May 14, 2020, Written by Heidi Sumser
Much has been written on the links between the current COVID-19 pandemic and climate change. These links include the lessons of COVID-19 for climate action, on both the similarities and differences, the factors that assist in accelerating or delaying climate action, and suggested next steps for governments, the private sector, NGOs and individuals. One of the best articles I´ve read on this is a comprehensive piece written recently by McKinsey.[md1] Here, I would like to highlight one key similarity cited between COVID-19 and climate change: their systemic nature. Both are systemic not only in their immediate and enduring consequences, with numerous spillover effects, but also in the sense that a systemic solution is needed to address them at the macro, meso and micro levels.
Clean energy is critical to transitioning to climate smart economies. However, while vital, it is only part of the story. In a recent report, the Ellen MacArthur Foundation (EMF) points out that the efforts to date to tackle climate change have largely focused on the clean energy transition. Renewable energy and energy efficiency represent a combined 55% of potential global emissions reduction; the remaining 45% will come from production and will require additional technologies to curb them. The circular economy, in fact, includes both clean energy and production. The circular economy As Seb Read, Learning Programmes Lead at EMF puts it, “the circular economy offers a new system, a defined vision, something ambitious yet practical to aim for, with a business-led transformation to unlock key value creation mechanisms.”
Therefore, the circular economy can and must help “complete the picture” to also address the emissions reductions from the production and consumption of products. EMF estimates costs to the global economy of USD 54 trillion by 2100 under a 1.5 ֠C temperature increase scenario, with steep rises for every further temperature increase. According to often-cited Accenture Strategy research, the circular economy represents a USD 4.5 trillion business opportunity by 2030, rising to as much as USD 25 trillion by 2050.
From a linear model toward a more comprehensive, circular system
COVID-19 has underscored the inadequacies and weaknesses of the current, linear take-make-waste economic model. It has also shown the dangers of ignoring the links between nature, pandemics and climate that are materializing. Economically speaking, these include sharp contractions in demand, revenue losses, supply chain disruptions and job losses as this LSE article shows. A paradigm shift is indeed needed, and now, which is essential to drive circularity across governments, business and the non-profit sector. This was commented on in a recent webinar in which Deirdre White, CEO, PYXERA Global and James George, Network Development Lead, Ellen MacArthur Foundation, participated. This was also highlighted in the publication Paradigm Shift, which showcases solutions across the globe driving circular transformation. As it states, “there are no good choices in a bad system” and COVID-19 only strengthens the case for circular transformation. The view was shared that multiple frameworks, strategies and solutions can be used and are likely needed, especially in a place like the US with vast and varied geographies, and where the private sector been leading the change. Mrs. White indicated that circular economy is seen by smart companies as material to the business, and therefore companies are seeking value on the circular side. The circular economy is not prescriptive; rather, it offers a vision, a flexible framework with guiding principles and an increasing number of tools.
This highlights the huge business opportunities for companies and financial institutions, big and small, to embrace and incorporate circularity in their business models, strategies, supply chains, product design and road maps as they continue operations or reopen in a vastly different and more uncertain environment in the context of COVID-19. Doing so will help them build back better, incorporating longer-term resiliency, enhanced value propositions, and enhance their positioning to gain lasting, competitive advantage. This is a triple win -- for their bottom line, the environment and society.
There are similar opportunities for governments at the country, city and municipal level. Unprecedented coordination, partnership and commitment at the global, national and local levels are paramount. Since the landmark Paris Agreement in 2015 to limit global warming to well below 2°C (and pursuing efforts to limit the increase to 1.5°C), this has gone backwards at the global level. At the same time, some countries, states, local jurisdictions and companies have stepped up and accelerated action. All these levels are critical and all of them must be part of the solution.
Two laudable examples at the supranational and country level are the EU´s Green New Deal passed in 2020, which includes a new Circular Economy Action Plan (the first one was in 2015) as a key building block, and Chile´s updated 2020 NDC (Nationally Determined Contribution), which integrates circular economy. Chile is one of the few countries that has a circular economy department (housed in its Ministry for the Environment), a number of related laws and is working on its circular economy roadmap. Countries worldwide are expected to revise and increase their ambitions in their NDCs this year. However, with COVID-19, this could be delayed since COP26 was postponed until 2021. In addition, in November 2019, the US formally began the withdrawal process from the Paris Agreement. These represent two formidable challenges.
