Opportunity and risk of the circular business model for financial executives

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As countries prepare to meet at COP26 in Glasgow in November to agree on new measures to tackle climate change, an idea that could help tackle the crisis – the ‘circular economy’ model – is embraced by companies as diverse as automaker Renault and furniture retailer. IKEA.

One thought leader in this space is the UK-based Ellen MacArthur Foundation. He said: “Relying only on energy efficiency and switching to renewables will solve only 55% of global greenhouse gas emissions.” What can help reduce the remaining 45%, the foundation suggested, is embracing the three design principles of the circular economy: eliminating waste and pollution, circulating products and materials, and regenerating the environment. nature.

The model is not limited to specific industries, but it is easier to implement in companies that deal with large quantities of products and materials, said Remy Le Moigne, former partner at Deloitte and now managing director of Gate. C, a consultancy firm specializing in circular economy based in the Paris region.

In an interview with FM, Le Moigne said the circular economy provides opportunities for businesses in three areas: purchasing, production and sales.

Purchase

Le Moigne said the buying opportunity offered by adopting circular economy principles is twofold. First, companies can secure their supply of raw material or product. This is the reason why automaker Renault explored the circular economy, he said. It is also the impetus that gave birth to the chemical company Solvay, headquartered in Belgium, in this field. “[The company] set up factories a few years ago to recycle rare earth metals from… electronic products, ”he said.

In many cases, there is a cost advantage as well. “If your business buys reconditioned material rather than new … it will be cheaper. … This is not always true for plastic, but for other materials, it is usually cheaper to buy recycled material than new.” , explained Le Moigne.

Production

Here again, the opportunity is cost reduction. Regulations, especially in the EU and UK, mean that waste from production processes can be expensive to deal with. “To recycle [waste products], reusing them or selling them as a by-product for another company is obviously useful from a cost point of view, ”said Le Moigne.

Sales

“[In] the textile industry, most of the big brands today, like H&M or Levi’s or Patagonia… what are they doing? They sell their product and when it is used, they buy it back from their customer and sell it back to another customer, ”said Le Moigne. An alternative is to use a subscription model for reused products to reach new markets and generate long-term income. .

Other opportunities

Egbert de Jong is a global asset manager at DLL Group, a Netherlands-based company that provides commercial, retail and used equipment finance to businesses.

For manufacturers, there is an opportunity, he said, to create a competitive advantage by designing and redesigning equipment to make it easier to redeploy and recycle. “It’s possible to stay connected longer with… customers and track equipment for a significantly larger part of the product lifecycle. [Manufacturers] also have the ability to bundle and sell more services, which gives them additional margin and helps maintain uptime [economic lifetime] equipment, ”he said.

For end users, the circular economy offers the option of paying only for the value consumed during their period of use, de Jong said.

“Through trade-in or lease programs, the equipment will be taken back by the supplier or another party and the residual value will be deployed to second-life customers. This can provide an economic advantage over non-circular equipment. responsibility for technological obsolescence lies with the vendor or another third party, and this could contribute to end-user sustainability goals, ”he said.

Risk

The major risk currently associated with the circular economy is to obtain a return on investment, said Le Moigne. Some significant costs of producing traditional goods – pollution, for example – are not paid by the producing company. As regulation increases and companies pay a greater portion of total production costs, the circular economy will become more financially attractive, he suggested.

This change is already visible. “In France, there is a new regulation which requires [companies] on the furniture market, on the textile market or on the automotive market to finance the repair of all products, ”said Le Moigne.

He said that under the French anti-waste law for a circular economy (anti-waste law for a circular economy), “a company has no choice but to design and build facilities or [a] service network to help customers repair their old chair or table [for example]”.

For accountant Christine Helliar, professor at the University of South Australia in Adelaide, Australia, CFOs and other business leaders must take a long-term view of embracing the circular economy . “This is a strategy of more than five years to really implement it because you have to change, maybe the supply chains, the production processes… what you manufacture and what are your inputs into it. raw materials, ”she said. FM.

She added, “It’s really about having a long-term focus. So the risk is that when you have a long-term focus, things can go wrong – you don’t see the benefits for that long.”

Government regulation should be a driver for implementation, Helliar said, but “there is always a risk that you decide to do something and the EU or a government … says no you can’t do it. that way you have to do it another way “.

De Jong said the risk is usually not with the end user but with the supplier, such as the manufacturer or reseller, or with a third party such as a service or rental company.

“The main risk lies in the projection of the future values ​​of the equipment, [which] can finish [being] different [from that] expected. And also setting up a reverse logistics process to ensure that equipment is collected for reuse and not disposed of in lower cycle applications. [reuse as a lower-value product] or thrown away, “he said.

Technology

The circular economy means keeping products and materials in a loop for as long as possible. After the first loop, information, such as the composition of a product and its duration of use, is more difficult to grasp.

Le Moigne said: “Technology can help us capture information [about] the life cycle of a product, and so when you get it back for recycling or for use … you know the product better, and you know if it needs to be recycled, it could be reused, or whatever. . “

In his article, “Digitizing Material Flows”, Le Moigne says that there are two types of technologies that can identify and track a product: either “anchors” that are embedded or that are attached.

Anchors can be physical, for example, fluorescent markers or watermarks; digital, such as radio frequency identification (RFID) tags or printed electronics or QR codes; or biological, such as chemical tracers or DNA markers, according to Le Moigne.

Other technologies can make implementation easier, Helliar said. Virtual and augmented realities (VR and AR) have the potential to train employees to see how a virtual business can put circular economy principles into practice.

Blockchain and artificial intelligence are also used in businesses to track and analyze circular economy products and inputs.

3 actions for financial leaders

De Jong recommends three areas where CFOs and other CFOs can take action to implement the principles of the circular economy.

Global activity: Look at your business setup from the point of view of the end user of equipment, facilities, buildings, machinery, etc., and think about how these can be managed more sustainably. Also consider the producer or service provider side of the business and think about what you can do to make the marketing and sales of your products or services more sustainable.

Supply: In procurement processes, ask suppliers to indicate the circularity of their products. If your business is more mature in this area, include minimum circular requirements when evaluating suppliers.

Funding: Consider other ways to finance the purchase of goods other than paying cash or borrowing money. De Jong proposed three financing solutions to help companies enter the circular economy:

  • Rental in general and more particularly simple rental in which the end user can return the equipment.
  • XaaS (“all as a service”) programs in which the equipment is not sold separately but as part of a larger service offering.
  • Pay-as-you-go solutions, where the customer only pays for the time the equipment is used.

Olivier rowe ([email protected]) is a FM editor of the magazine.

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