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

HANNAH BATES: 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.

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.

Weslynne Ashton is a systems scientist and 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. Here’s Ashton.

WESLYNNE 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 infant 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? I 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. 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, enjoying leisure, nature, culture, as the way that we measure value and exchange value came to be dominated by money.

For 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. But fashion, fast fashion particularly, churns out clothes at such low prices that people rush to purchase them, without thinking about where these clothes 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. So 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 we still see human rights violations within the supply chain. And 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.

Take Mumbai’s Dharavi. 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 circular economy models.

So what is the circular economy? It 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. And 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. I 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 byproducts to substitute for virgin materials.

I’m from the Caribbean, perhaps 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 up on 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 these Sargassum masses cost about nearly $200 million per year in cleanup costs, right? And 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. Legena 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 island. They’re 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. For large multinational companies, circularity can appear in many different places. We’ve just heard from Tarang Amin of e.l.f., 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. Let’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. Garry Cooper Jr. founded Rheaply, an asset management platform that got its start helping researchers in universities to find low-cost equipment from other labs across campus.

Rheaply 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 Rheaply 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 dollars in savings for customers on that platform. Larger 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 re-manufacturing of their products, across their own customers. So it’s just for their internal use. Finally, there are opportunities for creating new organizational and governance models, as the circular 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. My colleague, Erika Allen, here in the city of Chicago, co-founded a nonprofit, called The Urban Growers Collective. And they’re 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, and it’s often contaminated. But cities also have a tremendous resource, in the form of wasted food. We heard earlier that we have this tremendous food waste problem all around the world. In the US we waste close to 40% of the food that’s produced for human consumption. So for over a decade, Erika and her colleagues worked together to get funding, permits, and devise equitable governance models to launch Chicago’s first commercial and for-profit anaerobic digesta. So at Green Era 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 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. So 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.

In 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 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. So we have to think about those trade-offs.

I 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 US, 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.

So 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? And 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?

HANNAH BATES: That was Illinois Institute of Technology professor and systems scientist Weslynne Ashton.

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This episode was produced by Alison Beard, Adi Ignatius, Dave DiIulio, Julia Butler, Scott LaPierre, Elie Honein, and me—Hannah Bates. Curt Nickisch is our editor. Special thanks to Ian Fox, Maureen Hoch, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.