The future of circular business

The Future of Circular Business

How leaders can tackle the transformation challenge

Executive summary

Organizations today face multifaceted challenges in the quest for sustainability. The outdated linear ‘take-make-waste’ approach has led to a significant increase in global resource consumption, driving the triple planetary crisis: climate change, biodiversity loss, and pollution.

Customers and investors are increasingly aware that unsustainable resource use exacerbates these environmental crises, increasing pressure on businesses to recognize the risks of linear practices and the urgent need for change.

Globally, the regulatory framework is constantly evolving to tackle emerging sustainability challenges, with policies increasingly promoting circular practices. Companies must evolve their mindsets accordingly, proactively adapting to capture the benefits of sustainability.

The argument for a circular business revolution has never been stronger, as organizations seek ways to decarbonize, dematerialize, and regenerate natural systems while unlocking economic value and supply chain resilience.

However, the path to circularity is challenging, as circular models need to demonstrate economic viability to be adopted at scale. Businesses contemplating the necessary steps to circular transformation need skilled guidance to transition successfully from the old ways of doing business. It is not enough to secure the ‘license to operate’; rather, businesses must embrace the ‘license to innovate’ to capture new opportunities.

A circular approach offers the best chances of success in this challenging process. There are five core business model archetypes essential to this approach:

1. Optimizing resource use

2. Integrating green operations and secondary materials

3. Capitalizing on regeneration

4. Valorizing waste

5. Servitization of products

Understanding how each of these archetypes functions provides the foundation for a successful transformation, embedding sustainability strategically and aligning with circular goals to enhance an organization’s economic and environmental value.

The case for change

New solutions are urgently needed

Companies today face multidimensional sustainability challenges. The take-make-waste model of business that has dominated for decades delivers inefficient and often damaging resource flows. Consequently, global resource consumption continues its growth trend (by almost 400% since the 1970s to a level of more than 106 billion tonnes in 2024)1, while, at the same time, material productivity stagnates.

The triple planetary crisis – climate change, biodiversity loss, and pollution – is deeply rooted in this increased resource use and extraction. Tackling the increasing climate and nature risks demands a proactive solutions mindset. A ‘business as usual’ approach in the corporate world is unsustainable and exacerbates the problems.

Meanwhile, shifting customer and investor perceptions are drawing attention to unsustainable business practices. The corporate world is waking up to the fact that nature risk is also business risk. This includes physical risks due to ecosystem damage and transition risks such as changes in demand or difficulties in meeting regulatory requirements.

As new legislation proliferates to address these challenges, requiring corporate oversight of aspects of business far beyond the office or factory, markets are changing in often unpredictable ways.

To ask company owners and leaders to imagine a radically different future amid all these competing demands for attention may seem counterintuitive, but a circular business strategy has the potential to lead the way towards just such a future.

The circular business revolution

Conversations about a circular economy often focus on the abstract or philosophical realm, emphasizing environmental benefits only. Seemingly disconnected from the realities of business decision-makers, they lack urgency in the context of pressures to deliver tangible economic results quickly.

Increasingly, organizations are coming to understand that, if they are to be part of the solution, change is necessary. A circular approach to business is one way in which they can make meaningful progress towards this end, as they become empowered to contribute positively to resolving the critical issues that lie ahead:

1. Decarbonize the energy system

2. Dematerialize the materials system

3. Regenerate the natural system

But more than that: adopting circular and resourceefficient business models can unlock new value pools and strengthen supply chain resilience.

Circularity is not only possible but necessary. Yet, to demonstrate that a radically different future is possible, it also needs to make business sense. The challenge now is to break free from the prevailing linear systems and allow exciting, circular business opportunities to emerge at scale. Many pioneering business leaders, experts, and pioneers are starting to explore this route.

This requires envisioning, designing, and implementing circular business models to illustrate how a circular business transformation can generate both environmental and economic impact.

