How to achieve sustainable growth in a way that benefits all, and how to capture the economic value lost in our extractive linear model while reducing waste? In the first part of a series dedicated to the future of mobility and the role of the banking sector in shaping it, we explore the transformative potential of the circular economy, which aims at decoupling economic growth from the consumption of finite raw materials and resources. As part of a discussion on the opportunities of this model presented by HSBC and held at this year’s Movin’ On world summit on sustainable mobility in Montreal, Dana Krechowicz, Senior Sustainable Finance Manager for HSBC Bank Canada, explains the advantages of circular business models and the challenges ahead.
Closing the straight line
What we have now is a “linear” economy, says Krechowicz – we make, consume, dispose. But global trends such as increasing population, the growth of the middle class, resource constraints and climate change are expected to bring a very different operating environment for businesses, and they need to prepare to adapt if they want to remain successful. “At its core, the circular economy is about closing this straight line and making it a loop to minimize waste in the economic system and use resources more efficiently,” she explains. If adopted on a widespread scale, circular business models have the potential to modify the pattern of material flows by reducing the demand for virgin materials and diverting waste, which is polluting our lands, rivers and oceans. They also benefit from recent IT advancements, enabling more penetration and sophistication across all sectors. It’s a market that’s expected to generate between 1% and 4% of growth over the next decade.
Avoiding waste by shifting business models
Waste has become a huge problem in our societies, explains Krechowicz, and we observe increasing pressure on traditional business models: companies may have to start paying for the waste and pollution they produce and bear more responsibility for negative externalities; scarcer or more expensive virgin materials mean higher supply chain risk; and higher awareness of the environmental impact of consumption leads to changing consumer preferences.
The circular economy redefines our economic model in three important ways. First, there is a greater focus on higher quality products, even if that means fewer sales. Second, there’s a shift from product ownership to product as a service, allowing access to products even if the consumer doesn’t own them. Companies are leasing products or charging per use while retaining ownership, and while this has been around for years, it will certainly be expanded to new categories of things that we would have never thought to lease. In the mobility sector, cars are such an expensive asset to own and maintain that many people are embracing these cheaper alternatives as they become more widely available. Automotive brands are beginning to evolve from selling vehicles to providing mobility on demand services for specific segments and usages – a true motto for many companies represented at this year’s Movin’ On summit. The rise in sharing platforms is also another indicator, says Krechowicz, with IT-enabled monetizing of underutilized assets through co-ownership or co-access – think of car, bike or scooter sharing options now available in many major cities worldwide.
The third aspect of circularity is greater connection between actors in the supply chain, transforming relationships so they are less transactional. By producing secondary raw materials from waste, there’s increased resource recovery and recycling. “There’s more of a demand from consumers to focus on value creation in second-hand markets – for instance, the growth of the second-hand garment market is higher than the first-hand market,” notes Krechowicz. Pressure from consumers, together with regulations, are transforming other parts of the economy as well, including the mobility sector. Under the End of Life Vehicles Directive of the European Union, carmakers are now required to recover or recycle 95% of the materials in the cars they make. It’s about extending a product’s lifespan in the design process and recovering the embedded value out of disposed products.
Collaboration is key
Circular business models will create more opportunities for businesses to interact with their customers throughout a product’s lifecycle, believes Krechowicz. By extending the useful life of products, companies will prevent them from becoming waste through a stronger emphasis on care, repair, refurbishment and recycling. “Every company can incorporate the principles that underwrite this new economy at some level,” she says. “With so much waste built into the current system, there’s always room for resource optimization.” We already see companies that have completely adapted their business models – from examining their supply chain to redesigning products. If these principles sound simple in theory, they entail fundamentally rethinking how we produce and consume goods, concludes Krechowicz. But with strong drivers like regulatory incentives and increased consumer demand for sustainable alternatives, it’s only a matter of working together to find new ways to innovate.
In the second part of this series, we will explore current trends and solutions in sustainable mobility around the world, while the third part examines the financial implications of these major shifts in mobility for the banking sector.