Transition to the circular economy from a business perspective

Background
A transition to a circular economy is fundamental to achieve the 2050 carbon neutrality goals while simultaneously ensuring the preservation of natural resources and the creation of sustainable jobs. Jobs emerging from such a transition would essentially be in the area of re-use, recycle, repair and remanufacture, as the main goal would be to ensure that the original production materials such as plastics and metals continue to remain in circulation. Current jobs in polluting industries would be eliminated and substituted by others that add value to the production chain. The circular economy is all about leaving behind the “take-make-use-dispose” model in favour of a regenerative model that increments both the life and value of products (European Commission, n.d.). To do so, a series of objectives needs to be reached: Firstly, by eliminating waste pollution and use of raw materials, secondly by reusing, repairing and maximising the use of raw materials, and thirdly by the creation of new products with waste, and switching to regenerative activities (Marino & Pariso, 2021). In the long run, this will allow us to enjoy cleaner air, cut emissions, and support more resilient value chains.

Circular economy’s aims are to provide tangible steps to be undertaken by businesses. For instance, the European Circular Economy Stakeholder Platform includes practices and processes that serve as an inspiration for enterprises. Additionally, they are assigned a grade depending on their relevance for the circular economy (European Circular Economy Stakeholder Platform, 2023). An example of such practices is the Digital environment label, which ensures the proper disposal of packaging waste. Additionally, zero waste shops propose an alternative business model. Their objective is to make unpackaged shopping a well-established idea. Products are stored in bulk containers, and consumers can fill their containers with the amount they want to purchase. It encourages customers to contemplate their consumption habits, and it is based on a more corporate social responsibility notion of doing business. Thus, it goes beyond the financial performance of the company, and integrates social and environmental concerns in interactions with stakeholders.

The European Environment Agency also contributes to the transition. It is an European Union agency that provides environmental data to enable the formulation of policies and decision-making. It has set a framework for enabling circular business models in Europe with the aim to adapt present business structures, to ensure that they have mechanisms to facilitate the reuse of materials and products. The objectives are to guarantee the longevity and durability of items, access-based models, textile collection and resale, and material recycling and reuse (European Commission, n.d.)

In order to achieve these objectives, the European Environment Agency (EEA) gathers together knowledge and expertise as a path to provide the critical analysis that will allow the implementation of European policies and legislation, specifically the European Green Deal. Its core three pillars are: no net emissions of greenhouse gases by 2050, economic growth decoupled from resource use, and no person and no place left behind. To upscale circular business models in this line, the EEA proposes the following standards: policymakers’ agreement on circular goals, development of new business models, and technical and social innovation. This is then applied at the different levels of the enterprise. In the first place, business model innovation. This means value proposition, the reason why a consumer chooses a particular product or service, value creation and value delivery. An example of business model innovation would be Patagonia and its shift to organic cotton. Secondly, technical innovation: technology-based invention that is started when there is a new market or service opportunity. In the third place social innovations, or fresh ideas and strategies that influence behaviour. Fourthly, we have policy enablers, such as the EU Eco-design Directive. These include legislations and regulations, financial assistance, economic incentives, and other policies that contribute to circular business models. Finally, behavioural and education enablers, which target consumers to guide them to sustainable solutions (European Environment Agency, 2023).

This agency works around the life cycle and value chain of products, which means value creation can take place at any step of the chain. If the value creation process focuses on the material phase, companies in the raw materials industry can use recycled material, or ban problematic substances. If it takes place in the product design phase, the product’s design goals should be harmonised with the intended application, to guarantee its utility. In the case of the use phase, the goal is to increase its life span and assure that when it’s at the end of its life cycle, a new purpose can be found for the item (European Environment Agency, 2023).

Many sustainable solutions face a tricky situation due to the existence of ‘green’ claims that aren’t so green. Thus, the EU has established a set of criteria to prevent businesses from claiming falsely that their goods and services are environmentally friendly (Green claims, n.d). If greenwashing is eliminated, it will make it easier for consumers to make informed decisions when buying and consuming, and to trust environmental claims. In March 2023, taking these fundamentals into account, the European Commision proposed a Directive on Green Claims (Green Claims Directive). The measures include:

clear criteria on how companies should prove their environmental claims and labels
requirements for these claims and labels to be checked by an independent and accredited verifier and
new rules on governance of environmental labelling schemes to ensure they are solid, transparent and reliable (Green Claims Directive).

Even if a directive is not directly enforceable for Member States and has not yet been passed, it can still have positive impacts in the future by setting objectives and goals for the member states (Green claims, n.d).

