The Promises, Pitfalls, and Trade-offs of the Circular Economy

0:03Weslynne Ashton: Welcome to HBR on Strategy. Case studies and conversations with the world's top business and management experts. Hand-selected to help you unlock new ways of doing business.

0:17Weslynne Ashton: Most businesses are built on a linear model. Take, make, and discard. But that norm is reaching its limits. And leaders are under pressure to find smarter, more sustainable ways to operate. Wesleyan Ashton is a system scientist and a professor at the Illinois Institute of Technology. In her masterclass at HBR's 2024 Leaders Who Make a Difference conference, she explains how companies can shift to a circular economic strategy, one that reduces waste, reinvests in communities, and creates long-term value. She shares how businesses around the world are rethinking products, partnerships, and growth itself to build more resilient, regenerative business models.

0:58Weslynne Ashton: Here's Ashton. As you look to your future as business leaders, I'd like to reflect on what are the circles and cycles in our lives, right? We have our human life cycle from infants to adults to elders, our business cycles from product launch to maturity to decline, our seasonal cycles. So circles and cycles are everywhere in the world around us. It's a very common pattern. But we humans seem to have forgotten that pattern and more recently have begun to follow a more linear pattern of resource extraction, processing and disposal to run our global economy. So I'd like you to think about how can we move back to more circular patterns of resource use and why should we?

1:52I believe that we must and to do so, we need to draw on lessons from our past. There's a saying among the Akan people of Ghana that's colloquially known as Sankofa, which means that it is permitted to go back and get what you've forgotten. right and these could be things like traditions that we left behind as we modernized. The ways of caring for each other for people in place as we moved from communal living to more individualized modes of success and also different ways of being right enjoying leisure nature culture as the way that we measure value and exchange value came to be dominated by money.

2:42For the last two centuries, the global economy has operated in a linear fashion of take, make and waste. We take virgin resources to make products that generate lots of waste along the way. This economic system has enabled us to improve the material well-being of billions of people across the planet, moving people out of poverty, improving health, increasing well-being and lengthening lifespans. But there have been significant environmental and social costs that are not accounted for when we measure business success in terms of profits, growth, and market share. As an example, we now have enough clothing on the planet for the next six generations of human.

3:33But fashion, fast fashion particularly, churns out clothes at such low prices that people rush to purchase them, right, without thinking about where these clothes are coming from. And increasingly, they're using synthetic fibers that are made from fossil fuels. Who made them? Under what conditions? What were they paid to produce those clothes? And finally, where those clothes end up. So it's estimated that more than 80 % of the clothes that we create ends up in landfills, and only 15 % is donated or recycled. And of the materials that are donated, a large amount ends up in landfills in the global south.

4:21So there are significant costs of this linear economy that are not borne by businesses, but instead are borne by people and governments. And these externalities have emerged from mindsets that allowed people and nature to be exploited for a minority. From an environmental perspective, our consumption of fossil fuels has led to climate change. Our food and agricultural system takes land from animal habitats, reducing biodiversity. And our industrial activities release pollution that impact us, leading to things like rising cancer rates among humans. Socially, we can think about inequality and, you know, we still see human rights violations within the supply chain.

5:11And these penalties are disproportionately borne by minoritized and marginalized people. Black, brown, rural, poor, small towners, migrants in communities all around the world. But even within that scene of environmental justice and disproportionate harm, we see that there are also stories of resilience. as there's much that we can learn from the resource use practices of our ancestors, contemporary indigenous peoples, as well as people of the global majority whose low levels of disposable income mean that they have grown up learning how to make do with a little, sharing, reusing, recycling products many times over.

6:02Take Mumbai's Daravi. It's one of the world's largest informal settlements. It's estimated that over 15 ,000 micro enterprises in Dharavi collect, process and recycle more than 80 % of Mumbai's waste. And that these recycling enterprises contribute more than$650 million a year to the city's economy. I think we have a massive problem with our economic model and need new, but actually old ways of thinking about how we obtain value and regenerate resources. And I'd argue that we must consider social and environmental justice issues in these new circle economy models. So what is the circle economy?

