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The circular economy: Moving from theory to practice McKinsey Center for Business and Environment Special edition, October 2016 The circular economy: Editorial Board: McKinsey & Company Moving from theory to practice Shannon Bouton, Anne-Titia Practice Publications is written by consultants Bové, Eric Hannon, Clarisse Editor in Chief: from across sectors and Magnin-Mallez, Matt Rogers, Lucia Rahilly geographies, with expertise Steven Swartz, Helga in sustainability and Vanthournout Executive Editors: resource productivity. Michael T. Borruso, Editors: Cait Murphy, Allan Gold, Bill Javetski, To send comments or Josh Rosenfield Mark Staples request copies, email us: [email protected]. Art Direction and Design: Copyright © 2016 McKinsey & Leff Communications Company. All rights reserved. Managing Editors: This publication is not Michael T. Borruso, Venetia intended to be used as Simcock the basis for trading in the shares of any company or Editorial Production: for undertaking any other Runa Arora , Elizabeth complex or significant Brown, Heather Byer, Roger financial transaction without Draper, Torea Frey, Heather consulting appropriate Hanselman, Gwyn Herbein, professional advisers. Katya Petriwsky, John C. Sanchez, Dana Sand, No part of this publication may Sneha Vats, Belinda Yu be copied or redistributed in any form without the prior Cover Illustration: written consent of McKinsey & Richard Johnson Company. Table of contents 2 4 11 Introduction Finding growth within: Ahead of the curve: Innovative A new framework for Europe models for waste management How the circular economy in emerging markets could promote clean growth. How countries can turn their garbage into wealth. 17 22 26 A new plastics economy: Developing products for a Toward a circular economy From linear value chain to circular economy in food circular system Cross-functional collaboration Danone CEO Emmanuel Faber Remaking the plastics economy and customer-focused design shares how his company will require innovation in recycling thinking can help companies manages resources with an eye and reuse as well as in design reap more value from the energy on sustainability. and chemistry. and resources they use. 31 Style that’s sustainable: A new fast-fashion formula Stylish, affordable clothing has been a hit with shoppers. Now companies are trying to reduce its social and environmental costs. Introduction Eric Hannon, Clarisse Magnin-Mallez, and Helga Vanthournout We are pleased to present this special collection of high-grade stocks of key commodities dwindle. articles on the circular economy. Its subtitle, Moving People and companies are increasingly willing to from theory to practice, refers to the transition pay as needed to use durable goods, rather than to taking place as companies in many sectors use buy them outright. With digital technologies and circular-economy concepts to capture more value novel designs, items can be tracked and maintained from resources and to provide customers with better efficiently, which makes it easier to extend their experiences. The term “paradigm shift” is overused, useful lives. And governments are imposing new but this is one instance where it applies. restrictions on pollution and waste that apply along entire product life cycles. Since the Industrial Revolution, companies and consumers have largely adhered to a linear model These developments mean that it is increasingly of value creation that begins with extraction and advantageous to redeploy resources over and over, concludes with end-of-life disposal. Resources often for the same or comparable purposes. This are acquired, processed using energy and labor, is the organizing principle of circular economies, and sold as goods—with the expectation that and the benefits that come from following it can be customers will discard those goods and buy more. substantial. According to the research documented Contemporary trends, however, have exposed the in “Finding growth within: A new framework for wastefulness of such take–make–dispose systems. Europe,” a circular economy could generate a net The same trends have also made it practical to economic gain of €1.8 trillion per year by 2030. conserve assets and materials so maximum value The building sector, for example, could halve can be derived from them. construction costs with industrial and modular processes. Car sharing, autonomous driving, electric Consider that resource prices have become more vehicles, and better materials could lower the cost of volatile and are expected to rise over the long term, driving by 75 percent. as consumer demand increases and easy-to-access, 2 The circular economy: Moving from theory to practice Special edition, October 2016 The benefits are just as significant for less-developed Such opportunities are top of mind for Danone economies. “Ahead of the curve: Innovative models CEO Emmanuel Faber. In an interview, “Toward for waste management in emerging markets” a circular economy in food,” he describes how describes effective ways of encouraging the conver- his company looks at every stage in the life of its sion of waste materials into valuable inputs. products to overcome, and help solve, growing These include aggregating waste flows into large resource scarcity. “To embed the principles of the volumes that businesses can work with and circular economy in our operations,” he says, “we establishing incentives to lessen waste creation. have started managing our three key resources— South Africa increased collection rates for water, milk, and plastic—as cycles rather than as scrap tires to 70 percent, from 3 percent, in just conventional linear supply chains.” 18 months, leading to the creation of small and midsize processing and recycling companies. The Danone’s rethinking of its operations is one example country also aims to divert a majority of scrap tires of how business-model innovation, based on circular into high-value material-recovery processes by 2020. principles, helps companies get ahead. More examples can be found among apparel companies, Similar possibilities inform our thinking about which are starting to reckon with the resource the global plastics economy, which produces high- demands and waste associated with the business performance materials for a wide assortment of of fast fashion. “Style that’s sustainable: A new applications but relies heavily on nonrenewable fast-fashion formula” outlines how some clothing feedstocks and consigns too much plastic to the makers are getting ahead of consumer concerns by trash. “A new plastics economy: From linear value setting new design standards, improving materials chain to circular system” points to innovations and and recycling technologies, engaging suppliers, and practices that can lower the industry’s need for educating shoppers. virgin inputs and boost plastics reuse and recycling. Industry-wide standards for packaging formats and As other companies follow these pioneers in the materials, for example, could make it economical transition from circular-economy theory to practice, to recycle more plastic by reducing its variety and they are certain to encounter obstacles. This is increasing the volume of each plastic type. natural: breaking out of old models and letting go of time-tested approaches is challenging. But the “Developing products for a circular economy” offers lessons of the circular economy are accumulating— another point of view on how to eliminate waste and they show that the gains from making the and create value: that of designers and engineers. It transition outweigh the effort and the risk. With isn’t easy to create products that are lasting, simple those benefits in mind, we invite you to turn the page to reuse or recycle, and profitable. But when design and learn more about how to reap the rewards of teams get together with other company departments going circular. and use design thinking, they can conjure up resource-efficient ways of delighting customers. Eric Hannon is a partner in McKinsey’s Frankfurt office, Clarisse Magnin-Mallez is a senior partner in the Paris Greater collaboration allowed one medical-equipment office, andHelga Vanthournout is a senior expert in the company to figure out that collecting and refurbishing Geneva office. used devices would allow it to meet the needs of underserved customers in emerging markets. Copyright © 2016 McKinsey & Company. All rights reserved. Introduction 3 Finding growth within: A new framework for Europe © Maskot/Getty Images How the circular economy could promote clean growth. Morten Rossé, Martin Stuchtey, and Helga Vanthournout 4 How can Europe increase its prosperity, while in association with the Deutsche Post Foundation. reducing its dependence on primary materials This 98-page document considered what a circular and energy? European economy could look like and compared its potential impact with the current development The circular economy is part of the answer to that path. The report found that in the aggregate, the question. opportunities associated with a circular scenario could be large and that resource productivity Instead of today’s take–make–dispose linear model remains hugely underexploited as a source of of production, the circular economy is restorative wealth, competitiveness, and renewal. by design—using and reusing natural capital as efficiently as possible and finding value throughout The analysis applied circular-economy principles the life cycles of finished products. Three major and business actions to three sectors—mobility,
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