1United Nations Environment Programme and International Resource Panel. (2019) Global Resources Outlook 2019: Natural Resources for the Future We Want. Available at: https://www.resourcepanel.org/reports/global-resources-outlook

A new paradigm

To transition to a circular economy, we need to consider three distinct horizons that guide us from our current reality to a sustainable future. These horizons help us reimagine the economy, sustainability, innovation, and the future of business:

Business as usual

This is the current status quo, where companies operate within the bounds of traditional, linear business models and value creation. The primary focus is on understanding and addressing the constraints and threats inherent in the current system.

Business model revolution

Business model innovation empowers companies to proactively address the inefficiencies of their current value chain. Circular business models enable regenerative innovation, optimize resource productivity, and harmonize positive environmental impact with profitable economic value.

Circular and regenerative future

This horizon provides a transformative view of what the future of business might look like for an organization. It recognizes the emergence of a new circular and regenerative business paradigm that is future-proof and resilient against external shocks.

Leaders of circular thinking and action share a commitment to building a future that is not just more prosperous, but also inherently sustainable and regenerative. Along the above horizons, they have in common the ability to:

• Interpret signals for change, with a clear understanding of the constraints within a ‘business-as-usual’ approach

• Revolutionize business models, exchanging the ‘license to operate’ for ‘license to innovate’

• Envision a circular and regenerative future and take ambitious steps towards a new, circular business paradigm.

A circular business model follows a vision for a regenerative future. With this forward-looking lens, business leaders can define the company’s ambition for the years ahead, embracing transformative innovations that align with the company’s circular vision. This enables the identification of transition opportunities that will lead to the desired future.

It is important to note that the shift from business as usual to a circular approach is not the sole domain of sustainability specialists. The journey to a radically different future needs the skills and input of everyone, from senior leaders and executives to innovation managers, supply chain professionals, start-up founders, policymakers, educators, researchers, investors, and financial analysts. Everyone stands to gain from an economic approach that respects planetary limits. Time

Towards a new economic model

From linear to circular

Historically, economic value creation and supply chains have tended to follow a linear flow. This approach leads to a range of systemic challenges, including overuse of resources, significant waste generation, product obsolescence and loss of material value, low productivity, and underutilized capacities.

Within linear systems, value creation hinges on the production and sales of as many products as possible, with the productivity of workers prioritized over the efficient use of resources. This results in both overproduction and overconsumption. In addition to these impacts, linear flows create negative externalities on both natural and social capital, with the costs of these effects passed on to society and the environment.

Inefficiency is baked into linear systems. One clear example is the fashion e-commerce sector, where return rates typically range from 20-40%. This high rate of returns significantly impacts transport and logistics chains, leading to considerable wasted transportation of goods.

Many of the systemic challenges businesses currently face are deeply ingrained in linear economic systems. Circular value-creation systems, in contrast, thrive on intentional regenerative and restorative design, with a focus on retaining the highest possible value of products and materials by optimizing resource productivity.

The regulatory framework: Compliance is not enough

Regulation is creating a new policy environment with supporting enabling conditions for the development of a circular approach to business. The European Commission has outlined a comprehensive circular economy action plan, which presents the opportunity to generate up to:

For example, economic measures such as fiscal tax adjustments, subsidies, and public procurement policies are also affecting many businesses, along with new bans or mandates, such as those targeting single-use products. Companies will need to use all the tools available to them to anticipate and manage these new challenges, which can have significant impacts on their business operations, supply chains, and overall sustainability strategies.

However, the demands of policy measures are often balanced by interesting new possibilities, for those businesses that take a pro-active approach and are alert to the opportunities they present. A reactive approach and compliance mindset will not enable companies to capture the opportunities from sustainability and circularity. Leading businesses can reinvent their business models to amplify the scaling of sustainable solutions and strengthen their supply chain resilience. trillion

€1.8 in annual economic benefits2

700,000 new jobs in Europe alone3

Globally, policy interventions are becoming more widespread as regulators seek to tackle pressing sustainability risks. Comprising a range of measures including disclosure and reporting, standards, regulatory interventions, and economic instruments, these are prompting businesses to take a closer look at the sustainability of their business practices under the linear model.

