Ep 190: The competitive case for circular economy: From peripheral to pivotal | Circling Back

[01:00:00.980] - Emma Elobeid It's been a rocky ride for ESG recently. Amid ever-escalating risks, even sustainability sceptics would struggle to deny that the long-term dangers of linear as usual are feeling pretty real. The circular economy can no longer be sidelined as a nice to have. As a strategic business imperative, it can help not only future-proof individual operations, but hedge across whole industries to stay competitive and resilient in a fast-changing world.

[01:00:33.760] Hi, you're listening to the second in our five-part season of The Circular Economy Show. Today, we're going back to the beginning of the year when Seb caught up with Lindsay Hooper, CEO for the Cambridge Institute for Sustainability Leadership, and Joe Murphy, Executive Lead of the Ellen MacArthur Foundation's business network. Together, they discuss why the end of the ESG hype bubble, far from being the end of business-led action, could mark a real shift in corporate circular economy approaches.

[01:01:05.680] Referencing cross-sectoral examples of individual and collective action already underway, in this episode, you'll hear how the commercial and competitive case for the circular economy is becoming more compelling by the minute, and at the same time, what still needs to happen to shift market level dynamics at scale.

[01:01:29.700] - Seb Egerton-Read Coming to you first, Lindsay. Thanks so much for joining The Circular Economy Show. In some ways, the concept of this conversation, this podcast, started with a paper that the CISL published, which was titled provocatively, Survival of the Fittest: From ESG to Competitive Sustainability. I wonder if you could say first, what inspired you as one of the co-authors of that paper to write it?

[01:01:58.900] - Lindsay Hooper Sure. Pleasure to be here. We—when I say we, my co-author Paul Gilding and I—were frustrated at the quality of debate. We could see that there were very real reasons why the hype bubble, as we call it—or the ESG parties, the FT called it—why that had burst, why the tide was going out. But we're very concerned that the quality of the debate then was in some way throwing the baby out with the bathwater.

[01:02:27.800] It was ignoring the hard and fast laws of nature, the underlying drivers of the need for business action, the real risks to businesses of a failure to act. It was simply either doubling down on ESG and claiming, somehow, in spite of the evidence, the country is going to deliver, or saying it was all nonsense and we should just get back to business as usual.

[01:02:52.840] It was an intent to really provoke a different quality of conversation. We're not the only ones who landed in this same place of recognising that many businesses are stuck between a rock and a hard place. They have the underlying drivers of a need to act, but lack of market support for action. Many others are landing in a similar place. Their arguments have been made over many years, but we felt that they were really being overlooked and really wanted to put a stake in the ground and to say, it may not be popular, market sentiment may have shifted, but climate change is still real, it's still here, and the risks are really just going to escalate.

[01:03:31.260] - Seb Egerton-Read For the 1% of our audience who doesn't know, the ESG hype bubble that you refer to, the ESG refers to environmental and social governance. The hype bubble you refer to references this wave of business targets and ambitions on a number of things, from plastics to the climate crisis to biodiversity or nature-positive targets. The businesses have made with this ambition to be both economically viable in the long term or economically resilient, but also achieving success on a number of other things that we care about, such as tackling the climate crisis.

[01:04:06.540] I wonder if you could say in response to that, and the paper articulates that that hype bubble might be coming close to bursting or maybe already has burst in some respects. For anyone who hasn't read the paper yet or who doesn't read the paper, what's the 2 minutes synopsis of what the paper says?

[01:04:25.420] - Lindsay Hooper Briefly, the argument is, or the case we're making is that the case for business action should be grounded in the reality of and the real risks of climate change, of environmental degradation, not short term reputation, market sentiment. That case for action has not gone away. It acknowledges, though, that the markets that businesses are acting in today often don't reward the action, the investment that will be needed to transform the business, to be able to sustainably meet society's needs.

