With our pull on the planet’s resources, are we bold enough to embrace a circular economy? The potential benefits are not just material, argues Travis Elsum
ldous Huxley’s novel Brave New World depicts a future in which citizens are conditioned to consume in order to serve the economy. Like other successful dystopian authors, Huxley found a central anxiety that resonated with society and extrapolated it to illustrate an extreme but plausible alternative world.
While some aspects of the novel still seem far-fetched today, others ring true. For example, Huxley’s citizens are taught to reject rather than repair – “ending is better than mending” – and to de-emphasise quality and durability – “the more stitches, the less riches”. These mantras could easily describe our current throwaway habits.
Since Huxley wrote his book, we have seen a significant increase in material wealth – and a marked decrease in the planet’s natural wealth, to the extent to which we face a raft of serious environmental issues.
Reaching our limits
In 2009, a team of scientists led by Swedish professor Johan Rockström identified nine core Earth system processes in the paper Planetary Boundaries:
Exploring the Safe Operating Space for Humanity (see diagram overleaf). For each one, they proposed quantitative planetary boundaries that, if crossed, could lead to irreversible environmental change. At least three – climate change, biodiversity loss and alteration to the global nitrogen cycle – had already been breached at that time, and some scientists have recently argued that the boundaries relating to pollution and freshwater use have also been exceeded.
These environmental challenges arguably stem from a single cause: we are demanding too much from the planet. The Global Footprint Network estimates that humanity’s demand on nature now exceeds, by no less than 75%, Earth’s annual biological capacity to regenerate.
Sir Ian Boyd, former chief scientific adviser at Defra, has cautioned that cutting emissions will not be enough to halt ecological decline – we must also consume less.
In an article for The Conversation, he argued that “if we truly want to reduce the damaging waste produced by our global economy, then we need to reduce the amount of materials we put into it”.
During the past 50 years, the extraction of materials such as minerals, ores, fossil fuels and biomass has accelerated, accompanied by increased waste and emissions. In 1972, humanity extracted 29 gigatonnes of materials per year (Gt/yr); at the turn of the 21st century, this had increased to 55Gt/yr, and by 2021 it had reached 101Gt/yr. The Circle Economy’s Circularity Gap Report 2022 found that less than 9% of this material goes back into the economy.
The Organisation for Economic Co-operation and Development (OECD) projects that, by 2060, in the absence of new policies, the use of global materials will increase to 167Gt/yr. As demand grows, the overshoot of planetary boundaries is expected to worsen, increasing the likelihood that natural constraints will start to bite, causing potentially devastating effects to both the natural world and the economy.
Moving back to within planetary boundaries will require a major shift in the way we produce and consume goods, and transitioning to a circular economy would be a step in the right direction.
A rounded view
The term ‘circular’ has negative connotations for many actuaries – we loathe circular references and criticise circular logic. However, in terms of resource use, it is a positive aspiration that takes a cue from the natural world, where little is wasted. Circular economies eschew the linear ‘take-make-use-waste’ approach in favour of a model in which waste and pollution are eliminated, products are designed to last longer and be repaired or reused, and natural systems are regenerated.
A circular economy would alleviate the demand on our planet, so it is a key measure for addressing multiple environmental issues. The Circularity Gap Report 2022 outlined a list of measures that could double the Circularity Metric (the proportion of the global economy defined as circular), which would reduce global material use and extraction by 28% and cut greenhouse gas emissions by 39%.
A circular economy could also generate positive economic and social benefits. A study by the Club of Rome, The Circular Economy and Benefits for Society, found that a circular economy would increase employment and improve trade balances in the five European countries it examined. Transitioning to this target model is likely to cause significant disruption and require large sums of investment to re-engineer manufacturing processes. There will be winners and losers, opportunities and risks. However, it is within our ability to create affordable, reliable products that are consumed responsibly.