2Ellen MacArthur Foundation. (2015) ‘Growth within: A circular economy vision for a competitive Europe’. Available at: https://www. ellenmacarthurfoundation.org/growth-within-a-circulareconomy-vision-for-a-competitive-europe 3European Commission. (2018) ‘Impacts of circular economy policies on the labour market’. Available at: https://circulareconomy.europa.eu/ platform/sites/default/files/ec_2018_-_impacts_of_circular_economy_policies_on_the_labour_market.pdf

How the circular economy works

The circular economy draws its inspiration from nature, where the concept of waste is almost non-existent.

In the linear economy, natural resources flow into base materials, components, and products for sale. It comprises multiple value-adding stages with little consideration for the destination of products and waste.

In contrast, the circular economy aims to keep resources in continuous production cycles, promoting efficiency and longevity while circulating resources at their highest value.

The circular economy:

01

Emphasizes sustainable production on the supply side

02

Responsible consumption on the demand side

03 Turns linear value chains into circular value chains by ‘closing the loop’

04

Optimizes for resource productivity while regenerating nature

05

Decouples economic activities from resource consumption and related impacts

Circular economy principles

Three principles form the cornerstones of the circular economy4:

Eliminate

The aim is to eliminate waste and pollution entirely. This involves embracing the principle of ‘closing the loop’ and respecting natural cycles, which operate without generating waste. Effective systems should focus on designing out negative externalities such as soil/water/air/plastic pollution.

Circulate

The goal is to keep products and materials in continuous circulation at their highest value. This means ensuring that embedded technical or biological resources remain in use and maintain high productivity throughout their life cycle.

Regenerate

Drawing inspiration from natural processes, the circular economy operates in harmony with regenerative natural systems. It leaves room for nature and contributes to the generation of natural capital.

Through a synergy of these three principles, businesses can move towards the goal of highly productive and regenerative systems.

Intentional design serves as the central catalyst for this transformation, influencing the design of products and services and the redesign of operating systems. Embracing design paradigms such as cradleto-cradle5, or biomimicry inspired by nature6

Recent advances in digitalization, computational power, data analytics, and connectivity are enabling circular economy practices to be more cost-effective, leading to the adoption of circular economy principles by increasing numbers of companies.

4 Ellen MacArthur Foundation. (2015) ‘Growth within: A circular economy vision for a competitive Europe’. Available at: https://www. ellenmacarthurfoundation.org/growth-within-a-circulareconomy-vision-for-a-competitive-europe 5McDonough, W. and Braungart, M. (2002) Cradle to Cradle: Remaking the Way We Make Things. North Point Press. 6Benyus, J. M. (1997) Biomimicry: Innovation Inspired by Nature. Morrow.

A business model revolution

The power of circularity

In a truly circular economy, it is no longer enough for businesses to make a profit; in addition to their commercial activities, each organization aspires to make a positive difference in the world.

From an environmental perspective, circular business models have in common the power to decarbonize, dematerialize, and support the regeneration of damaged natural systems. But to drive take-up by businesses, they also need to be commercially viable and contribute to profitability and resilience.

This convergence of environmental and business impacts – which we define as ‘net impact’ – can lead to improved customer experience and loyalty, access to new value pools and price premiums, enhanced cost competitiveness, and overall supply chain resilience and risk reduction.

In crafting a circular business model, it is necessary to combine environmental ambitions (net zero, circularity principles, regenerative outcomes for nature) with business impact aspirations such as business development and resilience.

Organizations can start the strategic journey to circularity by exploring, developing, and scaling commercially viable, circular business models. This means seeking out ways of doing business that capture economic value by prioritizing resource productivity, circularity, and regenerative design.

What do circular business models look like?

