What goes around comes around: the Rise of Circular Economies

Traditionally, economies have been based on a “make-take-dispose” model. The OECD expects the global use of raw materials to double over the next 40 years. This will result in a 70% increase in generated annual waste by 2050, as estimated by the World Bank, showing that this linear approach relying on large quantities of readily accessible resources and energy is unsustainable for today’s reality.

The circular economy aims at transforming this system down to its very foundations: from how resources are managed, the way products are made and used, all the way to what happens with the materials after they are used.

This model is based on the principle of excluding waste and pollution out of the system, actively keeping products and materials in use. This way, the waste from one user becomes raw material for the next, creating a circular model in which products are designed and developed with the next use in mind.

The global megatrends, such as the shortage of resources, technical breakthroughs and a new sustainability-seeking consumer mindset are increasing the pressure on governments which are responding through subsidies and legislations and on companies which in turn are adopting circular business models. In recent years, we have seen how incumbents across sectors are being challenged by leasing and sharing business models, which are gaining more and more traction.

Customers are adopting the philosophy of readily accepting sustainable products for the same price with equal quality of performance, more so if its greater: according to the National Retail Federation’s 2020 Research Insights, about 8 in 10 consumers claim sustainability is important to them, and 70% of those who say it’s extremely important would willingly pay a 35% premium for environmentally responsible brands.

Simultaneously, companies are realizing the untapped cost-saving potential of products with extended lifecycles in the market, increasing consumer trust in the process. Having “ethical leaderships” to boost positive corporate images, targeting cost reduction through optimal usage of raw materials, and reducing consumption to increase energy savings are simply more ways these companies are adapting to the green movement.

In this context, Industry 4.0 is the key for business models to transition to circular economies through profits with lower environmental impacts. They are more than correlated, they are codependent: the tools for improving business processes and sustainability that could accelerate the transition into circularity are also the ones that support the emergence of the Industry 4.0.

It is technology itself that is responsible for this shift. New effective processes, improved communication channels, and operational efficiencies that allow multiple uses for the same resource across the industries are the strongest pillars circular economies stand on. It is why the businesses adopting these models will gain the advantage over the next 15 years: through the increase of the value-per-unit of resources.

At Axon, as signatories of the Principles of Responsible Investment (PRI) of the United Nations, we are also participating in this transformation through our investments in circular economy models.  For example, Renueva tu Vestidor (RTV) – a company from our Latin American portfolio – is the leading C2C second-hand fashion marketplace in Spanish speaking Latin America, allowing its users to profit from clothes they no longer wear and that would have been discarded otherwise.  The 2020 ThredUp Resale Report states the resale market grew 25 times faster than the broader retail sector in 2019 and is expected to overshadow the fast-fashion market by 50% by 2028.

Through its tech driven circular economy model, RTV has avoided the use of more than 3 billion liters of water and prevented around 40 million tons of CO2 equivalent emissions from one of the most polluting industries: fashion.  According to McKinsey, fashion is responsible for 10-20% of total pesticide use, 20% of water pollution and up to 35% of microplastic flows into the ocean.  Moreover, according to the United Nations Environmental Program, this industry accounts for 8% of global CO2 emissions.

From Internet of Things and data analysis bringing a new age of maintenance and smart waste collection solutions, to robotics and artificial intelligences developing specialized skills for electronic waste management, to additive manufacturing and 3D printing to avoid the environmental effects as byproducts to logistics, to material technology to improve packaging for consumer goods, technology is fueling the circularization of the economy.

Estimates from MDPI state that, through Industry 4.0 investments, emissions can be decreased by 30%, and as a positive side-effect, firms could increase their demand by 20% while The Ellen MacArthur Foundation estimates that there would be a 7%-point increase in Europe’s GDP by 2030 produced by this circular economy.

Simply put, circular economy is far more than just a fad. Both advanced and emerging economies are pushing this transition forward, being the later more material-intensive than the former and hence with obvious and huge use cases. Mindset is moving towards one in where if something cannot be recycled, at the very least it should be able to become compost and be “returned” to the ecosystem that produced it. Ultimately, it ensures that the value is never lost, being the “end” of its lifecycle the start of a new one.

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