The circular economy is effectively a way businesses can begin to decouple future economic growth from resource constraints.

Jamie Butterworth has worked with the Ellen MacArthur Foundation since the initial launch of the 5-year-old nonprofit, which aims to accelerate a transition toward the circular economy. In November, he plans to leave the foundation to set up a complementary venture tied to the circular economy. We spoke with Butterworth while researching our new trend report, which explores what the circular economy is and how brands are adopting its principles. He discussed why businesses are becoming more interested in this alternative economic model, some companies that are role models in this realm and what’s next for the circular economy.

How would you describe the circular economy in layman’s terms?

I would start by looking at the linear economy. In today’s economy, we tend to take something out of the ground, make that into something, take that something into a market, and at the end of its life, we throw that something away. We use a large quantity of resources to make that happen. We’re beginning to see increasing constraint on energy costs, and the circular economy is effectively a way by which businesses can begin to decouple future economic growth from resource constraints.

What are the social drivers and business incentives for the shift to the circular economy?

We see a number of elements that are causing the shift. The first one is economics. Between 1900 and 2002, we saw a century’s worth of price declines as we got better at extracting and processing materials in the economy and energy. In the decade between 2002 and 2012, however, we saw that century’s worth of savings effectively erased, so we’re beginning to see much more volatile commodity and energy prices.

Secondly, we’re seeing a different type of consumer, who is interested in different ownership and business models. We’ve seen many of these spring up in the last few years, like Airbnb or Zipcar. Others have been around for quite some time, but these are all successful models by which we begin to shift from ownership towards access or performance of products.

The third is, we’re beginning to see some increased legislation around topics such as toxicity levels in different materials or landfill taxes, recycling targets.

Lastly, we are seeing emerging technologies that make the circular economy possible. One of them would be the intelligence of knowing where things are within the economy, what they’re made from and what status they’re in. We link this with the Internet of Things. We can see that quite a few of these collaborative consumption or access-over-ownership models are enabled by knowing where things are and when they’re available through the use of the Internet and GPS.

This also applies to new technology in material science and manufacturing. How can you start to design materials that, by intent, are circular or optimized? In the future of manufacturing, how will things be made? Not through subtractive manufacturing but through additive manufacturing, or 3D printing. What opportunities do these ideas hold for building a different type of economy?

What are the operating principles of the circular economy?

The operating principles are quite simple. Within the economy, you have two types of stuff. You have technical materials, which cycle in perpetuity at the highest possible quality. This means that wherever possible, you’re moving beyond recycling into remanufacturing, refurbishment, maintenance and full-service provision. That would be one side of the economy. On the other side of the economy, we would have biological materials and the products that those make up.

Very importantly, there would be a separation between the two. Simply by doing that, we actually increase the value of the biological side of the economy in terms of the feedstock. We can start to do creative things with biological nutrients or materials, including valorizing that as a feedstock or taking biological processes and using those to create things like anaerobic digestion, or energy.

I’ll give you one example. If you look on the technical side, one company we work with is the European automotive manufacturer Renault. They’re part of the Nissan Renault alliance. They have a plant where they can take the drivetrain, the engine or the gearbox of the car at the end of its life, strip that apart, remanufacture it and send it back out the door with the same warranty as a new product. This remanufactured part is created using around about 80 percent less energy than a new product and contains about 60 percent of the materials embodied in a new product. They’re beginning to fundamentally change the relationship between the industrial economy and the way it uses energy.

One of the things we’re very keen to point out is that the circular economy isn’t really a new idea. It brings together a number of disciplines, such as industrial symbiosis, Cradle to Cradle, the performance economy, biomimicry and some of the initiatives in the collaborative business model. Ultimately it’s a framework for an economy that is regenerative by design.

Many of these activities, like remanufacturing, have quite a pedigree in a number of industry sectors, including automotive and heavy industry. But if we look globally at the amount of what’s manufactured in the economy and how much is remanufactured, it is absolutely the tiniest 2 to 3 percent. What we believe we will see is that as commodity prices become more price-volatile and as energy as well as materials become more expensive and harder to get hold of, we will see more of this activity.

When I describe this to people, they automatically assume it is an extension of recycling.

We did a series of analyses together with McKinsey, a Knowledge Partner of the Foundation, and one of them was to quantify what the circular economy would be worth. This was something we couldn’t find any data on back in 2010. We worked with McKinsey and manufacturers to look at a sector of the European economy. We studied things that were relatively complicated and cycle quite often in the economy, like TVs, washing machines and mobile phones, and modeled what would happen if we took a very conservative assumption on circularity. We looked at cycling about a quarter of the materials in those products once by about 2020.