It is important to recognize that the circular economy is more than a theoretical concept; it is a mindset and a business paradigm, in which human actions harmonize with the natural world’s rhythms.

Circular approaches have progressed far beyond the traditional ‘three Rs’ of Reduce, Reuse, Recycle. Businesses today need to consider a much fuller list of obligations and opportunities, including: Refuse (make Redundant), Rethink, Regenerate, Repair, Refurbish, Remanufacture, Repurpose, and Recover. This suite of R-strategies underpins the circular economy and enables value-creation systems to operate in closed loops.

As circular business models keep resources in continuous production cycles, they promote efficiency, effectiveness, and longevity while circulating resources at their highest value. The concept of waste is redefined, with items formerly perceived as trash treated as valuable. There is an emphasis on sustainable production on the supply side and responsible consumption on the demand side.

Businesses actively contribute to environmental restoration, enabled by design, making products that are no longer disposable but crafted for optimized resource use and with longevity in mind.

Their customers subscribe to services rather than stockpiling possessions.

Businesses stand to gain from increased economic value as a result of adopting a circular approach. By demonstrating a commitment to responsible business practices, organizations can build loyalty among both B2B and B2C customers.

This includes opportunities for market differentiation and enhanced reputation where businesses following a circular model stand out from their competitors and become more attractive to customers who prioritize sustainability in their purchasing decisions.

The use of secondary and decarbonized materials to foster innovation in product design can provide a competitive edge and access to new markets. It is also often possible to achieve a price premium due to enhanced services, such as rental and subscription models tailored to the needs of sustainabilityconscious customers.

In addition, sustainable businesses can build value by reducing the level of problematic dependencies on key resources and regional suppliers in their value chains. Under ‘business as usual’ conditions, such dependencies can pose significant economic risks.

The vision for a circular and regenerative economy:

• Eliminate waste and pollution

• Circulate products and materials at their highest value

• Regenerate nature

• Driven by design

• Inspired by the performance economy and absolute resource decoupling

• Powered by abundant clean energy

Circular business model archetypes

An overview of five core circular business archetypes shows how each one embodies different basic principles of circularity:

Optimize resource use

Capitalize regeneration and restoration

Valorize waste

Monetize extended product life

Build green operations or secondary and bio-based materials into a business model to generate a competitive advantage (cost, resilience, positioning).

Revitalize circular ecosystems through regenerative land use practices to enable a premium product, value creation through ecosystem services, or space productivity.

Capture economic value from waste and by-products so that technical and biological materials are restored and utilized at high value.

Offer repair and recommerce solutions or enable a reuse ecosystem to diversify revenue streams and strengthen customer loyalty over a long product life.

Servitize products Design and provide product-service bundles that embody circular material systems and focus on actual customer needs to deliver advanced performance.

For businesses seeking practical steps towards a circular strategy and operating system, making sense of these five archetypes requires finding a connection between them and recognizable business models. An effective way of doing this is to consider a range of basic business model patterns, each of which can be embedded within the archetypes.

By choosing from these business model patterns, it is possible to identify new and emerging circular opportunities and build business strategies that will deliver the greatest sustainable impact. The patterns transcend industries and have the power to align environmental impact with concrete business value. Strategically exploring these archetypes and patterns is a dynamic process that can generate diverse

opportunity scenarios. Depending on their specific needs and challenges, organizations may choose to make incremental adjustments to existing business models or embrace groundbreaking innovations. Some business models may appear to sit within a ‘business-as-usual’ scenario while others hold more obvious transformative potential.

Enabling the transformation

Moving mindsets toward a circular and regenerative future

As awareness of the climate crisis and biodiversity loss grows, companies are under pressure to move towards more sustainable ways of doing business. The burden of this responsibility can feel heavy but there are many significant business prospects to be grasped along the way. For businesses that can embrace transformation, the shift to a circular approach becomes not just a necessity but a window of opportunity.