[01:04:58.500] Leading businesses are increasingly hitting the barriers of market limits, market willingness to pay more, shareholder willingness to wear the costs of investment in transition. And so businesses collectively are being limited only to the win-wins, only to the things that can be afforded within today's markets and everything else is really being left. The cumulative impact of all businesses doing only what can be afforded in today's markets will put all businesses at risk. So the argument is the science is clear and the risks are increasing, the markets are providing limits to transition, businesses are between a rock and hard place.

[01:05:37.060] It's therefore in their own interest to assertively advocate for and work in support of market shifts. That requires a combination of innovation, demonstrating that it's doable, assertive advocacy, and also building wider political and social support for change to markets to effectively design out the tension between profitability and sustainability.

[01:06:00.000] - Seb Egerton-Read We'll definitely be coming back to those themes during the course of this conversation, Lindsay, especially those three areas of action that you mentioned. I wanted to bring Joe into the conversation at this point because I guess a lot of the themes that Lindsay is mentioning, Joe, given your role at the foundation, working very close to our business network, will be extremely familiar in the world of circular economy. We've worked for a long time with some of the early movers, if you like, across different industries.

[01:06:29.340] - Joe Murphy Yeah, for sure. The report was really well received. Within our organisation, it definitely got a lot of us talking, and across the network. I think it said the right words at the right time to capture a sentiment.

[01:06:43.540] Just to take a step back on the circular economy—and I've been at the foundation for nearly 9 or 10 years now—when we really first started, the whole premise of the circular economy was about making new markets. That was the idea. It was an economic thesis. It's saying, how do we design an economy which actually capitalises on some of the shortcomings of the linear economy and just builds a more prosperous, more resilient economy? Fundamentally, implicit in that has always been the need to actually create whole new value chains, create whole new markets.

[01:07:20.000] Again, the paper was also quite a helpful validation of that core original thesis for the circular economy. I think the circular economy has quite a nuanced positioning in the world of sustainability and sustainability efforts. We've seen lots of progress and action across our network. We've also seen lots of challenges and failures and things not working. What we're doing at the moment is trying to categorise that action into different archetypes, if you like. How do you actually do market making? How does that actually work in practise?

[01:07:52.900] - Seb Egerton-Read I guess what the foundation… I also, like you, have worked for quite a long time at the foundation. When we started, of course, the circular economy was not a well-known concept at all. There were a very small number of businesses that are almost more curious about it than acting upon it. I guess what we've seen during that build-up of our activities is a lot of what, I guess, Lindsay would describe as individual organisations trying to do things, and then some efforts that are a bit more cross-sectoral or more in that policy advocacy space. What are some of the big learnings that we've had as an organisation or that we see coming out from our network of businesses and wider network as well?

[01:08:35.500] - Joe Murphy Maybe just to give three examples. One of the archetypes we're looking at is really just individual companies taking this set of ideas and trying to implement it and generate and capture value by themselves. If you take someone like Philips, they have set a target to grow the revenue they earn from circular economy-related products and services to 25% of their total revenue by 2025. They're actually on track to achieve that, have achieved that.

[01:09:04.460] Philips is a great example where, whether that's redesigning specific products or changing the business model around how they sell MRI scanners to hospitals, they've actually been able to demonstrate individually the ability to generate a greater percentage of revenue from these products and services.

[01:09:25.600] Another example, which is more collective action, is the work that we did on the jeans redesign. We got 100 brands to sign up to a set of guidelines to show how they would redesign jeans to be fit for a circular economy. Removing some of the aspects of the design today that make it problematic for onward pathways once someone has used a pair of jeans. Brands agreed on a set of definitions and guidelines, but then innovated individually and competed, if you like, individually to actually implement those changes. The net result has been 1.5 million pairs of jeans on the market, and that's increasing year-on-year. The global commitment for plastics has done a similar thing for plastics packaging at an even bigger scale.

