Businesses have been slow to fully embrace circularity for multiple reasons, not least economics. There is money to be made from circularity, but allocating margins fairly across fragmented value chains is difficult. As the biggest beasts in the value chain – with the greatest capital and capability ‒ there is a compelling responsibility on commodity-producing companies to take a lead. However, corporate targets today remain stubbornly focused on individual companies, rather than on measures that would enable the entire circular value chain to thrive.

Companies need to explore different ways of building relationships across industries for circularity to flourish. In this report, we focus on three key initiatives across different industries – electronics, plastics and biofuels ‒ where companies have come together in precisely this manner, pointing a way forward for other sectors too. Through joined-up thinking, a pathway to increased circularity remains open.

Stuck in a loop: barriers to progress

A circular value chain is only as strong as its weakest link. If one company has no incentive to participate, the whole value chain can break down. In established, commoditised markets (such as gasoline), value allocation is coordinated by the price signal. However, in nascent, pre-commoditised markets typical of circular value chains (such as biofuels), transparency is lacking, presenting commercial challenges to businesses trying to make progress on circularity, among them: 

• International oil companies (IOCs), technology companies and waste management firms all operate with different capital bases, risk appetites and cashflow needs, complicating expectations about what ‘fair value’ looks like. 

• Without a clear route to value, waste-processing companies and new technologies will not be induced to bring supply to the market.  

Moreover, there are operational challenges for companies adopting circular business models. For starters, new systems need to be put in place to track material flows and staff will need to be trained to act in ways that promote the value chain as a whole. Sales and procurement teams, for example, need to operate differently when success depends on the whole value chain rather than just their own business.  

These challenges, though, can be overcome as long as the system can generate sufficient cash. We see three broad circular product models where that can happen. 

First, products where supply from waste costs less than virgin production. These are typically markets with the highest rates of secondary material usage and the closest to commoditised markets. Collecting plastic bottles to make fibres is a good example, with a global recycling rate of 56%. 

Second, products where the cost of the processed waste supply is at a premium to virgin production. But that premium can be easily absorbed in the price paid by the end consumer because of the fractional impact of material cost on the price of the final product. 

Third, products that come at a cost premium that cannot be absorbed by the consumer. Fuels are the classic example. Here, the margin must be supported by policy ‒ usually through demand mandates – but this can be substantial. While a typical refinery could generate a net margin of 2-5%, the equivalent for renewable diesel, for instance, has been 20-35% in recent years. 

Leading the charge: the flagbearers of circular value chains

Fuelling the future through vertical integration

Biofuels – fuels derived from non-fossilised organic matter and its processed derivatives ‒ will play a key role in the journey to net zero, providing carbon-neutral molecules to power hard-to-abate transport sectors. Eni is a leading biofuel producer with ambitious plans to expand from 1.7 million tonnes per annum (mtpa) of biorefining capacity in 2023 to 5 mtpa by 2030, during which time global production is forecast to expand by one-third.

A key challenge to the growth of the sector comes from the need to secure reliable access to sustainable biofeedstocks, which are severely constrained. To derisk the availability of feedstocks in future, Eni has invested in vertical integration into the agricultural sector in Africa. Recognising that its capital and expertise could be used to benefit farmers in the region, Eni has helped source land that does not compete with food production and provides security of income to farmers through its long-term feedstock needs.

In return for this upfront capital investment, Eni will fulfil 20% of its feedstock needs, providing a material hedge against future volatility and boosting the market through ‘greenfield’ investment.

Adding value to value chains

What marks these three case studies as examples to emulate is not that they provide a template. Joint ventures are not ‘the solution’ to recycling, not all refiners should invest in farming and e-waste will require more than the CEP arrangement to drive circular outcomes in the future.

What they show is that adopting the right forms of value-chain relationship – driven by the needs of the company and the value chain – can serve to introduce coordination, laying the foundation for circular value chains to grow together.

Joined-up thinking: the path to promoting circular growth 

Increasing circularity has a key role to play in reducing emissions and building a sustainable global economy. However, the hype around circularity over the past decade has not resulted in a material switch.  

Companies have not been incentivised to elevate their target setting to the level of the value chain, because of the complexity of circular business models and the relatively small revenue streams they generate compared with those available in primary commodities today. Consequently, firms have set ineffectual targets, focused on their niche.  