Systemic approach and systems thinking
Given that a systemic approach is a holistic one, it centers on the relationships, the inherent interconnectedness and mutual interdependence among the components of a system and among the members of a group or the stakeholders in an ecosystem, not on the individual components or the individuals themselves. Circular design -- of business models, products, thinking -- is essentially about adopting a systems mindset. A systemic approach has similarities to strategy in the sense that it has to do with the system of chosen activities and how they form a cohesive whole and reap synergies that matter – not any one activity in isolation. In a similar manner to strategy creation and execution, leadership is critical to systems thinking.
Applying this to the transition toward a circular economy, a systemic approach is not simply eliminating some plastic straws, doing a few beach clean-ups or recycling a handful of cardboard boxes, it´s about fundamentally altering the way we think and therefore act. Jamie P. Monat and Thomas F. Gannon proposed an excellent, concise definition of systems thinking: “a perspective, a language and a set of tools.” Given this, systems thinking is essential for solving complex (systemic) problems like pandemics and climate change. We need greater leadership at all levels and more circular economy pioneers and to communicate, inspire and bring others into doing this work and changing the mindset.
Below are some examples of cities and companies that are leading the way in creating or converting their business models and strategies into more circular ones.
Ø Circular Economy Examples in Cities:
a. Amsterdam – Amsterdam has a circular economy policy, and in April 2020 published its revised Circular Economy Strategy 2020-2025. Integral to the strategy is the Amsterdam City Doughnut, an innovative tool that produces city portraits as a starting point for transformative action. Amsterdam is the first city to implement the doughnut model based on British Economist Kate Raworth´s 21st century “Doughnut Economics.” It aims to meet all stakeholder needs within the means of the planet, hitting the “sweet spot” of a doughnut. Additional city doughnuts are under development.
b. Boulder – Boulder released a circular plan in February 2020, Circular Boulder based on extensive research working with sustainability consultant Metabolic. In taking a more systemic approach, the city broadened its focus from looking at just waste to also looking at materials and product consumption to assess the total impact on carbon emissions and devise a road map to move forward.
c. Austin – Austin created a Materials Marketplace, an online materials exchange platform for the city and local businesses to connect and create a closed-loop, collaborative network. Companies can find reuse and recycling solutions in order reduce expenses, earn additional income, reduce waste and keep products in use longer at a high quality. It aligns with the city´s ambition to reach zero-waste by 2040. The metrics used to measure progress include the trading parties, the exchange value, the type and quantity of materials or products used, and the avoided costs of both disposal and purchasing materials through alternative means. A useful case study is here.
d. Latin America – A Regional Latin America Circular Economy Coalition is under development with support from PACE (Platform for Accelerating the Circular Economy) and partners including the World Economic Forum, UNEP and the Konrad Adenauer Foundation. In addition, Colombia is scheduled to soon launch a circular economy national strategy.
e. Africa –The African Circular Economy Alliance was launched in 2017, with support from PACE, and already has seven members: Rwanda, Nigeria and South Africa (the 3 founders) along with Niger, Senegal, Malawi and DRC. It aims to create jobs, bring online new projects and partnerships, share best practices on legal frameworks and business practices, decrease dependence on commodities and improve environmental performance.
Ø Circular Economy Examples in Business:
a. Ikea – Ikea has had a sustainability strategy since 2018 and has been incorporating circularity into its product design, production process, product packaging and food production, and plans to start leasing furniture to customers in 2020, a considerable shift from just the more traditional furniture sales. The company´s vision is to reinvent itself as a circular company by 2030 by fundamentally changing its business model.
b. Unilever – Unilever is working along the value chain to create circular economy opportunities across its business and in working towards circular plastic packaging materials. In 2019, Unilever increased its commitments to reduce plastic waste with the goals of a) halving its use of virgin plastic and increasing the use of recycled plastic
along with b) collecting and processing more plastic packaging than it sells, both by 2025. Unilever is a core partner of the New Plastics Economy initiative.
c. Natura – (HQ in Brazil, Argentina, Chile, Colombia, Mexico, Peru, France, and the US) – Natura is a cosmetics MNC with a business model for many of its products that balances financial, environmental and social performance. It combines traditional community knowledge, use and preservation of natural capital such as the ucuuba berry to create value while keeping trees standing, and developing high quality, differentiated cosmetics from the Amazon, all designed to mimic the regenerative cycles of the forest. See here for a case study.