A closer look at businesses
Businesses constitute a big sector of the economy. In 2022, there were 23.2 million businesses operating in the non-financial business sector in the European Union (Statista, 2023). Moreover, the actions of enterprises have an extensive effect on the system as a whole, and thus they should play their part in the circular economy transition. The core goal should be to reduce negative environmental impacts, detaching from economic growth as such. Sustainability assessment approaches are needed as well, to decide whether the business idea is viable or not. In this line, policy-making is fundamental to set the tone and basis for profit goals to align with sustainability requirements (e.g: waste management and recycling regulations). The involvement of different stakeholders is also crucial. These include suppliers that have close relationships with companies, clients and universities (Lindgreen et al, 2021).

Businesses may face two types of barriers when following a more circular strategy. They may encounter problems inside the organisation, such as a lack of awareness on sustainability issues, an absence of perceived benefits, or a lack of resources (Lindgreen et al, 2021). Additional issues could take place outside the company, such as inadequate drivers: limited regulatory frameworks and a lack of market demand for circular products. The problem could also be linked to the complex tools available, like the waste management infrastructure. It should be noted as well that large enterprises that have more resources need less expert involvement for assessment than medium and small companies. This is because they have established networks that come along with relationships with consultants and industry experts. To keep up, smaller companies should receive support both in matters of circularity and sustainability (Lindgreen et al, 2021).
Circularity is a particular strategy under the more general definition of sustainability. The size of the company does not always determine its capabilities to implement new initiatives, and the level of expert advice required may of course vary. While circularity emphasises resource efficiency and waste reduction through circular economic models, sustainability takes a broader approach to safeguard the health of people, the environment, and the economy.

The Sustainable Opportunity (SO) model
Business projects are successful whenever they identify an interesting opportunity and it turns out to be feasible. In the case of circular business models, the key of the matter lies in finding the sustainable opportunity (SO) (Averina et al, 2021). This label may include ecological opportunities, any favourable condition in the environmental domain that can create a sustainable and successful business venture; regardless of sector (Averina et al, 2021). As this is a new way of doing business, the SO model requires additional advance work to reduce the number of unpredictable variables, and also to think about the circular value. This involves the process of designing, producing and transporting the product in a way to maximise its lifespan and keep the waste production to a minimum. The circular element can consist of “cycling” (reusing, recycling, remanufacturing), “extending” (long-lasting design, maintenance, upgradability) or “intensifying” (sharing platforms) (Averina et al, 2021).

The critical aspect of the Sustainable Opportunity Model is to make the SO appealing so that it can be easily commercialised. To do so, some academics have proposed specific criteria for assessing the SO (Averina et al., 2021). In the first place, it needs to comply with the capability assessment – the necessary competencies need to align with those that are available both internally and externally (in partner organisations). Moreover, the feasibility of investing in acquiring new competencies can be evaluated at this level as well. Additionally, the SO should respect the ecosystem alignment. This refers to the appeal of the SO to the ecosystem actors, meaning it matches the needs and goals of the ecosystem partners and customers. The SO must be perceived as reliable in order to get potential partners on board with the project. Finally, it should have a value capture viability. This refers to a promise of financial returns from the initial cooperation. When predicted benefits for important stakeholders outweigh necessary investments, the cooperation is fueled and the business plan is implemented (Averina et al, 2021).

Barriers to the transition of Small and Medium Enterprises (SMEs) – the Slovak example
One of the primary concerns is how to reach an environmentally acceptable use of resources while satisfying increasing demands on housing, transport, consumption, and related infrastructure (Levický et al, 2022). Taking the Slovak economy as an illustrative example, we can observe the challenges faced by companies with fewer resources: they avoid taking part in circular economy activities (Levický et al, 2022). However, they still need to invest in research, development and innovation to change that situation. Comparing middle sized with micro companies, the former are doing better: 46.1% of these 26 enterprises are involved in three to five activities associated with the circular economy. In contrast, approximately 90% of micro-enterprises engage in a maximum of two circular economy practices, but primarily focusing on cost-free or affordable activities (Levický et al, 2022). The range of activities includes: the use of renewable energy; energy use to reduce consumption; waste reduction by recycling or reusing waste or selling it to another business; and redesign of goods and services to use recycled materials or use as little water as possible. From this we can conclude that for smaller enterprises, it is difficult to solve environmental problems as they do not necessarily see the relationship between environmental practices and profits. Moreover, they face market barriers as the supply chains and market dynamics they operate in, do not always encourage the transition. Financial limitations can be present as well, considering the initial costs require a lot of resources. A possible solution could be collaboration with other stakeholders and public access to funding, to start the transition of medium-sized enterprises to a circular model.

Conclusion
There are already plenty of frameworks, strategies and initiatives concerning the transition to a circular economy within the EU. The crucial matter now is to reach every sector and level of the economy by finding sustainable opportunities that create value for all the stakeholders involved. Furthermore, support and expert involvement to fill the gap in medium and small businesses should be prioritised in the EU market agenda. Subsidies to aid businesses with less financial capability can assure that everyone takes part in the process, assuring a homogeneous transition without leaving anyone behind.

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