To overcome the status quo and secure the potential of a more circular economy, they must: 

• Switch their target-setting approach: ambitious circularity targets act as a key catalyst for change within a value chain. However, to be effectual, the ambitions must flip from ‘what’ they want to achieve to ‘how’ they will bring about the value-chain transformation that will help them to deliver. Embracing this systemic thinking at the heart of corporate strategy is difficult and uncomfortable, but essential if progress is to be made.  

• Make the case for patient capital: with primary markets some orders of magnitude larger than those for waste products, and with new technologies and business models to scale, investing in the circular economy will almost inevitably dilute a company’s margin today. However, those companies that fail to act today risk finding themselves locked out of secondary markets in the future, with available supply secured by first movers. Companies should leverage the relatively small scale of these markets and the necessity of investment today to secure buy-in from owners. 

• Build relationships with brands: consumer brands are the other bookend of these markets, and far more directly exposed to consumer pressure. As the other pole in these markets with capital and capability to deploy, commodity producers should reach out across the often complex and lengthy value chains to work with these companies – be they in fast-moving consumer goods, transport or apparel – to build value-chain competence. 

It is undoubtedly true that firms need support in the journey towards greater circularity, with clear and consistent regulation to underpin demand for circular materials. Equity holders, too, need patience to support investments that can bring the revenue streams of the future to the fore. But much is in the gift of commodity producers. As demand for circularity increases, greater action is imperative. 

To read the white paper as it was published on the Wood Mackenzie webpage, click here.

To read the full PDF, click here.

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The good news is that everyone is talking about the circular economy, and they are guided by its intuitive basics. There is a growing volume of work on the circular economy that adopts the same simple concept but approaches it with variety. The World Economic Forum and Ellen McArthur Foundation are preeminent conveners that combine the power of different stakeholders to generate action-oriented initiatives already making headway. The European Union is redesigning policies to create an “insular” circular economy based on self-sufficiency and working to convince others to take on that approach. The U.S. EPA announced a National Recycling Strategy in November 2021 as the first stage “to building a circular economy,” superseding a long-standing “Sustainable Materials Management” agenda in which recycling (i.e., the circular economy) is not necessarily the answer to post-use management.

With any policy work, we need a definition.The concept of the circular economy – as it grows in concept, reference and eventually action – seems simple, but there are several definitions (or attempts at definitions) that are true but wordy. Let’s take a look at some of the more prominent definitions:

• The World Economic Forum notes, “The circular economy, which promotes the elimination of waste and the continual safe use of natural resources, offers an alternative that can yield up to $4.5 trillion in economic benefits to 2030.”
• The Organization for Economic Cooperation and Development (OECD) says the Circular Economy “aims to transform the current linear economy into a circular model that would gradually reduce the consumption of finite material resources by recovering materials from waste streams for recycling or reuse, using products longer, and exploiting the potential of the sharing and services economy.”
• The Ellen MacArthur Foundation defines the Circular Economy as “an economy that provides multiple value-creation mechanisms which are decoupled from the consumption of finite resources” and which is based on the three principles that “eliminate waste and pollution…circulate products and materials…regenerate nature.”
• The U.S. Environmental Protection Agency (EPA) – late to acknowledging the Circular Economy concept – relies on the definition in the “Save Our Seas 2.0 Act” of 2020:“an economy that uses a systems-focused approach and involves industrial processes and economic activities that are restorative or regenerative by design; enable resources used in such processes and activities to maintain their highest value for as long as possible; and aim for the elimination of waste through the superior design of materials, products and systems (including business models).”
• The European Union is a major proponent of the circular economy but, not surprisingly, does not have a firm definition. The Circular Economy Action Plan of March 2020 aims to “help ‘close the loop’ of product lifecycles through greater recycling and re-use and bring benefits for both the environment and the economy.”

Over the course of the coming months, we will be dissecting the components of the circular economy and these different approaches to make sure we fully understand what it means but, especially, how we get there. In line with our mission, we are asking questions and developing policy ideas to transform into action under the banner of the Eco2Sec pillar – addressing economic and ecological risk and opportunity to meet the 21st century climate imperative – while also promoting trade policy as an enabler of the Circular Economy (Trade & Industrial Policy pillar). Watch this space and engage with us.

Adina Renee Adler is the Deputy Executive Director of Silverado Policy Accelerator.

To read the full commentary from Silverado Policy Accelerator, please click here. 

