Circling Toward Net Zero

Companies are introducing circularity to their supply chains to mitigate human impact on the global climate.

While powering offices with renewable energy, reducing paperwork and replacing gas-guzzling vehicles with electric ones are laudable efforts in helping corporations reduce their carbon footprint, the most important thing companies can do to help fight climate change is introduce circularity into their supply chains.

A circular economy aims to decouple consumption from growth; and supply chain choices are central to achieving it, according to Sarah Watt, a vice president at Gartner focusing on sustainable supply chain.

“These actions range from engagement in materials selection in product design, orchestration of reverse raw material flows and collaboration with ecosystem partners—from product-life extension to recycling,” she explains. “Circularity is growing in importance to businesses. The circular economy enables us to meet customer needs with second-life products at different price points; alternatively, we have seen a shift toward as a service business models. The businesses gain financial and stakeholder benefits from adopting circular economy practices.”

Taking such an approach can hedge against price volatility as the price of raw materials continues to rise in an inflationary environment.

“For companies just starting out, there are legitimate concerns about cannibalizing existing market share,” says Watt. “The success of this concept lies in execution. Second-life products are usually sold into different markets or targeted at different types of customers. Success also relies on a shift in sales incentives. Sales professionals incentivized on the value of a transaction with a customer will have no incentives to sell circular products, usually at a lower price point. Fundamentally, there is a business opportunity.”

Stakeholders often expect more from organizations than purely financial returns, she adds. “Our research shows that customers, investors and regulators are creating pressure on companies to act on or invest in sustainability initiatives. Enterprises need to communicate effectively how their circular economy strategies meet growing stakeholder expectations.”

Financial Tools

Nicolas Bouvier, head of sustainability for Transaction Banking for Europe, the Middle East and Africa at BNP Paribas, notes that corporates, in partnership with banks, can play on several levers to drive sustainability along their physical supply chain—be it carbon, waste or resource use. “More and more corporates have announced ambitious Scope 3 emission-reduction targets [addressing indirect emissions that occur upstream or downstream in the company’s value chain]. To achieve them, they need to onboard their ecosystem—suppliers and customers—on their sustainability transformation journey. This means not only establishing common goals but also providing solutions to finance the necessary investments.”

When implementing a supplier-engagement strategy, it is essential to meet suppliers where they are, assess their capabilities, help to build their competencies and then reinforce the desired outcomes by use of incentives and disincentives, advises Watt. “These can be either financial or non-financial. For example, incentives range from longer contracts and improved payment terms to offering suppliers recognition through awards programs. Disincentives range from limiting business opportunities to increased oversight. It is clear that supplier sustainability objectives need to be integrated into procurement and financial processes.”

Accelerating payments to suppliers (shorter payment terms) or allowing customers to delay payments (payment-term extensions) are efficient ways to support the sustainable financing needs of commercial partners, according to Bouvier. “This can be financed by banks through trade/supply finance techniques, so that corporates do not have to immobilize their funds. On that note, and beyond the sustainability impact, banks may have some direct interest in supporting the circular economy, as it should, for instance, reduce credit risk,” Bouvier says. “An analysis by Bocconi University of 200 European listed companies suggests that the circularity of a company reduces its probability of default. In today’s environment, sourcing disruptions in the physical supply chains and volatility in raw material prices should not contradict this paradigm.”

Bouvier says large financial institutions can finance the necessary investments to scale up circular supply chains through various channels, including bonds, sustainability-linked loans, leasing solutions and real estate. “It allows the corporate and the financial institution to have a broad and strategic road map, which can go from financing [capital and operating expenditures] for the corporate and its ecosystem to also helping to manage the life cycle of some equipment, such as IT or industrial vehicles. Financial institutions,” Bouvier continues, “will need to adapt some of their products and solutions to support the circular economy because it will trigger more renting and service rather than a product sale.”

Understanding and Extending Lifecycles

Signify (formerly Philips Lighting) follows product-as-a-service models that allow it to maintain control of products throughout their lifespan. The Dutch company has bold plans to double circular revenues to 32% by 2025, making it an integral part of its strategy.

“To achieve this doubling commitment, we have set internal targets and enhanced our sustainable design process with circular-design rules; and we will accelerate the rollout of our circular products, systems and services such as serviceable and circular economy-ready luminaires–including 3D-printed luminaires–circular components, intelligent systems and circular services,” says Maurice Loosschilder, head of Sustainability Strategy and Reporting at Signify. “For 3D printing, for example, we are expanding the number of locations where we print and further diversifying the products that we can offer, for both professionals and consumers.”

Other companies that have introduced circularity into their supply chains include Intel, whose reverse logistics breathes new life into e-waste—resulting in less than 1% of materials returned to Intel ending up in a landfill. Timberland and Nike, meanwhile, refurbish returned sneakers to sell at discounted prices.

There is both risk and opportunity in being the first mover, requiring a mindset shift and a leveraging of orchestration and partnership across the value chain, according to Gartner’s Watt. Being too late, however, brings stakeholder and regulatory concerns.

“The transition to a circular economy will challenge traditional working practices,” she says. “Essentially, we are building an ecosystem of materials. A core characteristic of a thriving ecosystem is communication, insight and adaptability—this is the role technology plays in enabling a circular economy.”

Getting reliable and comparable material data and developing robust methods to compare the impact of different material and design choices in life cycle assessments is, according to Loosschilder, the greatest obstacle for companies considering a circular supply chain. “Any communication needs to be backed up with independently reviewed data,” he says.

Furthermore, Watt says, stakeholders are increasingly demanding with respect to ESG claims. “Companies need to provide clear, concise messaging to avoid greenwashing risks,” she adds.

Signify encourages its product-design and purchasing community to reduce packaging’s environmental impact by adhering to defined principles. “[They include] requiring our suppliers to conduct a risk assessment to ensure compliance with our responsible sourcing requirements and doing a full life cycle assessment on the environmental impact of alternative materials,” says Loosschilder.

Traceability is also necessary to secure financing. “Operational simplicity is key to ensuring that these financing structures are scalable and that a large population of suppliers will have access to this alternative and competitive source of financing. BNP Paribas programs are typically run through our proprietary platform, which supports this objective,” says Paribas’ Bouvier.

The bank can then integrate ESG data from the physical supply chain into the platform it uses for financing. BNP Paribas has incorporated scoring data provided by extrafinancial data providers, such as EcoVadis.

“In the future, one can anticipate that technologies such as blockchain could integrate the whole ecosystem [corporates, banks, insurance, logistics, suppliers and customers for instance] and enhance traceability along the supply chain,” he adds.

Circularity could be a catalyst for supply chain sustainability, and it enables the transparency and financial incentives required for companies to edge closer to net zero. While not easy to achieve, a net-zero supply chain will benefit both bottom lines and worldwide health.