[01:10:10.280] The third example is not from our network, but is an example that I quite like. It's a project called Project ZEMBA, which was run by the Aspen Institute and involved Amazon and Patagonia and a number of other brands. That's a collective buyers club, essentially. So companies collaborating, they're going one step further than agree in common definitions. They're actually aggregating their purchasing power by putting money into a third party who then contracts on their behalf and ultimately secures lower carbon bunker fuel for future shipping of their products in the future, which allows them to hit their CO₂ targets.

[01:10:54.540] There are different archetypes and different examples, many examples that we've come across. But what we're really trying to understand now is how do you actually design, how do you facilitate those, acknowledging that it takes all sorts of effort to make new markets.

[01:11:11.300] - Seb Egerton-Read To some degree, we need all the above at some level in the economy.

[01:11:18.820] - Joe Murphy Yeah, arguably, we need a generation of thousands of these type of activities and intermediaries to set up, to actually facilitate the new markets, build the new infrastructure, implement the new technology that's going to enable companies to really make this transformation and bring some of these solutions into the money, so they're commercially viable. To Lindsay's original point that if it's just tinkering on the edges and it's leveraged mainly around target setting and reputation, you're not actually able to bring solutions that are commercially viable. It's going to be extremely hard to transition at scale. It just won't happen.

[01:11:58.440] - Seb Egerton-Read Lindsay, one of the-

[01:11:59.660] - Lindsay Hooper I…

[01:12:00.010] - Seb Egerton-Read Oh, please do.

[01:12:00.500] - Lindsay Hooper Sorry, no, go ahead. I was just going to jump in, but go ahead.

[01:12:03.080] - Seb Egerton-Read Well, I was going to… Maybe this offers the link as well. I was going to say one of the things I really liked about the paper that you published was it somehow straddled the line between being quite realistic while still remaining optimistic. We're offering a pathway forward. And I wondered whether… Part of that is being realistic about what has or hasn't really been achieved, but also you point towards solutions and the direction of travel, the things you think businesses should be doing to move towards competitive sustainability.

[01:12:36.960] I wonder if you could say something about those solutions, or maybe in the context of commenting on some of the solutions that Joe was speaking about there, or some of the archetypes that Joe was speaking about there.

[01:12:46.860] - Lindsay Hooper Absolutely. The point I really liked all of those examples, and I was going to jump in on all of them. I think the first one was a really good example of how the target setting was aligned to a strategic pivot. There was a clear commercial case and a plan. Not simply, "We'll set a goal because everybody else is, and we think we ought to." I think that's really key to success, having that value lens and also value at risk lens on why would we set this goal, and also a commercial strategy then to make the most of it rather than hoping that somehow rankings or reputation will translate into financial value.

[01:13:27.600] I think in the… Some of the challenge that one of the examples we had in the paper was around plastics. To your second archetype around the recyclability being important, that's a necessary but insufficient piece. We also need the infrastructure. We're going to need the collection piece at the end. How do we then look at the wider set of interventions that are needed? The point around government action wasn't simply it's just a blunt tool of, say, carbon pricing, although that may part of the mix. It's also around public procurement, and it's around infrastructure. It's around putting in place the broader structures that will be needed in order to transition whole industries.

[01:14:09.840] I think that there are some really important practical things there for business. It is. There is actually quite a lot of low-hanging fruit, efficiency gains, reducing exposure to some of the price shocks. There's obviously, as you've highlighted, some of those future business models where there can be real commercial strategies. Then I think where we've seen huge momentum has been in places where we've had that package of government incentives and infrastructure. That's really driven faster change than had been anticipated.

[01:14:41.270] We know that it's possible. We know that change can be achieved. We just haven't yet designed markets to do that in a whole range of ways. I think there are a lot of positive insights and lessons learned there. But the other point you highlighted was the one of scale. I think we've learned that relying on a small group of leading businesses is not enough. It may take a small group of leading businesses to start building momentum, but we're going to need trade associations.

