Circular Economy Theory to Practice
McKinsey Center for Business and Environment Special edition, October 2016
Eric Hannon, Clarisse Magnin-Mallez, and Helga Vanthournout
Its subtitle, Moving from theory to practice, refers to the transition taking place as companies in many sectors use circular-economy concepts to capture more value from resources and to provide customers with better experiences. The term “paradigm shift” is overused, but this is one instance where it applies. Circular Economy Theory to Practice
Since the Industrial Revolution, companies and consumers have largely adhered to a linear model of value creation that begins with extraction and concludes with end-of-life disposal. Resources are acquired, processed using energy and labor, and sold as goods—with the expectation that customers will discard those goods and buy more. Contemporary trends, however, have exposed the wastefulness of such take–make–dispose systems. The same trends have also made it practical to conserve assets and materials so maximum value can be derived from them. Circular Economy Theory to Practice
Consider that resource prices have become more volatile and are expected to rise over the long term, as consumer demand increases and easy-to-access, high-grade stocks of key commodities dwindle. People and companies are increasingly willing to pay as needed to use durable goods, rather than to buy them outright. With digital technologies and novel designs, items can be tracked and maintained efficiently, which makes it easier to extend their useful lives. And governments are imposing new restrictions on pollution and waste that apply along entire product life cycles.
Finding growth within:
A new framework for Europe How the circular economy could promote clean growth.
Morten Rossé, Martin Stuchtey, and Helga Vanthournout
How can Europe increase its prosperity, while reducing its dependence on primary materials and energy?
The circular economy is part of the answer to that question. Instead of today’s take–make–dispose linear model of production, the circular economy is restorative by design—using and reusing natural capital as efficiently as possible and finding value throughout the life cycles of finished products.
Three major principles govern the circular economy:
- Preserve and enhance natural capital by controlling finite stocks and balancing the flow of renewable resources.
- Optimize resource yields by circulating products, components, and materials in use at the highest possible levels at all times.
- Make the system more effective by eliminating negative externalities.
Proponents argue that the circular economy offers Europe an opportunity to increase the productivity of resources, decrease dependence on them (as well as waste), and raise employment and growth. They maintain, too, that a circular system would improve competitiveness and unleash innovation. Skeptics say that European companies are already capturing most of the economically attractive opportunities to recycle, remanufacture, and reuse. Reaching higher levels of circularity, they argue, would incur substantial economic costs.
To contribute to a fact base that could inform this debate, last year the McKinsey Center for Business and Environment and the Ellen MacArthur Foundation developed the report Growth within: A circular economy vision for a competitive Europe, in association with the Deutsche Post Foundation. This 98-page document considered what a circular European economy could look like and compared its potential impact with the current development path. The report found that in the aggregate, the opportunities associated with a circular scenario could be large and that resource productivity remains hugely under exploited as a source of wealth, competitiveness, and renewal.
Ahead of the curve:
Innovative models for waste management in emerging markets How countries can turn their garbage into wealth.
Hauke Engel, Martin Stuchtey, and Helga Vanthournout
As countries get richer, they create more garbage. Economic growth in emerging economies is raising living standards and reducing poverty, but there are also side effects, such as more waste of all kinds. To deal with it, countries need to build up waste-management systems that can reduce the risks to human and ecological health and curtail the degradation of urban and natural landscapes.
The Philippines is a case in point: it produces 2.7 million metric tons1 of plastic waste per year— 600,000 metric tons in metro Manila alone.2 While the country has high waste-collection rates (84 percent nationwide), 17 percent of collected plastics gets dumped into the ocean after collection because of illegal dumping and poor landfill siting and operating practices. For uncollected plastics, the rate of leakage into the ocean is 31 percent. The economic effects on tourism, fisheries, and healthcare are considerable. We estimate that each metric ton of uncollected mixed waste represents an average loss of about $375.3 Many municipalities are struggling to keep up; indeed, that has been the case for decades.
While the importance of protecting the ecosystem is well understood, the costs of dealing with waste can be burdensome. Municipalities in developing countries are already spending 20 to 50 percent of their budgets on solid-waste management.5 The default solution has been to encourage private sector operators to get involved. This can relieve the financial pressure and add much-needed expertise, but it does not necessarily guarantee value recovery, since this is usually not an explicit part of their mandate. In this article, we suggest how governments can turn waste into economic value and how they can develop incentives to avoid creating waste in the first place.
A new plastics economy:
From linear value chain to circular system Remaking the plastics economy will require innovation in recycling and reuse as well as in design and chemistry.
Martin Stuchtey, Steven Swartz, and Helga Vanthournout
Plastics are the workhorse material of the modern world. Their low cost, versatility, and toughness have made them essential to industries as varied as consumer packaged goods, healthcare, technology, and transportation. According to ICIS, the use of plastic worldwide is expected to increase by more than 4 percent a year between 2010 and 2025. That rate would exceed most estimates of global economic growth.
For all its success, the plastics economy has drawbacks. One is that production relies almost entirely on feedstocks of nonrenewable resources. Another is that too much plastic ends up in landfills or as litter. Some 95 percent of the value of plastic packaging, $80 billion to $120 billion per year, is lost after a single use. Making and disposing of plastics can also harm natural systems. The UN Environment. Programme estimates the environmental costs of plastic packaging at $40 billion—more than the industry’s total profits. Finally, there are concerns about the risks to human health that may be associated with chemical substances used to make some plastics.
