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April 25, 2022

Circular economy: What directors need to know

An interview with Derek Stephenson
By Heather Wilson, Senior Director, Policy & Research

 The concept of a circular economy challenges old practices of extracting resources, using them and then throwing them away as waste. According to the Ellen MacArthur Foundation, “A circular economy decouples economic activity from the consumption of finite resources. It is a resilient system that is good for business, people and the environment.”

To gain a better understanding of the circular economy, Heather Wilson, ICD’s Senior Director, Policy & Research spoke with Derek Stephenson, a noted expert on resource efficiency and circular economies. Stephenson outlined what we mean by a circular economy, how the concept has evolved from earlier models, and, finally, what directors should know in order to lead their organizations.

Many people may not know what we mean by a circular economy. Maybe we can start with your take on what a circular economy is?
There are multiple definitions, the most widely used is put out by the Ellen MacArthur Foundation and describes a future state whereby companies and governments will be driven by three core principles: design to eliminate waste and pollution, circulate products and materials at their highest level and regenerate nature.

These three pillars are then underpinned by a fundamental transition to renewable energy and materials. The ultimate goal, according to the Foundation, is to decouple economic growth from the consumption of resources. 

For example, if you want to keep electronic products circulating at their highest value, you repurpose the equipment by reusing the parts rather than collect, shred and extract the most precious metals from the discarded products. You can also implement regulations that require a company to organize and fund the collection of their products or packaging, and then reuse the material in the manufacturing process. Companies should think of this as the new environmentally-sound supply chain. However, the supply chain also needs to be socially just. It can’t rely on the poorest people to collect waste products from the side of the road or from landfill sites in order to create fast fashion, frisbees or park benches.

Producers also need to internalize externalities. Whenever a product is developed, there are external costs, but when they are externalized, there is no incentive to change. Mechanisms need to be developed to assign those external costs to producers and consumers which lets market forces create circular economy solutions.

It strikes me that you have been working on at least some aspects of the circular economy, such as extended producer responsibility, for decades. Do you think the idea of a circular economy is a significant evolution from some of those earlier ideas, and if so, how?
The circular economy provides a much broader framework than extended producer responsibility (EPR) and involves every kind of economic activity. Extended producer responsibility is mainly about holding brands responsible for what they put into the marketplace. It does not necessarily get to the broader impacts of all the resource consumption that went into that product’s creation.

We’ve seen a fundamental change from industries resisting the implementation of EPR programs to now, where multinational corporations are driving their industries to accept responsibility for the end-of-life material they put in the market. Far-sighted companies know that EPR is not enough though – it has to be a total economic solution. 

The circular economy model is trying to move producers and companies away from looking at these things as first-mover advantages to the realization that we need well-designed regulations that require all producers to take responsibility for all the impacts of their products. This will ensure a commercial level playing field. It’s also the role of business to use their experience and skills to make sure that regulations are efficient and work in the real world.

Throughout your career, you have been to the boardrooms of some pretty large multinational corporations. Has there been a shift, do you think, in how business leaders oversee issues such as the circular economy and is there more receptiveness to taking action?
I am really pleased to see at senior levels there is a much deeper understanding of the need for circular economy thinking. Now, the conversation has begun, but it can be stymied by a focus on immediate business needs. It’s hard for it reach the top of the agenda even if you understand that it is the top of the agenda.
The drip, drip, drip of all the impacts, all the sense of responsibility, all the wanting to not continue with the old ways seems to be making a difference. We are not there yet because company managers are not incented to take on these difficult challenges. Incentives to change will have to come from board members, shareholders, government and social pressure. But there are some phenomenal CEOs who want to do this but they need the support of their shareholders, their government and their boards.
You should begin with a discussion about what responsibilities the company has to its employees, its suppliers, its customers and to the communities in which it operates beyond maximizing shareholder returns. I think the most important thing a board can do is have a standing agenda item and a process to have an ongoing conversation about responsibility. It’s a worthy thing for the board to discuss: what are our responsibilities and how are they changing?

The board should ask management to map the risks to the business from not becoming more circular. I would task management to develop plans. Firstly, management can identify opportunities within the company’s existing business operations to adopt new sustainable circular economy practices. And then secondly, some companies, usually the leader in their sector, will have to go further and create a transformational strategy that will identify fundamental issues that need to be addressed to change the business into a more circular economy-based company. The board should ask management to provide a plan that will deal with one of the biggest risks that have been identified and for which the company is uniquely qualified to lead. Then the board should set CEO targets and regularly review the progress. 

The transition is so fundamental. You have to look in your company, you have to lead your company, and then your company has to step out and lead more widely because the challenge is so great.

[This interview has been condensed and edited for length].