Success in this transformative journey requires a willingness to break free from the constraints of the past and present. What worked for an organization in the past will not necessarily work in a sustainable future. It is necessary to embrace change, with adaptability and the courage to venture off the beaten track.

Many organizations sustain the existing linear economy by only innovating in an incremental manner to keep their ‘license to operate.’ While the actions they take – such as ensuring compliance with environmental regulations and adapting to changing societal conditions – may be valuable, they fall short of the revolutionary change that is needed to enable circular and regenerative innovation.

Circular business models, in contrast, represent a ‘license to innovate.’ To seize the opportunity this shift implies, businesses need to change the mindset that allows them to get away with poor transparency on compliance in the value chain and other problematic corporate behaviors. By making this change, businesses can access new transition opportunities

that act as a bridge between an aspirational future and the current business reality. Moving from a focus on compliance to a circular mindset requires multifaceted elements. Leaders need to actively articulate a shared vision and foster an environment of trust and mutual respect. This is particularly important in the context of circular business transformation, due to its inherent interdisciplinary nature. Regular communication, team-building exercises, and recognition of individual and collective accomplishments are key. Encouraging open dialogue and feedback helps address issues early, ensuring the team remains united and focused on its goals.

A circular mindset should be embraced across the organization, across all business units and functions, from strategy to sales as well as product design. Circular business transformations are enabled by design. The mindset and decisions at the design stage drive up to 80% of a product’s environmental impact over its lifetime.7

7European Parliament. (24 May 2023) ‘Circular economy: Definition, importance, and benefits’. European Parliament Directorate General for Communication. Available at: https://www.europarl.europa.eu/news/en/headlines/economy/20151201STO05603/circular-economydefinitionimportance-and-benefits.

Strategically embedding circularity

The transition from a linear to a circular value-creation system requires business models that radically optimize resource productivity on both the supply and demand sides. To find the right model for a business, it is important to link the search to the organization’s strategic north star, overall sustainability ambition, R&D priorities, and organizational development processes.

Leaders should broaden their strategic outlook by adopting a systems perspective. Embracing servicebased business models can shift the focus from product ownership to access, promoting resource efficiency and customer satisfaction. Building circular ecosystems and partnerships is crucial for achieving systemic change.

Leaders should collaborate with stakeholders across the value chain, including suppliers, customers, and even competitors, to create a more integrated and sustainable business environment.

Communicating the strategic priority of the circular business model is key to overcoming intraorganizational barriers and securing the required resources for the transition. It can be helpful to identify change agents and empower them to drive the innovation agenda for the highest net impact. This kind of strategic embeddedness can drive long-term engagement with the circular revolution after the initial enthusiasm for change has passed.

Measuring what matters

Targets and measurements are fundamental tools in the circular business toolkit. It is important to identify dedicated metrics that align with the desired business model pathway and future circular vision –and that capture concrete impact figures. Although there is currently no standard set of circular economy metrics, there are several emerging methodologies for calculating circular impact. Circulytics by the Ellen MacArthur Foundation, Circelligence by BCG (Boston Consulting Group), and the CTI tool by WBCSD (World Business Council for Sustainable Development) are all designed for use by businesses.

Circularity metrics are also relevant from a broader sustainability reporting perspective. Mandatory disclosure requirements, such as the EU Taxonomy and Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive, demand detailed disclosure, as do voluntary standards and frameworks, such as the Taskforce on ClimateRelated Financial Disclosures and the Taskforce on Nature-Related Financial Disclosures.

Of course, beyond external disclosure, corporate management steering and incentive schemes play a role in supporting new business model transformation. For example, it is often necessary to adapt existing incentive schemes, moving them away from a costoptimization focus and towards goals that align with the intended circular business model pathway.

Whichever metrics a business chooses to pursue its circular vision, it is important to provide transparent, measurable evidence to support it. This work needs to take place while the business navigates the short-term economic demands of the present. It requires imaginative thinking, innovative strategies, and creative problem-solving abilities to start doing things differently within today’s linear, profit-centered economic framework.