[01:15:07.870] We're going to need… This needs to be the business voice at scale, not just the usual suspects who've been calling for and pushing for action. We're going to have to get huge scales. That means those businesses not saying, "We're great, we're at the leading edge," those businesses working to activate trade associations, industry bodies more widely activating their supply chains.

[01:15:31.860] - Seb Egerton-Read It's quite interesting because in some lexicon, I guess, business lobbying has a negative connotation. But in many ways, the conversation we're having here is framing it as an absolutely necessary part of… If progressive businesses are lobbying, are giving policymakers confidence, are uniting around the kinds of packages you were talking about, Lindsay, that have a real opportunity to shift the market, that feels like you're arguing that's an absolutely essential part of tackling things like the climate crisis.

[01:16:06.300] - Lindsay Hooper I think so. We have, as an organisation, been very active in this space, as you know, for a long time. We hold the Corporate Leaders Group for a long time in the UK, in the EU, and now in South Africa, and in Kenya, bringing a voice of businesses who recognise it's in their interests to get market reform. But of course, we do speak to organisations. I've been in boardrooms where they've said, "Look, it's the bad guys that do lobbying. We're the good responsible guys." Then I said, "Well, what is your strategy? Are you going to sit and wait and hope the market transitions, or are you going to actively work to try to accelerate that transition?"

[01:16:45.840] I think it's also naive to be thinking the responsible thing is to sit back. We're in a context in which we know that those who benefit from blocking progress have got very deep pockets, are very focused on spending money on using strategic communications and advocacy to block progress. Sitting back is basically enabling and perpetuating the status quo. I don't think we will get change without those who've got resources and can see the need for change to be really assertive in pushing for it.

[01:17:20.060] I think, of course, that needs to be done responsibly, and there are good guidelines around how to be responsible in lobbying and engaging with democratic processes. But at this stage, it does seem somewhat naive to simply sit back, recognising that others are lobbying very hard to block any progress.

[01:17:40.260] - Seb Egerton-Read Joe, I was reflecting on our time together in the circular economy space. It's almost unimaginable 10 years ago that the circular economy can be as prolific as it is now in policy and business strategies. But similarly, it feels like there's this moment in time from individual business or individual organisation transformation to market transformation. It's a pretty big stepping stone for the circular economy to move from being a really good idea or something that we can see can work when the context is just about right in certain circumstances to something that has the impact that the foundation's forecasting suggest it can have, and not just the foundation, but many other organisations, obviously.

[01:18:25.080] - Joe Murphy Yeah, it's a growing up phase. I agree totally with Lindsay in the change will not happen without policy, without enabling policies that can actually support industrialisation and scale up of these solutions. So many of the barriers you run into when working with individual businesses on how to implement some of these solutions is that the economies of scale just make it really hard to shift from something like a single-use packaging to reusable packaging. You need the infrastructure and the systems to be able to make those just cost-competitive.

[01:19:03.320] Companies do the modelling. "Okay, well, if we had this, if X, Y, Z was in place, it would compete, and we'd easily be able to switch over," for example. But the gap between where we are and actually having that infrastructure is significant.

[01:19:18.760] One of the archetypes we also work on, of course, as an organisation is supporting that joint advocacy. I think that's a really important call to action across the field of actors here and NGOs, particularly to that point around creating credibility, creating platforms that have integrity, for businesses to call, with joint common voice, if you like, around what needs to happen to support them to move as an industry. Then they're very happy to compete beyond that.

[01:19:47.310] Set the foundations and we'll compete away and we'll do what we do every single day of the week, which is just try and knock the stuffing out of each other to capture market share. But there's a level of investment and advocacy that's required to create that level playing field to play on.

[01:20:06.880] I would also say in parallel, circular economy, sustainability, there's also a bit of an image problem around that topic because there are really—again, notwithstanding that scale up fundamentally requires this policy and this new infrastructure—but there are also companies that are winning today. There are great examples in case studies where companies are making money. They're reducing costs, they're finding competitive advantages. I think, again, with this ESG bubble bursting narrative, we've lost a little bit of that commercial savviness and astuteness to the way we're thinking and talking about implementation of some of these solutions.