d. Algramo – (Chile) - Algramo has been disrupting the staple goods industry, offering products from rice to detergent through smart mobile vending machines that serve as a dispensing system and refill unit. The products are targeted at low- and middle-income customers, offering them access to goods at more affordable prices, while avoiding the high “poverty tax” on smaller-sized, often single-use items. The products are offered in reusable, durable packaging “by the gram,” providing flexibility in the quantity purchased and reducing plastic packaging and non-recyclable single-use sachets.
e. Imperfect foods (US) – Imperfect Foods addresses the problems of food waste and hunger while serving a new customer segment online with still-quality-yet-imperfect produce and groceries at a relatively lower price (up to 30% discount) than supermarket chains. They sustainably source quality fruits and vegetables and groceries, many of which would otherwise get rejected from supermarkets (due to cosmetic, excess inventory or other reasons). They incorporate a packaging return program for recycling and work with strategic partners including non-profits and food banks. They offer delivery service in the US (Northeast, West South Central region and West Coast).
Financing circularity
Financing is an integral part of the transition. As governments develop their economic recovery plans for COVID-19, they should include strong green stimulus packages. Climate Action Tracker´s analysis finds that plans with strong green infrastructure investment will have the largest effect on emissions reduction, regardless of optimistic or pessimistic economy recovery by 2030. The financial system is as much of a driver of the circular economy as anything else. This view was shared during a webinar discussion in February 2020 in which Andrew Morlet, CEO, Ellen MacArthur Foundation, participated. Some first-mover investment firms and asset managers have already launched funds (e.g. Black Rock BGF Circular Economy Fund) or designed their business models around circular, profitable financing (e.g. Closed Loop Partners and Circulate Capital). Other investors are open to financing circularity as part of their overall investment guidelines. To mobilize capital for circular businesses and projects from the financial sector at scale, new, standardized criteria are needed.
Criteria and taxonomies for green credit lines and green/thematic bonds are a source of innovation and insight for circular ones. Green finance can be broadened and deepened in a meaningful way by including circularity to create and add value to business and financing opportunities while at the same time reducing emissions. The International Capital Market Association (ICMA) has already started including circularity in their green bond principles under use of proceeds and circular issuers are already emerging. One example cited by Climate Bonds Initiative (CBI) is Daiken Corporation in Japan that issued a JPY 5bn/USD 46m unsecured bond in September 2019 to finance circular economy adapted products. Circular lending criteria are currently under development and should emerge soon. It is also important that financial institutions begin assessing the holistic impacts (positive and negative) of their loan portfolios. UNEP-FI has recently developed an open-source tool for this, jointly with Principles for Responsible Banking signatories.
Notwithstanding the current pandemic, as start-ups and companies of all stages and sizes continue to cultivate relationships with investors, seeking partnership and financing, those whose investment stories and outreach documents take a systemic approach and follow circular economy principles are likely to have a financing edge. While pitches and preparation for due diligence will continue to be imperative, the investees that have sustainable business models, differentiated value propositions, find ways to localize their supply chains, and take a comprehensive approach to risk management that includes ESG, climate risk and longer-term resilience will stand out.
As Patty Simonton, Director, Be Green Business at Bethesda Green puts it, “we have a truly unique opportunity here to change the trajectory of our future. Business leaders and investors increasingly understand that efforts to boost short-term gains at the expense of long-term environmental sustainability and social responsibility will only cause expensive problems for the company down the road. As we emerge from this crisis, business leaders, investors, policy makers, and customers need to refuse to return to "business as usual," buying into the same old extractive, destructive systems.” In terms of raising money in times of COVID-19, attorney and author Jenny Kassan remarked in a recent webinar in May 2020 that right now is actually a great time for businesses to be raising money; many investors still care about values alignment, great business models, diversification and risk management.
It´s time to accelerate action
We are often moved to action by necessity or inspiration. The combination of the two that exists right now is potent, and can unleash a new, more effective system, that includes a circular economy. The power of the human mind can be harnessed to push forward a new, shared mindset that adopts a comprehensive approach and achieves new levels of cross-collaboration and strategic partnerships. We need more research and development to spur innovation and create scalable solutions, and equally we need to use and replicate the solutions that already exist. The pieces are there and this is already happening. We must accelerate it, with a greater sense of urgency, purpose and the co-benefits. And we need more transformational leaders who serve as multipliers. The stakes couldn´t be higher and the timing is ripe.