Closing the loop: Rethinking the supply chain

There has been much discussion about what individuals can do to reuse and recycle, yet individuals can only do so much. Most products are designed to only last for a limited time and it is often cheaper to buy a new product than to repair the original.

Moreover, most recycling is actually downcycling, as the process leads to inferior products which are eventually incinerated or landfilled. Thus, a huge amount of responsibility lies in the hands of businesses to redesign their products with better reuse and recovery value in mind.

In their 2002 book Cradle to Cradle, Michael Braungart and William McDonough present a biomimetic approach to product design, where materials become nutrients designed for continuous recovery and reutilisation just like nature’s biologic metabolism. This is not just about saving energy or reducing consumption - instead under this new approach waste does not exist, and the output of one system becomes the input for another system. This is one of the ideas behind the circular economy which - as defined by the Ellen MacArthur Foundation - is an economic system that is “restorative or regenerative by intention and design”.

The circular economy focuses on the efficient use of materials by creating products that are designed to be maintained and reused until they are ultimately degraded, at which point they are turned into new goods. This is also known as a closed-loop system. In contrast, much of today’s economic activity can be characterised as a linear or opened system: we extract materials, manufacture goods, use them once and throw them away.

A circular economy is very dependent upon the effectiveness of return supply chains. Whilst companies have focused for years on optimising their forward supply chains for product delivery, the return supply chains for product recovery are severely lagging behind. Pursuing a circular economy means creating an infrastructure that supports “reverse logistics” to allow for products to be recovered from end-users and dismantled into components which can then be reintegrated into a new manufacturing and supply chain. Bunzl, a distribution, and outsourcing company acting as a ‘one-stop-shop’ for business consumables, and Capgemini, a consultancy specialising in technology services, are two of the companies in the Evenlode portfolios exploring ways to create reverse logistics. This can involve arranging for waste generated by their customers to be collected, consolidated, and transported to selected partners for processing and manufacturing into new products. These products will subsequently be sold to other customers, thereby creating a ‘closed loop solution’.

When the cost of reclaiming products from end-users is higher than the cost of the component materials to be recovered there may not be an economic incentive to reclaim, recycle and reuse. Some businesses have thus turned to other solutions like refillable containers for cleaning or beauty products. Unilever and Procter & Gamble, major consumer goods companies forming part of the Evenlode portfolios, are trialling in-store dispensing machines for laundry detergents or body care products to see how shoppers react to the concept. Procter & Gamble is also collaborating with Loop, a circular e-commerce platform, to offer consumers the option to have used goods collected from their doorsteps, washed, refilled, and restocked – just like the milkman but for shampoo. At the moment these are only pilot programmes, and many elements will need to be refined before they are rolled out as commercially viable solutions at scale.

In 2019 Unilever announced its sustainable brands are growing c70% faster than the rest of the business and delivering 75% of the company’s growth. Moreover, research by NYU Stern Centre for Sustainable Business revealed that 50% of growth in consumer-packaged goods from 2013 to 2018 came from sustainable products, signalling a clear shift that consumer preferences are changing. Companies are also starting to notice that linear economics increase their exposure to risks and to higher resource pricesⁱ. In contrast, circular economics can be a ‘better hedge’ for businesses looking to decouple revenues from material input. Thus, companies that are willing to pivot to closed-loop solutions will thrive by strengthening their relationship with consumers and competitive position in the market. Investors interested in long-term value creation should view the circular economy as a great opportunity and support companies in making the shift.

Cristina Dumitru, Investment Analyst
2020

Please note, these views represent the opinions of the Evenlode Team as of 2020 and do not constitute investment advice. Where opinions are expressed, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is not intended as a recommendation to invest in any particular asset class, security or strategy. The information provided is for illustrative purposes only and should not be relied upon as a recommendation to buy or sell securities. Every effort is taken to ensure the accuracy of the data in this document, but no warranties are given.