3 June 2020
There is growing momentum to ensure the recovery from the global pandemic shifts the economy to a more sustainable model and enables the transition to a circular economy post-2020. In their blog, Jan Raes, a circular economy finance expert who drafted our study Demystifying Circular Economy Finance, supported by Aliyorbek Muminov in UNEP FI’s Secretariat, ask what the circular economy will look like for business after the pandemic. UNEP FI members are invited to take part in a consultation on the draft study, to be published during UNEP FI’s first virtual Global Roundtable on 13-14 October 2020.
What does the circular economy look like for businesses after the pandemic?
There is active discussion and speculation about winners and losers during the recovery phase of the global pandemic. While the concerns are gradually shifting from the health-related response to the economic implications, the jury is out on readiness for a circular economy. How will the sudden disruption in supply chains, changed social interactions and reduced consumer spending affect circular economy related behaviours like sharing, recovery of materials, reuse, remanufacturing, recycling and resource efficiency? Will the circular economy suffer or prosper from the post pandemic recovery? We cover six opportunities and challenges in relation to the growth of a circular economy:
- The sharing economy: the post-pandemic fear of the second-hand. The sharing economy is recognised as a business model under various circular economy classification schemes for the finance sector. The sharing economy upsets conventional financial services (e.g. insurance coverage policies and loans) due to a change in the relationship between user and owner of the shared asset. For financial institutions, the sharing economy introduces new income flows and collateral agreements, but also new risks due to shared use of assets amongst a multitude of parties. As analysed before the pandemic, the sharing economy offers tremendous opportunity due to the projected growth of sharing services to above USD 300 billion on an annual basis by 2025. Given the highly transmissible nature of COVID-19, there is the so-called “fear of the second-hand” at play for these services. A heightened fear of a disease vector can hurt sharing business models like home, apparel, equipment, ride, car, bike and scooter sharing. The providers will thus have to reassure customers that their shared assets are clean and hygienic upon delivery. This will impose extra transaction cost to sharing business models that thrive on shared physical assets;
- Potential increase of product-as-a-service. The aftermath of the lockdown measures also brings opportunity. The ongoing switch from store-based product to online sales could break ground for product-as-a-service (PAAS). The pandemic has increased consumer demand for services. The growth in the number of users of platforms for food delivery, grocery delivery, entertainment and any form of non-contact based e-commerce, could stimulate the faster adoption of products offered as a service during the economic recovery phase. PAAS offerings are far from a silver bullet, but they offer space for incumbents. The restructuring of traditional product offerings (ranging from camper vans to washing machines to mobility options) along the lines of PAAS offerings has the potential of delivering the same service to a large consumer base at a lower cost, with fewer resources. For the circular economy the important aspect is that fewer resources are in play with the potential of a higher degree of refurbishment, reuse and recycling during and at the end of the lifetime of the goods;
- Shift in waste volumes, waste collection and waste treatment during crisis. The volume of contaminated medical protective gear has increased tremendously across the globe. This waste is destroyed by incineration due to the concerns of contamination with the virus. The increased success of food delivery and e-commerce platforms unfortunately increases packaging waste. As a result of the stay-at-home orders, consumption is down and many local governments have altered their waste collection schedules. Less waste has entered collection systems for reuse and recycling. These logistical disruptions in waste or resource collection cause downstream supply and demand losses and mismatches. Buyers of raw materials in manufacturing can decide to abandon sustainability measures, lured in by the low price of freshly extracted materials. With less secondary materials on offer, the gap in price between virgin and secondary materials is expected to widen. Collection and deposit schemes generally make consumption less wasteful. The speed at which collection of waste returns to normal, will be crucial as reduced collection rates undermine the ground work for further expansion of the circular economy;
- Onshoring to areas where waste management policies are stricter. The effects of the lockdown and the lingering uncertainty over longer international distribution channels will make companies automatically focus on shorter supply chains and where possible they will onshore production to be closer to consumers. This onshoring will force companies to redesign their logistics and reverse logistics in light of extended producer responsibility laws and more stringent waste management policies. These laws might be absent or badly policed in the developing countries where they generally manufacture. Re-engineering supply chains could accelerate the shift to a circular-economy;
- The overhaul of distribution: the locally integrated economy. In the food and agricultural sector, some farmers are losing income due to disrupted distribution channels. In livestock markets the infection of meat packaging workers has halted processing and packaging operations. While this is mostly negative in highly concentrated markets like the US, independent farmers can themselves reach out to consumers directly via shortened distribution channels. They can differentiate their offering from the mainstream linear food production systems. The Farmer to Fork (F2F) strategy is another example. This was introduced as part of the new EU food policy. F2F can also become a form of insurance policy for farmers to secure their income in the post-pandemic period. In its most positive form, this shortening of distribution channels for food could result in less food waste and production losses and more resilience of farmers, exposed to exclusive off taker contracts – a potential silver lining for the circular economy;
- Inclusive circular economy. There is no doubt that some countries will cope with the economic recovery in the wake of the global pandemic better and faster than others. If economies start “building-back-better” based on public recovery funding, glimpses of a more circular economy might emerge. Especially in a situation where, under pressure to stimulate local jobs, developed countries are rushed to accelerate the restructuring of their supply chains with onshoring of companies and employment opportunities. This also involves the rebalancing of trade and larger national stockpiles to pre-empt potential future disruption. The flipside of the coin is that many developing countries heavily rely on commodity exports. Altered post-pandemic patterns of trade, tariffs and border control could slow their economic progress, unless they move to higher value production models. Onshoring to build-back-better needs to be done with consideration of those that are at the bottom of the pyramid and potentially out-of-sight. There is a role for both the public and private sector here. If we really want to build back better, the work of government agencies and international organisations, such as the United Nations and the International Labour Organisation, remains essential to guarantee the decency and inclusiveness of policies related to working conditions. In many countries, private financial institutions will be tasked as distribution channels of recovery funding to private parties. A successful recovery will include the individuals most affected.
Please provide feedback here on UNEP FI’s draft study Demystifying Circular Economy Finance by 11pm CET on Wednesday 10 June 2020.
COVID-19 updates from UN Environment Programme
The transmission of diseases, like the Novel Coronavirus COVID-19, between animals and humans (zoonoses) threatens economic development, animal and human well-being, and ecosystem integrity. The United Nations Environment Programme supports global efforts to protect biodiversity, to put an end to the illegal trade in wildlife, to safeguard the handling of chemicals and waste and to promote economic recovery plans that take nature and the climate emergency into account. Read the latest news and science from UN Environment Programme on these areas.
Image: Sergio Souza