Taking the Trash Out of the Global Economy
By Fawn Fitter | 7 min read
Before World War II, the global economy was inherently circular. Manufacturers extracted resources to make items that were designed to last and were used until they could no longer be repaired. At that point, people repurposed the parts or components in any way possible. Discarding an item before it was worn out was unthinkable; even most trash was put to good use. But the deprivation of war on the heels of the Great Depression drove a backlash against thrift. Companies aggressively marketed the idea that consumers deserved things that were new and untouched – and that anything else was inferior, even shameful.
The resulting demand turbocharged economic growth, but at a steep price. The linear way of manufacturing – extracting and consuming raw materials to make new products that are barely used before being thrown away – has befouled the planet and made precious resources increasingly scarce and expensive while literally shoveling billions of dollars into landfills. As the deputy commissioner of sanitation, recycling, and sustainability for New York City, Ron Gonen saw this every day, both in the streets and in the city budget: every penny of tax revenues that the city spent on landfills and other waste disposal could have been invested in delivering education, transportation, recreation, safety, and other public services.
In 2014, Gonen left city government to become the founder and CEO of Closed Loop Partners, an investment firm and innovation center focused on making the economy circular again by connecting entrepreneurs with industry experts, global consumer goods companies, retailers, financial institutions, and municipalities. His book, The Waste-Free World: How the Circular Economy Will Take Less, Make More, and Save the Planet, encapsulates what he’s learned about maximizing growth while reducing waste.
We asked Gonen about the challenges facing sustainability-minded CEOs who want to build circularity into their businesses and what enterprises can learn from how his firm invests.
Q: What does Closed Loop Partners look for in an investment?
Ron Gonen: We chose all 45 of our portfolio companies because they provide solutions for other companies or people that want to become more circular – for example, by coming up with secondary uses and markets for materials that weren’t previously being recycled or by developing technology to reduce food waste by keeping perishable foods fresher longer. We want to invest in aspirins for issues that are causing a lot of pain on the path to circularity.
What is the goal of a circular economy?
It aims to redefine growth to benefit people and the planet.
For example, Algramo sells name-brand household cleaning products in bulk from cashless kiosks using reusable containers with an embedded radio-frequency identification (RFID) chip that connects to the online payment capabilities of your mobile phone. You download the Algramo app and create an account, then go to the vending kiosk, where you select an Algramo “smart” container and fill it with detergent. The kiosk charges you for the product by weight and deducts that plus the cost of the container from your account. The next time you run out of detergent, you bring the container back to the kiosk, which charges you only for the refill. And you don’t have to fill the container to the brim. You can buy only as much as you need or can afford.
By encouraging customers to use a single smart container over and over, Algramo helps eliminate single-use plastic, which is especially important in areas with no recycling infrastructure. It also increases manufacturers’ margins because it enables them to sell more product without needing to purchase additional materials to package items individually. And because the chip can keep track of how much and how often a consumer buys the products that Algramo dispenses, a shop or manufacturer can better manage inventory, offer coupons or frequent buyer discounts, and create opportunities for cross-sales.
Q: How does circularity fit under the broader umbrella of sustainability?
Gonen: Sustainability and circularity are concentric circles. Sustainability is a moral and ethical view of business that’s about recognizing how the “take, make, use, pollute” approach increases the risk that climate change, environmental degradation, resource scarcity, and so on will raise the costs of doing business. The circular economy is the tactical approach: you reduce risk, increase margins, and serve your customers by eliminating as much waste as possible from the system.
Q: As you describe in your book, the concept of the circular economy has been emerging for 50 years. Why has it only recently started to gain traction with senior executives?
Gonen: Leaders in the C-suite are recognizing that they’ve become too dependent on extracting raw natural resources to make their products. Doing so is becoming increasingly risky, costly, and volatile as resources become scarcer. As companies recapture more of the waste they create, they find more ways to extract value from it, their margins are higher, and they become better positioned for long-term success.
As companies recapture more of the waste they create, they find more ways to extract value from it, their margins are higher, and they become better positioned for long-term success.
At the same time, leaders in the public sector globally are realizing that they need to spend more taxpayer money on infrastructure and public services instead of waste disposal. So they are communicating to business leaders that companies can’t expect to sell their products while the community subsidizes the cost of recycling or disposing of them. Instead, municipalities are starting to demand that companies pay for landfills in perpetuity – or invest heavily in developing recycling infrastructure, which is a lot less expensive!
Consumer demand also plays a role, but it’s not the main driver.
Q: What can business leaders do right now to promote the case for circularity?
Gonen: American business culture has assumed for decades that businesses can shunt onto the public the enormous costs of cleaning up after their products, but that’s changing quickly. This makes it a challenging time for CEOs. They’re not hearing a consistent message from all stakeholders. Some stakeholders are pushing for more circularity, which will generate enormous economic opportunity while healing the planet, while others are pushing to maintain the status quo, which is focused on short-term gains regardless of long-term cost.
One way for leaders to promote the case for circularity is by making eliminating waste synonymous with cutting costs and reducing risk. Then they can challenge their internal teams to use materials science, supply chain technologies, and product design to eliminate waste streams, which will create measurable and profitable results.
One way for leaders to promote the case for circularity is by making eliminating waste synonymous with cutting costs and reducing risk.
Q: Where should companies be focusing their attention if they want to be in the vanguard of this shift?
Gonen: The first step is for companies to explore and analyze their supply chain in detail to spot potential waste, from inefficient processes to excessive resource consumption. The second is to explore ways to utilize their materials that are not dependent on natural resource extraction. For example, you could replace the need to extract natural resources by using recycled content and locking in a lower price in the long term. And the third step is to change your product design so that materials get continually reused. For example, the typical toothpaste tube is made of a mix of plastic and aluminum that’s so hard to separate that it can’t be recycled. It’s hugely notable that Colgate has spent five years developing a tube made entirely of recycled plastic that works just as well and is 100% recyclable.
Right now, only 16% of companies have taken significant steps toward circularity, and most of those efforts have been by manufacturers around cutting the cost of production by using recycled or renewable materials. To get closer to our goal of 80% of companies thinking circular, business leaders need to look at actually eliminating waste in the manufacturing process by using less material and making their processes and supply chains more efficient. Leaders who recognize that are the ones who are going to be out in front.
Meet the Authors
SAP Insights Newsletter
Ideas you won’t find anywhere else
Sign up for a dose of business intelligence delivered straight to your inbox.