Overview of the circular economy

The World Economic Forum defines a circular economy as “an industrial system that is restorative or regenerative by intention and design.” Instead of today’s linear economy that makes and discards products, generating rubbish and depleting resources in the process, a circular model channels everything back into the production cycle. Manufactured goods and by-products are reused, recycled, or repurposed using renewable energy. These circular economy principles decouple profit from waste and overconsumption, building a global market that benefits both people and the planet.

Around the world, more countries and companies are transitioning to a circular economy as its benefits gain traction in a changing climate. The modern cycle of pollution, natural disasters, supply shortages, and global conflicts often destabilises conventional production and trade. Instead, a global circular economy model illuminates a potential new way forward. By designing waste out of the system, industries can become more efficient and resilient while reducing their environmental impact.

Principles of the circular economy

Also known as circularity, this model is based on three principles:

1. Design out waste and pollution.
2. Keep products and materials in use.
3. Regenerate natural systems.

According to the Ellen MacArthur Foundation, acting on these three principles would deliver long-term benefits and a resilient system that supports business, people, and the environment.

How does the circular economy work? What are its success factors?

The success of the circular economy model depends on certain core elements. Firstly, products should adopt future-proof designs made from durable materials to last for appropriate lifespans. This includes using renewable energy and renewable, reusable, and non-toxic resources in efficient ways. Success requires a shift in mindset. Waste is a resource; it must be recovered for reuse and recycling, which in turn requires the right infrastructure. Enterprises must reconsider their business models and seek opportunities to create greater value by building on the interaction between products and services. And finally, the new model requires digital technology that can track, monitor, and analyse relevant data across the entire process.

Circular economy versus linear economy

Both circular and linear economies approach production in divergent ways.

In a linear economy model:

• Materials flow in a straight line from resource extraction, to manufacturing, and then to landfill
• Profit depends on creating, selling, and consuming as many products as possible
• Inefficient process leads to excessive pollution and overuse of natural resources

In a circular economy model:

• Both products and waste materials are collected to be reused or recycled
• New products incorporate green design features that focus on longevity and recyclability
• A cleaner manufacturing process uses renewable energy instead of finite resources
• New asset-sharing business models such as subscriptions and rentals replace the emphasis on product ownership

To successfully shift towards a circular economy, organisations must perform life cycle assessments to evaluate the environmental impact of their products and processes.

Why is the circular economy important?

The entire planet benefits from the circular economy. Every human being, enterprise, plant, and creature will benefit from an economic system that generates less waste and pollution, keeps products and materials in use for longer, and preserves natural ecosystems.

A circular economy has enormous potential to improve businesses, society, and the environment. The sustainable lifestyle that circularity provides could also meet our current needs without compromising the ability of future generations to meet theirs.

The environmental benefits are immense: Businesses that employ circular economy models can manage their use of land, soil, water, and raw materials sustainably whilst reducing the release of carbon emissions and toxic pollutants. A circular economy preserves natural habitats and biodiversity and helps prevent mass extinctions of species suffering from the effects of climate change.

The benefits to society are extensive: First and foremost, a circular economy reduces the health hazards caused by waste and pollution. At the same time, improved design enables producers and consumers to reuse and recycle more. Keeping valuable resources circulating in the economy supports the market for secondary products and materials across all regions. This approach creates new jobs and also meets consumer demand for better, longer-lasting products. Additional job opportunities are created to remanufacture, maintain, and repair products as part of product-as-a-service business models.

The circular economy is profitable: Following circularity principles makes businesses more resilient and better prepared to deal with unexpected changes. Companies become less dependent on the volatile prices of raw materials, protecting them from geopolitical crises and safeguarding supply chains already threatened by climate change events such as natural disasters. In circular business models such as rentals or leases, products can generate greater profit over their entire lifecycles compared to one-off sales. Companies in turn gain insight into customer usage patterns and behaviours. While attracting ESG-minded investors, sustainability as a brand also encourages customer loyalty, fostering emotional connections that increase their lifetime value.