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Containing greenwashing

A green bond is a traditional bond where the proceeds from issuance are used for a project that meets certain pre-established environmental criteria. In the case of default, the investor typically has recourse to the issuer’s entire balance sheet, as structures based only on the underlying green project or its revenues are rare. To the end investor, the additional value from holding the green asset derives from this enhanced transparency and association with the green project financed by the bond (even though refinancing is common). However, definitions of what activities are sustainable are often fuzzy or conflict across jurisdictions. Reporting on the use of proceeds, let alone a project’s impact, is often lax. The problems with  issuer disclosure and communicating information on the use of proceeds to investors are more pronounced in emerging markets, exactly where the bulk of low-carbon investment will be needed over the coming years.

The EU green bond standard would address these inherent problems with a rigorous regime of transparency and supervision. Only projects that are in line with the EU taxonomy of sustainable activities would be eligible for funding, and issuers would need to provide additional information at the time of issuance, and subsequently through regular reporting on the use of proceeds and its impact. Crucially, only external reviewers supervised by the European Securities and Markets Authority (ESMA) will be allowed to sign off on an EU green bond.

Green bonds will be a crucial part of financing the low-carbon transition, given their typical long durations and end-loaded repayment structures, which fit well with large infrastructure projects. Use of the EU green bond label will be voluntary, so the extent to which investors use it and mobilise capital for the low-carbon transition should be one measure of its success. But the standard will also define a framework for green assets in the capital markets. As such, it should foster scale and liquidity of the asset class, so that investors can discern a yield curve specific to green debt instruments. Green bond funds and the securitisation of green bank loans could mobilise additional funds, but will depend on there being a uniform standard across different issuers and jurisdictions.

A global blueprint?

Given these wider objectives, there are two possible fates for the EU green bond standard. It may come to define a widely recognised quality benchmark that is replicated in other markets. This kind of ‘Brussels effect’ in global capital markets has, for instance, been observed for the EU format for retail investment funds (UCITS), which are now widely used outside the EU, including in emerging markets.

Alternatively, the EU’s ‘gold standard’ ambition may remain out of reach for most issuers. Compliance with the technical standards in the EU taxonomy in particular could become a problem. Issuers will weigh the costs and complications of additional disclosure and of going through an ESMA-approved and supervised external reviewers against the benefits of accessing a wider investor base. Alternative private green bond standards and certification processes may well continue to proliferate. Several EU capital market products have already been shunned by market participants in this way, as for instance has been the case with European long-term investment funds, first designed in 2015, but barely used since then.

Implementing the standard

To simultaneously define a high-quality bond standard while creating scale and liquidity in capital markets, pragmatic implementation by the EU supervisor, and full support from public sector issuers in the EU, will be crucial. Three measures in particular could define success.

First, the EU itself and other EU supranational and sovereign issuers will likely be the largest single class of green bond issuers over the coming years. Green bond issuance by the European Commission under the Next Generation EU (NGEU) programme may amount to €250 billion over the next three years, roughly equal to total global issuance of green bonds in 2020. To date, issuance by ten EU sovereigns amounted to over €80 billion, and is set to increase rapidly given strong investor demand and the presumed benefits to funding costs in sovereign debt markets. To ensure credibility, the EU and other public sector issuers now need to adopt the EU green bond standard in their own capital market activities.

At the national level, we have already shown that the problems in classifying public expenditures under the EU taxonomy can be overcome(France has already done so). Some EU states have shown how a clear green bond framework can define credible forward-looking commitments on the use of bond proceeds in the national budgetary process. But under the proposed, regulation green bond issuance by EU countries would be subject to a weaker standard than issuance by the private sector, as reviews by government auditors will not be subject to ESMA supervision. Government agencies would in effect determine what could become a key non-financial attribute of sovereign debt.

Issuance by the Commission under the NGEU programme began in June. Ultimately, the EU as the largest issuer of green bonds will need to account to bond investors for spending of the proceeds in EU countries. It is in the interest of both the EU and member states that their own green bond issuance complies with the same high standards as corporate issuers. There should not be a separate green bond type for public sector issuers.

Second, EU regulators should define straightforward ways through which taxonomies in other jurisdictions can be mapped into alignment under the EU taxonomy. Many of such classification systems are in use globally, and EU coordination with the key jurisdictions should make different systems compatible (as suggested by Fabio Panetta). The United Kingdom and the United States are likely to develop taxonomies which are more principles-based. Discussions between the EU and the Chinese authorities within the International Platform on Sustainable Finance suggests the two classification systems are not fundamentally at odds. Ultimately, issuers from non-EU markets should be able to access EU capital markets. EU bond investors may want to document a coherent standard aligned with the EU taxonomy in their global portfolios.

