How companies are incorporating the circular economy concept into their business models

In the first instalment of this series, I explored the potential of the circular economy and considered some of the complexities of measuring corporate performance in this area.

Now, I want to share what I’ve learned about how companies are embedding circular economy ideas into their day-to-day operations, and what it potentially means for business models and industry transition. The case studies below all draw on my meetings with the companies in question during the first quarter of 2023.

Equipment rental

Asset rental is just one example of prolonging the life of products by increasing utilisation and reducing both production and consumption of new goods. The rental-oriented model continues to bear fruit for Ashtead*, the second-largest equipment rental company in the US, where its General Tool and Specialty divisions continue to see higher market penetration rates.

Growing customer appreciation of cost and environmental benefits is driving double-digit revenue growth, with the company owning the latest, most environmentally friendly fleet.

As it advances its cluster branch network, management anticipate increased demand for rental assets fuelled by climate considerations for mega projects under the Inflation Reduction Act.  

Product as a service

The pulp and paper sector provides a good example of plans to shift a company’s products/services. Circularity is increasingly creating areas of value creation through new business models and revenue streams. DS Smith* is exploring potential commercial avenues of the product as a service (PAAS) model, which can generate new recurring revenues via service-oriented offerings.

As a fibre-based packaging business, the company is not only pursuing a closed-loop model on cardboard recycling, but improving recovery rates of valuable resources. Having formed its circular design principles, including optimised use and collection, the company has committed £100 million as part of an R&D package.

Extending equipment lifespans

Durability and efficiency can be viewed through various lenses within process industries, with many relevant environmental dimensions for metals and mining companies. Equipment aftermarket focused business Weir Group* saw record orders for its spares and expendable parts in 2022 as customers attempted to meet market demand for resources, while looking to reduce emissions intensity of operations.

With greenfield projects slow to convert, the company continues to benefit from high levels of brownfield activity, where mineral companies are incentivised to maximise throughput and accelerate production from existing assets. This increased wear of processing equipment ensures that servicing and maintenance in regions of depleting ore grades remains integral for the industry.

Sustainability

In construction, Genuit Group* continues to demonstrate leadership with its commitment to recycled polymers, which represent around 60% of its product mix. As the housing and repair, maintenance and improvement markets respond actively to incoming industry legislation – seeking more ‘green’ solutions – the company has aligned both capital investment and its strategy by focusing on technology that improves the sustainability of its products.

Its recycling capability allows it to convert waste into products with a design life of over 100 years. The move towards more energy-efficient solutions is fulfilling essential contractor specification requirements to significantly lower carbon impact and move away from legacy products.

Waste reduction

In the food production supply chain, halving waste is now paramount.

Poultry and pork producer Cranswick* surpassed its goal several years ahead of plan and is now well placed to fully eliminate all food loss before 2030. The combination of better technologies on production lines, increasing the level of vertically integrated farms, and the acquisition of Grove Pet Foods (dried kibbled product) will help support its new target and allow the business to become fully circular.  

Reusing input materials

In the area of steel and industrial process refractories, RHI Magnesita earlier this year achieved its circularity target three years ahead of plan. Following a joint venture partnership, the company surpassed 10% use of secondary raw material, with a revised higher target to be unveiled later this year.

Going forward, approximately 50,000 tonnes of used refractories per year will be processed for reuse. This has a dual benefit of saving on raw material and a resulting reduction in CO2 emissions per year. Progress on circular activities is not only key for its own decarbonisation pathway, but offers customers security of supply and forms a new revenue opportunity under its sustainable solutions proposition.

Reducing consumer goods waste

Within textiles and fashion, innovations such as fibre-to-fibre recycling and closed-loop polyester technologies are being explored, but these require serious investment to scale and can’t be driven by small indie brands alone.

For now, commitments towards increased usage of more responsible materials and in-store take-back recycling schemes for goods that involve refurbishment and reselling, such as those provided by homewares retailer Dunelm*, remain viable areas to drive product circularity and influence customer purchasing behaviour.  

Going fully circular

The potential of the circular economy is clear, but as outlined in my previous blog, it does represent an investment dilemma. Today, this is due to big gaps in data, improvements required in standardised disclosures and the need for more forward-looking analysis over a longer time horizon.

Encouragingly, steps are being taken to address this from both corporates and the regulator. For advancements to be made, cultural and business model shifts are required. Investors also have an important role to play in supporting this much-needed transition.  

However, we remain optimistic that circularity will become an increased focus for investors, and that scaling of technologies and supportive government policies will lead to increased adoption and higher penetration rates of circular principles.

This, in our view, is when the real financial benefits for companies and all stakeholders will materialise.

All company-specific figures sourced from in-person meetings during Q1 2023. Figures are subject to change and should not be relied upon.

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.