Examples of the circular economy

Legacy enterprises are also committing to circularity. Founded in 1835, wine and spirits producer González Byass used circular economy principles to rethink every aspect of the family-owned business. Their vineyards adopted sustainable agricultural practices such as composting and deficit irrigation. Wineries integrated water-saving methods and renewable energy sources. Their packaging significantly reduced the use of plastic and label ink. Production overall recovers 99% of generated waste, from turning organic matter into biomass fuel to recycling 100% of paper, glass, cardboard, and plastic waste. The company also employed data-driven solutions to track sustainability metrics in their manufacturing and recycling processes. These tools enable González Byass to provide complete transparency to both customers and compliance regulators across different markets.

How did the circular economy begin?

Just as industrialisation and consumerism didn’t occur overnight, the shift towards circularity has been decades in the making. In the late 1970s, Walter R. Stahel, a founding voice of industrial sustainability, coined the term “cradle to cradle”, a design concept that aims to reduce waste by focusing on products that are safe for humans and the environment. Popularised by the book Cradle to Cradle: Remaking the Way We Make Things, the concept was widely implemented by architect William McDonough, who was introduced as the “father of the circular economy” in 2017 at the World Economic Forum.

Through her foundation, Ellen MacArthur has also been instrumental in developing and promoting circularity by inspiring businesses, academics, policymakers, and institutions to transition to the economic model of the future.

How does the circular economy support sustainability goals?

Environmental sustainability refers to the responsible management of natural resources, finding innovative ways to meet modern-day needs while preserving them for future generations. This delicate ecological balance depends on a global transition to a circular economy, especially when facing the destabilising forces of climate change. Circular economy models fundamentally enhance sustainability goals because they:

Reduce pollution and minimise waste

Instead of throwing away products at the end of their lives, the circular economy focuses on finding ways to reuse and recycle. This means less waste ends up in landfill sites, polluting the air, soil, and water. Reducing pollution is a crucial part of stabilising ecosystems affected by climate change.

Alleviate pressure on natural resources

Conventional linear production relies on the continuous and excessive extraction of raw materials such as steel, aluminium, cement, wood, and rare metals used in electronics. Over time, this process depletes natural resources, disturbs habitats, and reduces overall biodiversity. In a circular economy, repurposing by-products and post-consumer materials disrupts this destabilising process, allowing the environment to recover and replenish.

Support renewable energy

The extraction and use of fossil fuels damage natural ecosystems whilst increasing carbon emissions. This dependence on finite energy sources also makes industries vulnerable to disruptions and shortages. A circular economy approach instead emphasises renewable energy alternatives, reducing the global market’s environmental footprint and instability risks.

Reduce the need for new plastics

Plastics transformed modern manufacturing as the material infiltrated every industry. However, the extraction of fossil fuels, from which plastics are made, worsens climate change by increasing carbon emissions. Plastics are also non-biodegradable, eventually polluting natural habitats. Recycling plastics removes these harmful consequences from the environmental equation.

How do you implement a circular economy business model?

Can these harmful trends of industrialisation and consumerism be reversed while maintaining the levels of comfort and convenience that society has come to depend on? Shifting this massive system of waste and overconsumption involves coordination and collaboration among global governments, consumers, and businesses. Enterprises can play their part by following these key circular economy principles:

Design sustainable products

Create products that are durable, repairable, upgradeable, and recyclable:

• Avoid designs with single-use functions and planned obsolescence
• Reduce packaging to a minimum, while incorporating features that make the designs reusable and recyclable
• Focus on manufacturing components that can be repaired and dismantled easily for high-quality recycling
• Replace finite raw materials where possible with recycled or renewable alternatives

Provide transparency for consumers

Empower customers with reliable product information detailing manufacturing processes, supply chains, and overall environmental impact:

• Use tracing technology to verify sustainable manufacturing and raw material sources
• Provide public audits outlining sustainability data, from water usage to carbon footprints
• Offer product digital passports, which are digital records that customers can access to view products’ sustainability information

Integrate circular and regenerative production practices

Reduce the need for natural resources and keep materials in circulation by reconsidering every stage of product manufacturing and consumption:

• Prioritise manufacturing methods that reduce water and energy consumption and repurpose by-products
• Integrate renewable energy and waste management into the manufacturing and transport process
• Incorporate circular business streams such as asset-sharing and product-as-a-service models
• Create programmes that collect products and circulate them back into the economy through resale, remanufacturing, or composting
• Provide repair and recycling services for customers to encourage more sustainable consumption

How can technology drive the circular economy?

