Circular economy able to add significantly to global climate targets

18 July 2016 Consultancy.uk

The world is waking up to the need to rapidly transform towards a low carbon economy, or face, according to the scientific community, an uncertain and potentially disastrous future. Agreements have been made regarding limiting warming to below 2.0°C above pre-industrial levels. Getting there is, however, a thorny challenge. One way forward is the transformation of the world economy to one based on circular economic principals, in which waste is reduced in favour of sustainability.

At the COP21 conference a key global agreement was laid down by 195 countries to reduce their waste emissions to limit global average temperature rise to well below 2.0°C above pre-industrial levels, and to pursue efforts to keep it under 1.5°C. How to get there remains relatively difficult, however, with intransigent business interests, human ignorance and technology gaps (due in part to a lack of innovation), among others, holding the world back from a carbon free long-term stability.

In a recently released white paper, titled ‘Implementing Circular Economy Globally Makes Paris Targets Achievable’, from Ecofys and Amsterdam based social enterprise Circle Economy, the current situation regarding the pathways towards humanities climate future are laid bare, as well as one possible strategy for creating a path towards a more sustainable world, the circular economy.

Current situation and future trends

Towards 1.5°C
As it stands, without government intervention, humanity is on a trajectory towards dangerous climate change. The irreversible experiment, of continuing to pump large amounts of waste into the atmosphere is, by the scientific community, met with considerable concern for the sake of long-term social stability as well as wider environmental effects, including a mass loss of biodiversity. The business as usual case, sees warming of more than 4.0 °C above pre-industrial levels.

Government intervention, through commitments made so far, is projected to see climate warming limited to around 3.0°C – still well above the COP21 target and within the range of dangerous climate changes affecting human and ecological wellbeing and prosperity in the long-term. The assumption, following the COP21 pledge, is that governments will continue to develop a regulatory environment that pushes industry and citizens towards creating technologies, practices and behaviours that are sustainable – thereby reaching the 2.0°C limit.

One method for creating long term sustainability, as well as bridging the gap between 3.0°C and 1.5°C, is, according to the report, a circular economy. The authors find that current economic model is in many ways highly inefficient. The economic model, for the most part, takes resources, uses them once for some utility, then that utility produces something that is at the least useless and in many instances harmful. This model, sometimes termed ‘from the cradle to the grave’ is in many ways, extremely unsustainable – resources are finite, their exploitation cannot occur indefinitely and the waste, externality, is often not factored into the price of production or use.

In a circular economy the whole cycle of resources and their utility are considered. The aim of a circular economy is to create value chains in which products are produced and used in such a way as to reduce, in so far as is practical, the waste produced in its production and their utilisation. A number of concepts are related to circular economy, including:

Recovery and Reuse: products are designed in a way that makes the resources recoverable and reusable for other uses.

Extending the lifetime of products and assets: durability becomes mainstream, products are designed to provide their function for a long time – while users are trained to maintain them. Additionally, products are also designed to allow for upgrade, and repair, as well as reverse logistics, product take-back, and remanufacturing.

Sharing and Service Models: focus on increasing the utilisation of products, particularly for items, such as cars, which have high externalities but very low levels of utilisation (<95%).

Circular Design: focus on designing products with durability, low resource impact and sustainability in mind.

Digital platforms: focus on reducing the need to resource based services towards more efficient digital services.

Emission Breakdown

The report also considers the different sectors in the economy that are particularly open to becoming circular, finding that across the major economic sectors that produce waste emissions, as well as other forms of sometimes toxic waste, 50% of all emissions are the result of materials. The introduction of circular economic principals are, according the analysis of the report, able to drive reductions in emissions from their utilisation by between 20% - 30%, representing 11-13 billion tonnes CO2e by 2030, producing a significant step forward towards the 1.5 °C pathway of 15 billion tonnes CO2e reduction in the same time frame.

The firms suggest that getting there will require policy makers, as well as industry in general, to create frameworks which encourage improved efficient uses of resources. This may mean that policies are put in place to reduce food waste, both at the consumer level as well as the wider value chain that may encourage poor food use – or that businesses start creating more durable, repairable and good quality goods. Much like the wider move toward sustainability, efforts will require multi-stakeholder engagement in which, while in the short term there will be winners and losers, in the long-term there will be heritage.

Andy Ridley, CEO of Circle Economy, says, “The research clearly shows that there is a massive role for the circular economy. Not only as the ‘missing part of the puzzle’ to make our Paris targets achievable, but also as a practical and scalable approach to decouple unsustainable material use from prosperity. This makes the circular economy a vital addition to the mix of solutions to address climate change. We urge companies and governments to embed the circular economy in their climate strategies and policies, and prompt the next wave of climate action through circularity.”

“The momentum from a circular economy can provide a basis for the transition to a low carbon economy with secure sustainable economic growth and prosperity for all. To reduce the risk, companies need to find new ways of doing business. The sooner this is accomplished, the less disruptive and more cost-effective the transition will be,” adds Preeti Srivastav, Project Director of Corporate Climate Action at Ecofys.

The benefits of circular
According to a study conducted by McKinsey & Company last year, a transformation to a circular economy has the potential to increase European GDP by 7% and disposable income by 11% by 2030 through a reduction of raw material costs. Another study, by Accenture, found that, globally, the consumer advantage of circular economy adoption could reach $4.5 trillion by 2030.

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.