What we found was that by the time we get to the materials level, most of what we call recycling is, in fact, downcycling. It’s a kind of detour to the end of its life. There are relatively small numbers of examples where materials have been optimized to cycle many times. The value we saw in the economy for individual businesses to benefit from was most apparent within the “inner loops” of component and product remanufacturing and refurbishment and moving into selling performance as opposed to selling the product.

Are there any new industries that may emerge from the shift in circular economy?

I think an industry will form around the use of intelligent data to know where things are in the economy: More data and more intelligence as to what is in the economy—where the stocks and flows are—will basically unlock value.

Another area we believe will grow quite significantly will be this part of the economy where people are beginning to sell the performance of products. One example we often talk about is Philips’ Pay per Lux lighting model, whereby they’ve shifted from selling light bulbs to selling a number of lumens of light, so how much light you need. They’re working with municipalities in the Netherlands, and what they look at is how many lumens of light would you need, for example, to light motorway infrastructure?

This has a number of advantages for both the customer and the company involved. For the company, this means that with the right business model, when they come up with a more energy-efficient lighting technology, they benefit from the margin—so they become incentivized to upgrade the LED. The other thing they benefit from is retaining ownership of valuable materials, which become their assets. They can then design for upgrades into a second lifecycle, so they actually don’t have an issue with someone bringing something back to them.

For the customer, the understanding is that they actually get a better product. They get a recipe of lighting that is exactly what they require. It might mean brighter lighting during periods of time when people are sleepy late at night or calmer lighting to calm people down during rush hour. The idea is, by innovating the business model, people benefit. We’re actually seeing some growth in that area right now.

The other area of the economy we are fascinated by is waste management, or reverse logistics. As businesses begin to recognize that their products, when they reach the end of their first life, become valuable components for the second lifecycle, we believe they will look more towards resource management or reverse logistics partners to bring their things back at a high quality, as opposed to traditional waste players. In fact, even within the traditional waste management industry, we’re seeing quite a lot of interest in the topic of the circular economy as these businesses start to innovate to provide businesses with what they need.

I’ve also seen examples of companies that are looking to create new revenue streams from the waste they are producing instead of remanufacturing and bringing it back for a second lifecycle. Starbucks Hong Kong, for example, was looking to create new materials from all the coffee bean waste they have. Is that something you see picking up?

Exactly as you say, the opportunities will exist for the waste of one person’s supply chain to become the food of the next, and at the materials level that is clearly interesting.

We were talking about the Internet of Things and the ability to effectively know where things are. If you look at fast-moving consumer goods, one of the challenges there is that you really need to be able to aggregate a large volume of material in one place, with the right purity for it to become valuable. We believe there will be a shift in the way you’re able to tag and trace these materials. This will enable organizations to trace where those materials end up.

The interesting thing about that is the business model because, at the moment, most of the examples you were referring to are where there is a joint benefit for the company selling the products and the company buying the products, who can then make margin from it by processing it into a product or something more valuable.

In those inner loops we were talking about, where we’ve got very established remanufacturing companies like Renault or Caterpillar, the interesting thing there is to look at how the business model drives that. It’s the ability for margin to flow, and we’re beginning to see more examples of that in print photocopiers and mobile phones.

In your opinion, what are the top three companies that are doing the circular economy well?

One really interesting company which has been doing this for quite some time is Ricoh. Ricoh is a print photocopier manufacturer based in Japan. What is interesting about them is that they do this from an economic perspective, and they have since 1994. Back in the ’90s, they put in place something called the Ricoh Comet System, which effectively is a continual improvement model.

They have a plant in the U.K. that employs 180 people on a semi-automated reverse-manufacturing line. They will take a product at the end of its first life, decomponentize that, upgrade the elements that need upgrading, ultrasonically clean parts of it, put it back together again and then send it back out into the market with the same warranty as a new product. What’s interesting about the way they do this is that they get better at it all the time. They have the feedback mechanism built in to incorporate any new learning into designing new products.

Another interesting example is a company called Desso, based in the Netherlands. They’ve looked at how you could actually design a carpet from first principles of what it is made from right through to how you sell it—asking how you may be able to lease floor covering in a B-to-B situation.

What’s very exciting is when emerging innovators come into the story. One fantastic example you may have heard of already is called Ecovative. Ecovative is based in California, and they grow packaging. They use the waste material from agricultural feedstock, and they actually grow mycelium, which is basically mushroom roots, into molds to create packaging. They’re now providing packaging for Dell, Steelcase and others, which is apparently price-competitive. They are changing the landscape of packaging by coming up with a different type of material.

We actually featured Ecovative on our 100 Things to Watch list a few years back. As you point out, the emerging innovators are designing their companies from the ground up with a circular economy in mind instead of revamping after the fact. These innovators don’t have to battle against years of bureaucracy and the status quo.

