet, with growth opportunities becoming something of a longer term priority. However, the investable universe is expanding as existing publicly listed companies adopt circular economy principles and new entrants emerge. There has been an observable trend in the funding available for sustainable investment funds overall, and more recently, with the circular economy as the sole or partial investment focus.
In steady state, it’s likely that businesses in the green economy sector will be able to access a lower cost of finance compared to conventional sectors. After all, innovation will require a supply of affordable capital to capture value and expedite the flow of capital into the circular economy, in order to create a viable ecosystem. By then, financial institutions need to be ready to assess the new business models and risks they present in order to maximise opportunities. In fact, banks are ideally positioned to be drivers of the circular economy by introducing circular businesses to their clients and investors, and emerging risks from circular business models will provide insurers with the opportunity to develop new products for both circular businesses and consumers.
Doing good for the environment and the communities we live in is a compelling incentive, but moral argument aside, there is a strategic and economic case for widening the avenues for innovation and investment as a driver to jumpstart circularity in the Malaysian and South East Asian economy. Demand is far from its peak, but the market is warming up. To benefit from this opportunity, there needs to be substantial commitment from stakeholders in both the public and private sector, including big business, governments, entrepreneurs and innovators, civil society groups and the financial sector to stand on the right side of history, and back the actions needed towards a circular and sustainable future.
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Contact us
Asia Pacific Sustainability, Strategy & Transformation Partner, PwC Malaysia
Tel: +60 (3) 2173 0348