Finally, ESMA, as the EU’s capital market supervisor, will need quickly to build up the skills and capacity for its new role as supervisor of green-bond reviewers. The criteria proposed by the European Commission are sensible, as they will put in place a minimum standard for qualifications, transparency and limitation of conflicts of interest. ESMA should as much as possible enable entities outside the EU to issue on the basis of the EU standard. This should especially reflect the requirements in emerging markets, where corporate disclosure and reporting standards are still weak.

The financing requirements of the EU Green deal are substantial and will primarily rest with the private sector. The new EU standard will put green bond markets on a sounder footing, though implementation should mobilise additional issuers and facilitate cross-border funding in capital markets, which are quickly embracing sustainability.

Alexander Lehmann, a German citizen, joined Bruegel in 2016 and is now a non-resident fellow. His work at Bruegel focuses on EU banking sectors and how private debt and non-performing loans can be addressed in the aftermath of recessions. Work on EU capital market development now also comprises the EU sustainable finance agenda. Currently he is also a lecturer at the Frankfurt School of Finance, and an adviser to a number of central banks and governments in eastern Europe.

To read the full commentary from Bruegel, please click here. 

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From the production of renewable agricultural feedstocks to the many circular end-of-life options for the materials themselves, the plant-based products industry is bringing the circular economy closer to reality. Looking more specifically at economic benefits, the infographic below describes a few metrics that show how plant-based products are driving economic growth, particularly in rural areas:

Growing the Feedstock

American agriculture has the capacity to grow a wide array of potential feedstock crops required to sustain a robust plant-based materials industry without impacting domestic food supply or hampering America’s trading role as the world’s breadbasket. According to the USDA Economic Research Service, farming directly employs 2.6 million Americans and exports over 20 percent of production. The plant-based products industry represents a wide range of uses and applications for American crops that can both increase and maintain existing demand for Americancommodities and value-added products both domestic and abroad.

Manufacturing of Plant-Based Materials

The emergence or expansion of plant-based product manufacturing facilities immediately stimulates local economies and connects these communities to the global supply chain through the innovative materials created at these facilities. In fact, the plant-based products industry contributes over $57 billion to the U.S. economy through exports and supports another 550,000 global trade-related jobs. In terms of direct domestic employment, currently the U.S. biorefining, biobased chemicals, and biobased plastic bottles and packaging industries employ over 15,000 people. As noted in the infographic, these are well-paying, skilled jobs. As consumer demand for more sustainable alternatives to traditional materials and packaging continues to increase around the world, the expansion of plant-based materials manufacturing to meet this demand would create more economic opportunities for producers and increase international competitiveness of U.S. bioeconomy sector moving forward.

End of Life and Conversion of Plant-Based Materials into Manufacturing Feedstock

Plant-based alternatives offer a wide suite of circular end-of-life management options, ranging from recyclability to compostability, with each option possessing its own opportunity for job creation. Composting is a particularly advantageous end-of-life option for many plant-based materials. The Institute for Local Self Reliance has estimated that for every 1 million tons of organic material composted, and its subsequent use, almost 1,400 new full-time jobs could potentially be supported.

America is not alone in its desire to seek out better waste management options. A thriving domestic plant-based materials industry provides countries around the world with opportunities to import these critical materials for transitioning to a better waste management future.

Conclusion

Growing a robust plant-based products industry presents a chance to create economic opportunity throughout America. Not only in the immediate term, but in the long term as the U.S. industry seeks out new ways to compete more effectively in a rapidly-evolving international market of advanced materials. From preserving the livelihoods of the farmers who grow agricultural feedstocks, supporting climate changes solutions, to the manufacturing of the materials themselves and the practical benefits of a wide range of end-of-life options, plant-based materials contribute positively to the shift towards a more circular global economy.

Jessica Bowman serves as the Plant Based Products Council’s (PBPC) Executive Director. In her position, she leads PBPC’s efforts in advocating for using more renewable, plant-based materials and ensuring they become part of the circular bioeconomy.

Jessica joins PBPC from the American Chemistry Council, where she served as Executive Director of the FluoroCouncil, and previously as Senior Director of Environmental Affairs for the Airports Council International – North America. She holds a J.D. with a concentration in environmental law from University of Maryland School of Law and a B.S. in GeoEnvironmental Engineering from Penn State University.

To read additional commentary from the Plant Based Products Council (PBPC), please click here. 

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