Providing resources for the journey

Moving from ambition to action requires an implementation plan that balances optimism about a new circular future with realism about the resources available and an ability to prioritize actions accordingly.

To scale circular concepts successfully, organizations must be prepared to provide the necessary resources to support new business models, even if they may not initially be as lucrative as the status quo. Internal partnerships are key to this process.

The good news is that business models that support the circular economy offer many opportunities to add sustainable value, including optimizing resource supply, capitalizing on regeneration and restoration, valorizing waste, monetizing extended product life, and servitizing products. The ‘bad’ news is that circular innovations may require longer timespans until the initial investments pay off and the business models are commercially successful. Yet, companies that are embarking on their transformation journey now will likely benefit from being first movers.

Effective resource planning is crucial for the success of circular business models. Leaders must ensure that team members have the capacity to contribute fully by reallocating resources, hiring additional talent, or leveraging external experts when necessary. Adequate support and resources are essential for successful implementation and long-term sustainability. It is advisable to calculate a business and impact case very early on. A stage-gate process can create freedom of resource use and help keep budgets under control.

Building the digital layer for circularity

Creating circular material flows will also require circular information flows. But many data flows still follow a linear logic, impeding circular systems. Building a robust digital layer should focus on capturing data both upstream and downstream across the supply chain. Such information (e.g., material composition, use-phase data, end of product life scenario) can be critical to building circular business models and unlocking value by improving reverse logistics, refurbishment operations, or seconduse applications. For company leaders who think proactively, the current developments in digital product passports and supply chain transparency will help build the data muscle.

Advanced data analytics and management solutions will also help to optimize and run many circular business strategies. Solutions may inform machine learning and simulation, reducing transaction costs, accelerating processes, and enabling network effects for greater efficiency. Remote monitoring or predictive and preventive maintenance through IoT connectivity and sensors reduces costs and waste. Digital advancements may be crucial for engaging consumers in circular practices, such as carpooling and peer-to-peer trading.

Collaborating for a circular future

While individual companies can contribute in many ways to building the circular economy, a comprehensive global agenda is necessary for its successful implementation. Just as no single company can single-handedly drive circularity in a sector, no individual country can drive circular transformation.

A holistic approach, which helps to ensure a comprehensive and strategic mapping of the collaborative landscape, requires thinking in two dimensions:

• Vertically, by considering which partners could contribute some of the missing capabilities for a company’s circular business model.

• Horizontally, by seeking links to relevant partners in the enabling ecosystem to accelerate the business transition.

Collective effort is essential to the reinvention of fragmented global supply and value chains in line with a shared circular vision and ambitious environmental targets. By collaborating with a network of partners, businesses have a better chance of effectively directing the necessary resource flows. This may include establishing new supplier partnerships for raw material recovery and the provision of recycled material. Logistics partnerships can help businesses manage the complex return flows of products and materials.

Stronger alignment between the circular economy and global agendas and frameworks, such as the UN Agenda 2030 and the Paris Climate Agreement, is also necessary. Current discussions around establishing a Global Circularity Protocol (like the Greenhouse Gas Protocol) also promise useful outcomes for businesses seeking to transform their practices.

The circular business revolution is a shared journey that has the power to bring about a more prosperous, resilient, and sustainable economic reality. From the initial decision to pursue circularity, through the choice of sustainable business models and beyond, that journey can lead to radical systemic shifts.

There is no place for complacency among those already on the path, as growing global challenges make it necessary to scale up and expedite the pace of collective action. This requires collaboration between leaders from diverse sectors, including business and government, to prompt the necessary societal shifts towards a circular and sustainable future.

Finding support for your transformation challenges

The Circular Business Revolution, published by Pearson Education in June 2024, examines the challenges of transitioning to a circular economy in more depth, featuring examples of successful initiatives as well as exercises for organizations to use in their transformation journey.

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