6:51It provides businesses opportunities to create, share, and regenerate value from the resources that they're using. Moving from this current linear extraction and exploitation model to one where we rethink and redesign products and services, share their value with more people through reuse, resale, secondary markets. We extend their durability and reusability and regenerate materials through decomposition or recycling rather than treating them as waste. By shifting to more renewable energy sources, we can curtail our greenhouse gas emissions, minimize pollution, and reduce our environmental footprint.

7:40And by restoring and regenerating both natural and human resources, we can sustain the stock of these vital assets that businesses rely upon both in the short and long terms.

7:56I think of three ways that we can put the circular economy into action. First, by developing new materials. Second, new business models, rethinking what and how we sell. And third, new forms of organizational collaboration and governance, broadening how we work, who we work with, and how. So first, let's take a look at materials. So companies are using their research and development capabilities to develop renewable, bio-based materials to replace toxic, scarce, and expensive ones, or are developing technologies to convert waste and buy products to substitute for virgin materials. I'm from the Caribbean.

8:42Perhaps many of you have visited the Caribbean. But sargassum is a brown seaweed that floats in mats in the Western Atlantic. It provides a habitat for several species of fish. But triggered by climate change and warming ocean temperatures, we now have masses of sargassum that wash upon the shores of the Caribbean islands and the southeastern United States. This is a huge problem for island and coastal economies that are heavily dependent on tourism, right? People all across the world flock to enjoy the white sand beaches of the Caribbean. It's estimated that the sargassum masses cost about nearly$200 million per year in cleanup costs, right?

9:32And that's not including the lost revenues from tourism. So seeing this problem, several researchers across the Caribbean have been investigating the reuse potential for this biomass. Here I feature Dr. Ligina Henry, a lecturer at the University of the West Indies in Barbados, who founded a company called Rum and Sargassum that developed a process to combine sargassum with rum distillery waste, producing a bio-based compressed natural gas that can replace gasoline for cars on the islet. They are currently building a pilot plant to produce and test this biofuel in cars, and it has the potential to replace all of the gasoline imports and carbon emissions associated with them on the island.

10:25For large multinational companies, circularity can appear in many different places. We've just heard from Tarang Amin of Elf. Their project, Unicorn, was focused on streamlining their product portfolio, placement, and presentation. And their packaging was a major component of this strategy because it also represents a huge part of their environmental footprint. In redesigning their products for better store display, they increased the recycled content in the packaging, as well as reduced the number of finishes, the number of materials, the number of components in the packaging, which not only reduced cost, but it also made these products much easier to recycle.

11:13Let's switch to thinking about business models, such as sharing products and services, and finding opportunities in secondary markets. In offices all around the world, perhaps there's a closet in your office, it might not look as messy as this. There are often stockpiles of slightly used but still fully functional equipment and furniture. Within the same organization, another department might be looking to purchase similar equipment. Dr. Gary Cooper, Jr. founded Reaply, an asset management platform that got its start helping researchers in universities to find low-cost equipment from other labs across campus.

11:59Reaply has expanded. It has raised more than$30 million in venture funding. And this funding has enabled it to build a smart inventory management system that organizations can use to manage equipment within their organization, to find and sell equipment between different organizations. and Ripley has now expanded their activities to several cities across the United States. So working with cities to develop a marketplace for companies within those cities to share resources. Last year, they had over 1 million items posted on the platform, which generated about$2.5 million in savings for customers on that platform.

12:51Larger companies might be able to do this themselves. So Hitachi, for example, has developed an AI-powered asset management platform that uses analytics and builds a trusted data sharing platform to enable remanufacturing of their products across their own customers, right? So it's just for their internal use. Finally, there are opportunities for creating new organizational and governance models as the circle economy requires collaboration across supply chains and creating new value networks, right? This is a big part of the research that I do. It can also create opportunities for reconciliation and repair with groups that have been harmed by exploitative practices.