Stepchanges in manufacturing
The first move is to eliminate planned obsolescence, a practice in which products are designed to have a limited operating life to enhance future sales. It is thought to date back to the 1920s, when a group of lightbulb makers (the Phoebus cartel) colluded to limit
the lifetime of their products with enhanced future sales in mind. Many manufacturers still limit the lifetime of their products and make it difficult or expensive to repair them.
Planned obsolescence is a suboptimal outcome for the environment and for consumers, who derive minimal utility from replacing a device or appliance. However, forcing manufacturers to change will not be easy and will require pressure from consumers and investors, as well as regulations and legislation, such as ‘right to repair’ laws.
Traditional manufacturers’ business models will need to place greater focus on new revenue streams from repairs, spare parts and refurbished products. Some businesses are already embracing circular models and using them as a selling point – Dutch electronics manufacturer Fairphone sells modular smartphones that make it easier for owners to repair and customise their devices.
Newer industries can embed circularity from the outset: most battery gigafactories, for example, have been designed to recover raw materials from old batteries. Swedish battery maker Northvolt expects that half of its raw materials will come from old batteries by 2030. Aside from being more sustainable, this is likely to reduce long-term costs as virgin battery materials become increasingly scarce and expensive.
The circular economy will also foster innovation and new business. A growing number of companies build themselves on the concept of circularity. Vinted is an online platform for buying and selling second-hand clothes and accessories; CeX applies the same concept to technology; Back Market refurbishes and sells old devices. In contrast, business models such as fast fashion are inherently incompatible with circularity and must adapt or fail.
Many consumers are already embracing circular models, but others must shift their expectations. Old adages around quality over quantity, and the forgotten habit of repairing rather than replacing, will have new relevance. Direct ownership may fall in favour of subscription and rental models, and nudges or price adjustments may be required to level the playing field and ensure the cost of externalities are reflected.
As with any major transition, moving to a circular economy is likely to cause significant economic and financial disruption – and actuaries are well positioned to help financial institutions navigate these risks and seize opportunities.
Transition risks will arise from a move to a circular economy. For example, companies may be adversely affected by new laws and regulations and changing consumer demand. The companies affected most by the transition will not necessarily be those affected by climate transition risks, although there may be overlap.
There are also the physical risks associated with the continued growth in material extraction, which could lead to further biodiversity loss, ecosystem collapse, resource scarcity and pollution. Again, while the concept is similar to climate change, the impacts and the ways they are spread across sectors are likely to differ.
Actuaries can also build on existing climate-scenario modelling to explore and quantify a wider range of physical effects and the transition to a circular economy.
The Ellen MacArthur Foundation report Financing the Circular Economy: Capturing the Opportunity argues that a circular-economy transition represents a multi-trillion-dollar economic opportunity geared towards long-term value creation. It highlights signs of recent growth in financing activity, as well as in the investible universe of aligned assets.
Life insurers and asset managers can engage with investee companies to transition to circular business models, as many are already doing in terms of climate change and other environmental, social and governance (ESG) issues. Another white paper issued by the foundation, in partnership with Bocconi University in Milan, The Circular Economy as a De-risking Strategy and Driver of Superior Risk-adjusted Returns, suggests that investing in companies that are better aligned with circular principles could enhance risk-adjusted long-term returns. There are also opportunities to launch new or enhanced ESG products that meet customer demand for wider criteria.
Life insurers should embed circular economy principles into their direct investments. For example, they can seek to refurbish commercial properties as an alternative to rebuilding, increase the use of recycled materials in construction, and reduce waste.
General insurers, meanwhile, are likely to benefit from demand for new types of insurance cover as production and consumption patterns change. There is also an opportunity to tweak traditional insurance policies and practice. For example, contents insurance could replace items with professionally refurbished ones instead of new, and insurers could make greater use of second-hand car parts. General insurers can also drive the transition via exclusions against unsustainable practices, such as new mines in ecologically sensitive areas.
All in all, there is reason for optimism – Huxley himself might have been pleased to see a transition to this brave new world.
Travis Elsum is head of group capital aggregation at Legal & General