Exactly. These concepts aren’t completely new, and for us that’s actually quite important in terms of the role we play at the Foundation. What the circular economy provides is a framework with which to rethink the economy. Ultimately the economy starts to unlock new opportunities. Maybe existing organizations are wondering how they’re going to differentiate or define themselves in the future. Maybe some of them are in resource-intensive industries that really do rely on resources to make products. The circular economy is an interesting way for them to begin to rethink how they can prosper in the future.

What are some of the challenges companies need to overcome internally to transition to a circular economy?

One of the biggest challenges for a business is how fundamentally different a circular economic model is to a linear model. A really good linear company is highly effective at taking something out of the ground, making something with it, selling it in a market and not needing to ever see that product again. In a circular model, you’d have a system in place in which you would get that component, material or product back, and then you remanufacture, potentially upgrade, service or sell it back into the market.

If the business model is not enabled, then you can do all the design you want, but you won’t be setting things up for success. Philips set up a center of excellence within the company to focus on the circular economy across their three areas of health care, consumer electronics and lighting. Their aim was to set up this center of excellence centrally, which they can then use to build capacity across the business.

Then secondary to that is being able to highlight and identify how shifting from a linear to a circular model will become more profitable for that business and its supply chain.

What are some of the challenges to overcome when dealing with consumers?

We’ve done quite a bit of research around consumer attitudes towards different elements of the circular economy, and there are some fairly hard and fast rules. With regard to getting things back, there needs to be value and convenience in how you do that.

In the past, a lot of work has gone into trying to persuade consumers that they should buy less stuff, which is quite problematic on a number of different levels. One, obviously, is that the revenue of that business probably relies on the customer buying something in the first place. The second thing is, how realistic is it that we can persuade people to buy less things? In developing markets, is it even reasonable to suppose that people can develop economically without buying things?

What’s interesting about the circular framework is we begin to look at both business models and design practices that move from using less towards being restorative by intent. So take the carpet example I was giving you. If we are able to design a carpet which can be regenerated into a new carpet at the end of its life using 100 percent renewable energy, then we shift from buying that carpet to actually buying square meters of floor covering. In that case, is there actually a problem with more people having access to more floor covering?

Obviously, there’s an important balancing act in that discussion, but what we are interested in primarily is those business models and approaches that enable us to shift from a throughput consumer pattern to one which is ultimately circular and more restorative.

What does the shift to the circular economy mean for brands?

For brands, this is an inevitable and necessary shift due to the economics. In fact, in the future, some linear businesses will be unlikely to do as well as they can today. With 3 billion new middle class consumers increasing the demand for commodities, things are going to change. We will see some brands deciding to be proactive and taking advantage of that and others being less proactive. We’ve even begun to see investment notes on those topics.

For businesses that are able to operate in a circular economy, there are a number of benefits. We are fascinated by the idea of the ongoing relationship that businesses can create with their customers. Rather than selling them something and then leaving them with that, and needing to persuade them to use that for a period of time, get fed up with it and have to want another one, we actually start to look at slightly different, potentially more complex relationships, where there’s more of a relationship between the customer of a product—who shifts from being a consumer to a user—and the value add we can provide in keeping in touch with those people and providing them with the opportunity to upgrade at the right point. There will be some change in dynamic there.

What’s next for the circular economy? What changes do you think we’ll start to see in our everyday lives as consumers?

We’re beginning to see some signs already of what will happen in the next few years. We do a lot of work with universities in design, engineering and business, and we’re seeing more take-up around research, teaching and learning on the topic. As people become interested in using the circular economy as a framework for starting to redesign things, there are new questions around what future materials might look like and what future manufacturing might look like.

We will also see more collaboration among businesses. One example of this is a new project called Mainstream. We’re involved in it along with the World Economic Forum and McKinsey. It brings together a group of 15 CEOs from global companies who are looking for ways to work together to run large-scale demonstrations on the circular economy. At some point, it will involve more collaboration across the supply chain, so I think we’ll see more of that type of activity.

Shortly after launching Project Mainstream, we found there was a lot of interest from regions. For example, Scotland, the central region of Denmark and the southern region of Belgium. They’re interested because the model holds the opportunity to potentially increase resilient employment opportunities. At the moment, a lot of stuff is extracted out of the ground in the East. It then moves into another manufacturing market, probably the East, and gets shipped out to the West. If you take the Ricoh example, they have their remanufacturing plant in the U.K., so you’re actually creating employment on a regionalized basis. We are beginning to see quite a lot of interest from different regional players, and that’s something we are expecting to see more of over the next few years in North America, into India and China.

The other big factor will be the circularity/linearity of China, Asia more broadly and broader developing markets. The majority of the expected 3 billion new middle-class consumers will be in these markets. This provides an interesting opportunity: Developed markets like Europe and the U.S. already have a lot of embedded “linear” infrastructure, technology and setups, while emerging markets have the potential opportunity to leapfrog this phase and align themselves to create more circular economies from the start. This is a fascinating area that we are exploring right now.