Circular business models reuse everything, but they rely heavily on emerging technologies to enable the path to sustainable profitability.

Companies undergoing digital transformation must rethink every aspect of their business: future vision, strategy, value chain, operations, pricing models, sales channels, and customer engagement. This presents a unique opportunity to use data and digital technology more efficiently for circular innovation.

As Deloitte notes in its “Recipe for Circular Economy Transformation” report, key elements for circular transformation include the Internet of Things (IoT) platforms, artificial intelligence (AI), machine learning, and predictive analytics. These elements help companies better understand their use of resources and waste, material flows and areas of inefficiency, and how to deliver customer value. These technologies can also help them identify potential circular hotspots and align business strategy with profit and pricing models.

Blockchain, augmented reality, and smart mobility help companies rethink operations to optimise resources, break down silos, and connect data, devices, and partners. Big Data analytics, social media apps, and e-commerce platforms enable personalisation and create better customer experiences. Cloud services, social platforms, data visualisation, and virtual reality (VR) also encourage engagement and continuous feedback loops for better design throughout the cycle.

How can AI accelerate the circular economy?

Closing the production loop means addressing every step of the process—from prototype development to recycling post-consumer waste. A new generation of AI technology can help businesses adopt more circular economy models, providing holistic solutions at every stage. Current innovative AI applications can:

• Support circular product design: Using pattern analysis, AI-based algorithms help researchers discover new recyclable base materials alongside innovative ways to repurpose post-consumer waste and manufacturing by-products. AI-supported product development can also help manufacturers create product and packaging designs that prioritise disassembly and recyclability.
• Strengthen circular business models: AI technology can help new circular business models compete against more conventional linear production. For example, AI-based automation helps asset-sharing and product-as-a-service enterprises optimise their platforms’ inventory management and transaction data, from car- and bicycle-sharing apps to resale retailing. Consumer analysis also helps businesses develop targeted marketing campaigns to attract new customers.
• Reduce production waste: Mass overproduction across industries jeopardises global economic circularity. AI-informed production can reduce this waste with predictive analysis. These algorithms help create more accurate consumer demand forecasts, reducing the risk of overstocked inventories that go to waste.
• Streamline supply chains: AI-based supply chain management systems further close the circularity loop by optimising the distribution of both raw supplies and manufactured products. This includes managing transport routes, delivery schedules, storage conditions, equipment maintenance, and quality control inspection. Fine-tuning these processes with AI helps companies reduce product loss and carbon emissions.
• Transform recycling: Many of today’s recyclable products are lost because of inefficient collection systems. Integrated AI technology can simplify this process from bin to processing plant. By employing pattern recognition to identify valuable materials within mixed recycling and waste streams, AI robotic systems can significantly enhance sorting accuracy, increasing recovery yields while reducing losses due to contamination.

Circular economy partnerships to know

Driving the forces of environmental change, institutional partners have emerged to advance the global circular economy. Their environmental research and network of international alliances are activating meaningful sustainability solutions across industries. Leading the way, the following organisations offer enterprises valuable resources for adopting more circular economy models.

Ellen MacArthur Foundation

Founded in 2010, the Ellen MacArthur Foundation is a non-profit dedicated to accelerating the global transition to a circular economy. The organisation focuses on promoting circularity through innovative industry research, public educational programmes, and joint partnerships with international policy makers, business leaders, and NGO groups. They have also developed important global initiatives such as the Plastics Pact Network, the Fashion ReModel, and the Big Food Redesign Challenge.

Eunomia

Eunomia is an environmental consultancy founded in 2001 that helps organisations transition to more sustainable practices. With a global team of experts, they provide strategic guidance on waste management, recycling, and circular economy solutions, supporting both public and private sector clients in reducing environmental impact and improving regulatory compliance.

Earth Action

Combining robust analysis, consultancy, and public advocacy, Earth Action helps companies, regulators, and non-profits worldwide develop practical solutions for a more sustainable future. Their scientific research and data-driven methodologies provide the foundation for modern innovations in plastic reduction, carbon footprint management, ecological design, and business climate strategies. The group also leads environmental initiatives such as Plastic Overshoot Day, Swiss Climate Action, and the Plastic Footprint Network.

FAQs

SAP sustainability customers in action