Four Motivations for Companies to Embrace the Circular Economy

On November 9 and 10, 2021, Dentsu Inc. Japan Network's Sustainability Promotion Office and Dentsu Inc. TeamSDGs held an online seminar titled "New Collaborations and Business Opportunities for Realizing the Circular Economy."

This webinar introduced future collaboration and business possibilities based on demonstration experiments and case studies jointly implemented by various companies and local governments to realize the circular economy. Web Dentsu Inc. News will present a digest of its content in three parts. The second part reports on the keynote speech titled "The Full Scope of the Circular Economy and the Global Frontiers."

Previous article:
How Will Consumption and Society Change with the "Circular Economy"?

Speaker Kazuyoshi Nakaishi, Representative Director of Circular Economy Japan, presented on the overall picture of the circular economy, global trends, and the latest case studies from various industries both domestically and internationally. This article highlights key points regarding the direction companies should aim for when engaging with the circular economy.

 

What are the three major principles of the circular economy?

The UN estimates the world population, currently around 7.9 billion, will reach approximately 10 billion by 2050. The World Bank projects that due to population growth and other factors, annual global waste will reach about 3.4 billion tons by 2050 (currently around 2 billion tons).

Various global impacts, primarily centered on climate change and resource depletion, are already occurring. It is clear that if this trend continues, humanity will face a world where safe and healthy living becomes impossible. Driven by this sense of crisis, the world is beginning to move toward realizing a sustainable society.

At the start of the webinar, Mr. Nakaishi outlined four goals for achieving a sustainable world.

① Planetary Boundaries
Classifying elements critical to Earth's sustainability into nine categories, such as "climate change" and "stratospheric ozone depletion," and setting three levels for each: "safe space," "danger zone," and "catastrophic zone." The goal is to keep each element within the safe space while considering their interrelationships.

② Decoupling
Decoupling economic growth from increased resource use. This aims to pursue human well-being through economic growth while simultaneously reducing resource depletion and environmental impacts.

③2030 Agenda SDGs
International goals aiming for a sustainable and better society by 2030. Composed of 17 goals and 169 targets.

④Paris Agreement
An international framework addressing climate change. It aims to achieve carbon neutrality as humanity's most critical challenge.

Mr. Nakaishi states that the investment and financial industry was among the first to begin supporting these four goals. Indeed, ESG investment amounts have increased annually, reaching ¥388.3 trillion in 2020, accounting for 36% of global investment. Against this backdrop, governments, investors, and companies worldwide are leading efforts to achieve these four sustainability goals. The circular economy is gaining attention as a key means to achieve them.

Unlike the previous "linear economy" of mass production, mass consumption, and mass disposal—where resources are extracted, products are made and used, then discarded and disposed of—or the "3R economy" focused on minimizing waste, the "circular economy" is an economic system designed from the outset to avoid creating waste or pollution.

Mr. Nakaishi introduced the following three principles as key to understanding the circular economy:

① Design to eliminate waste, pollution, and inefficiency
(Including negative impacts on people and the environment, economic waste, and social issues like inequality and human rights)
② Continuous use of products and raw materials
③ Regenerating natural systems

He conveyed his expectation for companies: "I hope you will set your business models and business visions while always keeping these three principles in mind."

Don't get stuck on business models; start with concept design

When companies engage with the circular economy, Mr. Nakaishi states that the following "five business models" are almost invariably referenced:

・Circular raw material and material supply
・Sharing platforms
・Products as a service
・Extended product lifecycle
・Resource recovery and recycling

He cautioned, "Don't get too fixated on these, as it could lead to building the wrong business model." He explained that the five business models listed above cannot establish a circular economy on their own. He emphasized the need to create a business model that builds the entire lifecycle through collaboration between companies and sectors. He explained that products designed with the circular economy concept are first necessary; only then can business models like sharing platforms and resource recovery and recycling become viable.

He particularly stressed that products based on the circular economy concept offer no advantage under the linear "make and sell" approach, making the development of a PaaS (Product as a Service) model critically important.

Regarding key points for building circular economy business models, Mr. Nakaishi cited "shifting thinking from linear value chains to circular value recycling" and "collaboration with other companies, sectors, and fields, including competitors."

Mr. Nakaishi also raised the question: "I want you to switch your mindset and consider whether achieving sustainability goals is truly the purpose." He argued that while initiatives like the SDGs, climate change mitigation, biodiversity restoration, and waste management are often seen as national or corporate objectives, the fundamental purpose is "human well-being—happiness and health."

"Often, the means and ends get reversed. The purpose is human health and happiness (Why), and the four sustainability goals (What) exist as the means to achieve that. Furthermore, the circular economy is the means (How) to realize those sustainability goals."

Four Motivations for Companies to Adopt the Circular Economy

So why should companies incorporate the circular economy into their business strategies? Mr. Nakaishi explained four motivations:

① Risk Mitigation
Risks such as soaring resource prices and unstable resource supply itself; regulations and carbon pricing targeting countries not addressing climate change or sustainable societies; global supply chain risks highlighted even during the pandemic; and the risk of losing investors and customers. Engaging with the circular economy is necessary as a means to avoid these risks.

② Brand Enhancement
Engaging with the circular economy not only earns positive recognition from investors, financial institutions, customers, and consumers but also heightens employee expectations, contributing to the retention of top talent.

③ Cost Reduction
While many companies perceive the circular economy as leading to increased costs, leading global companies are actually pursuing it with the understanding that it contributes to overall cost reduction through supply chain optimization, improved efficiency in resource and energy use, and reduced waste disposal costs.

④ Revenue Generation & Growth Strategy
The circular economy aims to create new revenue streams and business models, targeting new markets/customers and expanding business portfolios. To achieve this, it is crucial to redefine the circular economy not merely as an "economy that recycles resources and eliminates waste," but as "a transformation of the economic and social system to enable humanity's sustainable prosperity and realize the well-being of future generations."

While countries like Europe, the US, and China are pursuing circular economy transitions through government-business collaboration, Japan has adopted a soft law approach, promoting voluntary corporate initiatives rather than formal policy.

Mr. Nakaishi stated, "To promote sustainable finance, the Ministry of Economy, Trade and Industry, the Ministry of the Environment, and the Financial Services Agency are beginning to establish robust guidelines," praising their comprehensive coverage of the current global carbon neutrality environment. He emphasized the importance of referencing these guidelines to avoid carbon neutrality risks while seizing opportunities and integrating them into corporate strategy.

Next time, we will report on the talk session covering three projects co-created by the Dentsu Group and companies.