How can the plastics economy address these drawbacks while creating value? One promising approach is to shift away from linear, take–make–dispose modes of production and use. A new plastics economy might be underpinned instead by circular economy principles, which call for reusing materials efficiently and thereby minimizing the depletion of natural resources and the creation of waste and pollution. One relatively simple step toward a new plastics economy would be to improve waste-management systems. A small number of changes—all drawing on existing technologies and know-how—in just five countries could lower the amount of plastic waste that enters the ocean by 45 percent over the next ten years.
Developing products for a circular economy:
Cross-functional collaboration and customer-focused design thinking can help companies reap more value from the energy and resources they use.
Eric Hannon, Marianne Kuhlmann, and Benjamin Thaidigsmann
Over the past 150 years, companies have steadily refined their ability to invent products and produce them efficiently, delivering a wide range of goods to consumers and improving financial returns to shareholders. In other respects, however, this system is far from optimal. Specifically, companies have hardly begun to reckon with the waste that occurs after products are purchased. When a consumer uses a product infrequently or discards it because it has worn out, at least some of the energy and material that went into making the product has been wasted.
Things don’t have to be this way. Some businesses are using circular-economy principles to create products that are durable, easy to reuse or recycle—and profitable. Nothing about this is easy, but two tactics can help.
The first is devising a highly collaborative product development process that both accounts for and helps to determine sourcing requirements, production methods, marketing, sales, and other aspects of how goods are made and how they are handled at the end of their lives. The second is to use design thinking, which can help companies discover unexpected ways of meeting customers’ needs with much greater resource efficiency than in the past.In this article, we explore how these tactics can help companies capitalize on the opportunities that the circular economy presents.
Toward a circular economy in food:
Danone CEO Emmanuel Faber shares how his company manages resources with an eye on sustainability.
The French food and water company Danone has a history of environmental awareness. In this interview with McKinsey partner Clarisse Magnin-Mallez, CEO Emmanuel Faber discusses his commitment to resource efficiency.
McKinsey: What inspired Danone’s current thinking? Circular Economy Theory to Practice
Emmanuel Faber: Three things. My own upbringing and convictions, the culture and history of Danone, and the overwhelming case for change. I grew up in the Alps, where the beauty of the natural cycles seeded in me the underlying importance of something that we as managers can often lose sight of—namely, that life is more than ideas, mathematical models, and software. I later spent three years in Asia, including Indonesia and China, where I saw firsthand how fast resources were being depleted in emerging markets. Danone’s commitment to tackling these problems is not new, so it was always fitting that I should join such a company. More than 40 years ago, in Marseille, Antoine Riboud, our founding CEO, made a speech in which he pointed out that we only have one Earth, that it’s our responsibility to look after it, and that as a business we would pursue a dual economic and social agenda. Last, the world is changing. Cheap, low-quality calories have dominated the industrial-food business for nearly 100 years, but we are reaching the end of this era. Consumer tastes and behaviors are evolving, and as part of this evolution, consumers expect us to act differently. Circular Economy Theory to Practice
Style that’s sustainable:
A new fast-fashion formula Stylish, affordable clothing has been a hit with shoppers. Now companies are trying to reduce its social and environmental costs.
Nathalie Remy, Eveline Speelman, and Steven Swartz
The early 21st century has been good to the apparel industry. Thanks to falling costs, streamlined operations, and rising consumer spending, clothing production doubled from 2000 to 2014, and the number of garments purchased each year by the average consumer increased by 60 percent. Fast fashion has been a particularly hot segment and a source of enviable growth for some clothing companies. By compressing production cycles and turning out up-to-the-minute designs, these businesses have enabled shoppers not only to expand their wardrobes but also to refresh them quickly. Across nearly every apparel category, consumers keep clothing items about half as long as they did 15 years ago. Some estimates suggest that consumers treat the lowest-priced garments as nearly disposable, discarding them after just seven or eight wears. Circular Economy Theory to Practice
The fact remains, however, that innovation in the way clothes are made has not kept pace with the acceleration of how they are designed and marketed. Fast fashion is now a large, sophisticated business fed by a fragmented and relatively low-tech production system. This system has outsize environmental effects: making clothes typically requires using a lot of water and chemicals and emitting significant amounts of greenhouse gases. Reports also continue to emerge about clothing-factory workers being underpaid and exposed to unsafe even deadly workplace conditions, particularly when handling materials like cotton and leather that require extensive processing. Without improvements in how clothing is made, these issues will grow proportionally as more clothes are produced. Circular Economy Theory to Practice
So far, sales increases suggest that most shoppers either overlook or tolerate the social and environmental costs of fast fashion. But some companies aren’t waiting for a consumer backlash. They have begun to remedy the largely unseen impact of the fast-fashion business. In this article, we consider how apparel businesses can resolve challenges in two major segments of their value chain: the heavy resource demands and difficult labor issues in the production process, and the excessive waste associated with disposing of unfashionable or worn-out garments.C