13:40My colleague Erica Allen here in the city of Chicago co-founded a non-profit called the Urban Growers Collective. And they are working to build a more just and equitable food system through growing, selling and donating food, as well as educating and training the next generation of black and brown urban farmers. But one of the realities of trying to grow food in urban environments is that our soil is poor, right? And it's often contaminated. But cities also have a tremendous resource in the form of wasted food. We heard earlier that, you know, we have this tremendous food waste problem all around the world.

14:24In the U.S., we waste close to 40 % of the food that's produced for human consumption. So for over a decade, Erica and her colleagues worked together to get funding permits and devise equitable governance models to launch Chicago's first commercial and for-profit anaerobic digester. So at Greenera Sustainability, food waste is converted into heat for growing food in a greenhouse, methane that's fed to the natural gas grid, and compost that's sold through a worker-owned cooperative. So a critical aspect of this organizational model is that the business is partially owned by the nonprofit and community members.

15:10So we're not only talking about materials being circulated, but wealth in the community is circulated, repairing decades of harm from redlining and disinvestment in the city. So our ancestors, people in low income and low resource communities have been doing this. making do with what's available and enough. And I'm asking you to think about what can we learn and apply in today's businesses. The circular economy provides many opportunities, but we can't circularize our way to sustainability. We can't recycle everything. And there are significant energy, capital investment, operational costs that are associated with converting old materials to new ones.

16:03In many parts of the world, populations are still growing, right? And people need to grow the infrastructure, so they're going to need more material resources to improve their material well-being. The well-being that many of us in North America, Western Europe, and East Asia enjoy. And, you know, in many of these places, in the more developed, the global north, we are consuming more than we need. So there will be trade-offs. For example, we might reduce the carbon footprint of our operations by becoming more efficient. But if we're selling more stuff, then we're negating those savings, right? So we have to think about those trade-offs.

16:47I think there are also some hard truths that we need to confront about the harms that many of our businesses have caused in certain communities, and what we need to do to repair those harms and restore opportunities for wealth building and well-being in those places through investment and partnership. So the social entrepreneurs who were featured today were great examples of this type of investment in emerging economies in the U.S., where we see that there has been underinvestment And there are so many solutions that exist in these places that could grow through investment and through partnerships with investors, with businesses, that our businesses can also benefit from these opportunities.

17:39So you've spent the day listening to all of these great talks and perspectives on leadership. Purpose-driven leadership is needed to navigate some of these tensions and make commitments when the short-term ROI for a circularity, a sustainability, a social impact investment might not be as high as other investments. but the social value, the environmental value, the long-term value is there. If we could open our aperture to more holistically consider what is important for our businesses, our employees, our customers, and our planet. So I'd like to ask you to consider how can we transform the understanding of the value that we are creating as well as the value that we're destroying through our actions?

18:29And how could we instead be regenerating value by reinvesting in partners and places that have been neglected? How can your businesses redesign your products, rethink what you buy, what you sell, reconfigure your operations to eliminate waste and regenerate human and natural resources through your actions. I'd like to end by asking you to think about the fact that we will be ancestors one day. And when future generations look back, will they be disappointed or will they be impressed by what we've done? And I ask you, what do you want to be remembered for?

19:21Weslynne Ashton: That was Illinois Institute of Technology professor and system scientist, Weslyn Ashton. We'll be back next Wednesday with another handpicked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books, and videos with the world's top business and management experts, find it all at hbr.org.

20:03Weslynne Ashton: This episode was produced by Alison Beard, Adi Ignatius, Dave DiIulio, Julia Butler, Scott LaPierre, Ellie Honain, and me, Hannah Bates. Kurt Nickish is our editor. Special thanks to Ian Fox, Maureen Hoke, Erica Truxler, Ramsey Kabaz, Nicole Smith, Anne Bartholomew, and you, our listener. See you next week.