[01:20:47.080] Just a very simple, to give an example. H&M redesigned their product design to procurement process recently, which allowed them to save $500 million of dead stock every year. Just having that eliminated combination of waste efficiency mindset into how an already extremely efficient business was working allows a tangible, real bottom line impact for a business.

[01:21:11.440] There are many others, startups, back market, who are selling refurbished electronics. It's just a more competitive proposition now because you can basically get the same thing for, I don't know, 40% cheaper, 50% cheaper. There are real solutions out there today that have a competitive advantage, but fundamentally for the scale of impact we need, joint advocacy and rules of the game being in place that set a level playing field are essential.

[01:21:42.540] - Seb Egerton-Read I guess that comes a bit back to what Lindsay was saying about not throwing the baby out with the bathwater in the sense that lots of good things have happened and are happening as a result of a lot of the efforts over the last, however long you want to play it back to, in the case of circular economy, 10–15 years.

[01:22:00.760] I guess as we come to the end of the conversation, that leaves two questions. One is, what are the critical things that businesses should be doing to take a leadership role in this space? I guess the other side of that is that are there any things they can do that are unhelpful? Are there any things they shouldn't be doing? I don't know if you want to start with that one, Lindsay.

[01:22:24.540] - Lindsay Hooper I think we do need to tackle the image problem. I think we need to acknowledge that it exists. This isn't quite answering your question, but I think that's a very real challenge. I think that action to address climate and nature issues in particular has been boxed into a space of being seen as anti-growth, anti-capitalist. I think we need to not be limited by that frame and on the defensive, but I think we really have to tackle that.

[01:22:48.810] I think we also need to make it more relevant to political imperatives, competitiveness, growth, national security, access to economic opportunity. So I think there is a real need to be clear-sighted and politically savvy and step out of the box that it's been pushed into to rebuild some of that momentum and enthusiasm, which is needed because we need the sentiment as well as the economic analysis and so on.

[01:23:15.440] But I think looking forward then, there are some things that probably need to be stopped, partly because they may create the impression of progress, which may delay the significant shifts that are needed, but also companies just have to make hard choices about resource. There is so much resource at the moment being focused on things that are really not going to change the system or create long term value.

[01:23:39.960] Voluntary disclosures, where you're disclosing why. I talk to companies, and they're not even clear why they are, just think that they should. So being really clear on the use of data and disclosures. If you're setting targets, why? How is that…? Is it aligned to a commercial strategy? Are you doing it because everybody else is doing so? If you're pursuing ratings and rankings, is that going to reduce cost of capital? How is that going to deliver for you?

[01:24:07.100] - Seb Egerton-Read That's really interesting, Lindsay.

[01:24:08.700] - Lindsay Hooper Sorry, go ahead.

[01:24:08.920] - Seb Egerton-Read Sorry to interrupt, but that's really interesting, the context that in many ways, that's the space that businesses will get critiqued on. As in almost the reverse of that, you're not disclosing enough, you're not hitting these targets. I really think it's interesting the angle you're coming at that conversation from, which is, well, if that's taking up your resource and time and it's not actually having an impact to the bottom line of shifting that market, igniting that market transformation, is it helpful to do it?

[01:24:38.260] - Lindsay Hooper As long as it's not just cover for inaction, as long as it's actually, "We're going to really seriously focus on what it's going to take to transition and build thriving markets for the future," then I think there's a logic to that. If it's an excuse for doing nothing, then no, that is not a great move. But I think…

[01:24:58.000] There are also, I think, a whole range of, I suppose, initiatives which are well-meaning but aren't punchy or clear or specific enough that they will actually unlock change. I think we need to go beyond the broad, "Please, can governments do something," to really quite specific, "Here are the specific interventions that we're going to need in order to incentivise innovation or to scale solutions that work, or to phase out the damaging activity or the barriers to market and scaling."

