The circular economy: legal requirements and opportunities for value creation

In the face of increasing environmental problems and finite natural resources, companies around the world are rethinking their traditional operating models. The linear "take, make, dispose" approach that has dominated the industrial landscape for centuries is increasingly being recognized as unsustainable. This is where the circular economy comes in - a transformative concept that promises to redefine the way businesses operate, innovate and grow.
In a circular economy, systems and products are designed to eliminate the concept of waste by allowing all materials to be recovered and reused at the highest possible value at all times. This paradigm shift not only addresses pressing environmental issues, but also offers significant economic opportunities. For businesses, the successful adoption of circular economy practices can lead to significant cost savings, new revenue streams and competitive advantage. This blog post explores the challenges and opportunities associated with the circular economy, focusing on regulatory compliance, business opportunities and measuring circular economy performance.

**Declining global circular economy levels require urgent transitions to the circular economy

Despite an increase in discussions, debates and articles on the circular economy over the last five years, the global circular economy is in decline. The Circularity Gap Report shows that the share of secondary raw materials consumed by the global economy has fallen from 9.1% in 2018 to 7.2% in 2023, a decrease of 21%. At the same time, material consumption continues to rise: In the last six years, humanity has consumed more than half a trillion tons of material - almost as much as in the entire 20th century. This discrepancy shows that current global efforts towards a circular economy cannot keep pace with the general increase in material consumption. This not only jeopardizes the stability of global ecosystems, but also hinders efforts to achieve the emission reduction targets set out in the Paris Agreement, as 45% of global emissions come from industrial, agricultural and land use activities that cannot be tackled by the energy transition alone. Therefore, improving the circular economy is crucial to tackling numerous global sustainability challenges [1].

Increasing legal requirements for the circular economy

In 2020, the European Commission adopted the Circular Economy Action Plan (CEAP), initiating the introduction of 54 legislative and voluntary measures to advance the circular economy across Europe. These measures cover a range of topics, including packaging and the use of critical raw materials. Figure 1 shows some of the recent legislation adopted under the CEAP. To ensure compliance, companies need to understand these legal obligations and make appropriate changes to their business practices.

In addition, EU reporting requirements set out in the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy require companies to report specifically on the circular economy. The EU Taxonomy requires reporting on certain circular economy measures implemented in specific economic activities, while the CSRD requires companies to disclose their circular economy policies, measures and targets if this is a material issue for the company's business model or value chain. In addition, the CSRD requires companies to report on their material inflows and outflows at company level. While measuring material outflows (waste) is a common KPI in current business operations, tracking material inflows (type, weight, etc.) is a significant challenge for many companies.

Realizing business opportunities through circular economy measures

While companies must comply with the legal requirements set by European and national authorities, they should also focus on the business opportunities that arise from a more circular economy. Practices such as extending product life, reusing and recovering materials offer significant benefits, including reduced reliance on resources, improved resource efficiency and revenue growth through new business opportunities. A comprehensive study by McKinsey & Company and the Ellen MacArthur Foundation found that a comprehensive implementation of circular economy measures in various industries could increase Europe's resource productivity by 3 percent by 2030 and lead to annual cost savings of €600 billion [2]. Similarly, a survey conducted by Bain & Company found that executives expect the share of revenue from the circular economy to increase by 20% between 2021 and 2030 [3].
To realize these benefits, companies need to rethink their use of materials and strategically integrate circularity into their business models. While integrating circular economy principles into existing operations can bring benefits through reduced material consumption, the true value potential lies in exploring new business models. Such adaptations to business models can lead to significant cost reductions, reduced reliance on resources and the development of circular economy-oriented business models that open up new revenue streams. Examples of such adaptations include as-a-service business models, active material recovery services and marketplaces for used products. Figure 2 shows the circular economy principles set out in the 9R framework and links them to options for transforming business models.

Circular performance measurement

To successfully manage and track a company's circularity performance, organizations need to establish appropriate performance measurement mechanisms at the enterprise level. This enables the development of circularity targets with aligned KPIs. In addition, effective circularity measurement mechanisms are critical to meeting the reporting obligations set out in the CSRD.
Measuring circularity can be done at different levels and include metrics such as material circularity indicators, greenhouse gas footprint, resource efficiency and waste reduction. Numerous organizations, including the Ellen MacArthur Foundation, the World Business Council for Sustainable Development (WBCSD) and Circle Economy, have developed a variety of indicators. Companies need to select the most appropriate indicators from these frameworks for their specific circular economy management and reporting requirements. This is currently a major challenge for many companies as they are still at the beginning of their circular economy journey.