Understanding circular economy

A circular economy is an economic model that aims to extend the lifecycle of products, reduce waste, and regenerate natural systems. It operates on principles of designing out waste and pollution and keeping products and materials in use. This model follows a "make-use-return" approach that contrasts with the traditional linear economy, which follows a “take-make-dispose”approach. The circular economy seeks to transform how the world produces and consumesgoods, ensuring that resources are utilized more efficiently and sustainably. It encourages businesses to rethink their production processes, product designs, and business models to minimize waste and environmental impact while maximizing value creation.

Relationship to ESG?

The circular economy and ESG are closely intertwined, with both focused on promoting sustainable and responsible business practices. ESG provides a framework for evaluating a company's environmental, social, and governance performance, while the circular economy offers a practical approach to achieving sustainability goals.:

• Environmental: The circular economy directly addresses environmental sustainability by reducing waste, lowering carbon emissions, and minimizing the extraction of natural resources. It promotes usage of renewable energy and materials, helping companies reduce their environmental footprint.

• Resource efficiency: By promoting resource conservation and waste reduction, circular economy principles support sustainable resource management, a key ESG consideration.

• Innovation: The circular economy drives innovation in product design and business models, which can enhance a company's ESG profile.

• Social: The circular economy can have significant social benefits, such as creating jobs in the recycling and refurbishing sectors, promoting social equity through access to sustainable products, and improving community health by reducing pollution and waste.

• Governance: Implementing circular economy practices often requires robust governance to ensure transparent and ethical business operations. This includes compliance with environmental regulations, transparent reporting, and ethical supply chain management.

ESG impact on a circular economy

The integration of ESG principles into business strategies significantly enhances the effectiveness of a circular economy:

1. Investor pressure: As ESG becomes increasingly important to investors, companies are more likely to adopt circular economy practices to improve their ESG ratings.

2. Regulatory compliance: ESG-related regulations often encourage or require companies to implement circular economy principles.

3. Reputation management: Strong ESG performance, including circular economy initiatives, can enhance a company's reputation and brand value.

4. Risk mitigation: Circular economy practices can help companies address ESG-related risks, such as resource scarcity and environmental impact.

Role of ESG in circular economy practices

ESG criteria play a pivotal role in advancing circular economy practices:

1. Goal setting: ESG frameworks provide targets and metrics that can guide the development of circular economy initiatives.

2. Performance measurement: ESG reporting helps companies track and communicate their progress in implementing circular economy practices.

3. Stakeholder engagement: ESG considerations encourage companies to collaborate with various stakeholders, which is essential for creating closed-loop systems. H&M’s "Conscious Collection" uses sustainable materials, and the company has implemented a garment recycling program in its stores. Customers can return old clothes for recycling, and H&M aims to use 100% recycled or sustainably sourced materials by 2030.

4. Innovation driver: ESG pressures can spur companies to innovate and develop new circular business models and products. Global fashion online retailer SHEIN launched a new Circularity Fund providing an initial investment of €200 million, aimed at supporting startups in Europe and the UK focused on textile-to-textile circularity solutions (SHEIN launches €200 Million Circularity Fund in the UK and the EU and commits to investing €50 million in broader ESG efforts - SHEIN Group)

5. Driving investment: Investors are increasingly focusing on companies with strong ESG performance. By adopting circular economy principles, companies can attract investment from stakeholders who prioritize sustainability and ethical practices.

6. Regulatory compliance: ESG standards often align with regulatory requirements, encouraging companies to adopt circular economy practices to meet legal obligations. This helps companies avoid fines and penalties while promoting sustainable operations.

7. Brand reputation: Companies that integrate ESG and circular economy principles can enhance their reputation and brand loyalty among consumers who value sustainability. This can lead to increased market share and customer retention. Patagonia’s key circularity initiatives like ‘Worn wear program’ has increased customer loyalty, led to positive media coverage, a positioning as an influential voice an advocate of sustainability and enhanced the overall brand reputation

8. Risk management: ESG practices help companies mitigate risks related to resource scarcity, waste management, and regulatory non-compliance. By adopting circular economy practices, companies can reduce their environmental impact and avoid potential liabilities.

9. Innovation: ESG criteria encourage companies to innovate in product design, materials usage, and business models. This can lead to the development of new products and services that support circularity and drive business growth. Adidas, a global leader in sportswear, has embraced circularity in product design with its Futurecraft Loop project. This initiative focuses on creating high-performance running shoes that are entirely recyclable adidas unlocks a circular future for Sports with Futurecraft.loop: a performance running shoe made to be remade.

The circular economy is a transformative approach to production and consumption that aligns closely with ESG principles. By adopting circular economy practices, companies can reduce their environmental impact, promote social equity, and enhance governance. This not only helps in achieving sustainability goals but also drives innovation, improves brand reputation, and attracts investment. As more companies embrace this model, the shift towards a sustainable and resilient economy becomes increasingly achievable.