[01:25:28.230] I think getting more specific rather than in the blah, "We'd like some good stuff," because I think that just doesn't cut through. What do we need? A lens that is really focused on value and competitiveness. I think there's a need to look inwards and address some complacency. I think we still see assumptions in some business that they'll be able to jump before the market shifts and not recognising the wider systemic risk created by everyone taking that same approach. I think it's really unrealistic that everyone will be able to jump. It just won't happen. It's not a thing before the music stops.

[01:26:04.080] I think really looking at what are those specific market shifts, policy interventions that would create a pathway to transition that would level the playing field, reduce that competitive disadvantage from action. A focus, as I said, on engaging industry associations, getting that scale, the wider business voice. Government aren't saying, "Well, you say this, but another group of businesses say this," and we don't know. So getting a really coherent, clear, loud business voice.

[01:26:32.600] Then I think in the innovation space, businesses tend to be good at doing the same things better, but not necessarily at transforming. I think we'll need much more transformation of industry sectors than many businesses have prepared for. What are their M&A targets? How are they working with innovators and entrepreneurs? How are they getting close to university breakthrough research on solutions that aren't yet in the market in order to look at and better understand and position themselves for the future? But I think fundamentally, recognising that doing nothing is a vote in support of status quo, and will inevitably lead to markets being eroded in the medium to long term.

[01:27:13.800] - Seb Egerton-Read I like that point about there's a cost to an action. I think you have a line in the paper where you say this market transition is inevitable. That feels like one of the things that does feel inevitable. That's maybe the both optimistic and realistic end of the narrative. But for a business that wants to be a leader, acknowledging that you can choose to be part of leading that market transition, or you can be caught in it in some sense.

[01:27:45.940] Joe, just one final question to you. I guess this is also a moment in time for organisations like the foundation you play a role in, you mentioned the facilitators of transition. Obviously, it's really important that there are big ideas and stories and visions and directions of travel. But it's also a moment in time for us as an organisation, for organisations like us, and a lot of the people we work with in terms of the way Lindsay termed it, moving from that broader advocacy of a thing that people can work towards to more specific transitions that speak to that competitive value.

[01:28:29.080] - Joe Murphy Yeah, absolutely. I think that's why the paper resonated as well, because it mirrored lots of conversations we've been having and looking at the circular economy field as a subset of the wider sustainability field. I am anticipating we're already seeing a bit of a rationalisation of that. Of course, we need research, we need coalitions, we need all of the elements that are there, but there's a lot of duplication. A lot of it is fairly macro.

[01:28:57.940] If we're saying that the world is focused on pragmatism, implementation, the solutions that can actually create the infrastructure that can enable the transformation of markets, that can bring circular economy into the money, if you like, and make it more competitive. Then you still need advocacy, you still need research, you still need coalitions, but there needs to be a level of specificity to that, which I don't think we're seeing across the board sufficiently today.

[01:29:26.210] That's a big question for organisations like the foundation and the wider field around how are we reorganising, retooling, not to lose. It's a danger to lose some of the North Star, the vision, the pieces that hold it all together, but to actually play really value-adding roles, whether it's in facilitating joint advocacy or facilitating some of these market-making-type activities. That's really specialist work. I think there's a big shift underway within the ecosystem as organisations try and tool up to be more relevant, more value-adding in that context.

[01:30:09.840] - Seb Egerton-Read Joe and Lindsay, thank you so much for joining The Circular Economy Show.

[01:30:13.580] - Emma Elobeid While policy interventions, finance measures, and infrastructure hold enormous enabling power, the increasing cost of inaction means that corporate leaders who transform before the music stops have a live and present competitive advantage to break out of the market limited bubbles, both discursive and operational, that are also holding back scale. Now is the time to take the lead before the tune changes for good. Thanks for being with us here on The Circular Economy Show. That's it for this week, and I'll be back next time as we hear about how the investment opportunity in the circular-built environment is hotting up