• Jana Vrzel

How to Overcome the Most Common External and Internal Business Barriers to Circular Economy

Despite the urgent need to adopt sustainable and circular practices, many businesses that wish to implement circular solutions face business barriers. These barriers must be overcome to scale circularity and make it the norm. In the following, the most common business barriers to adopting circular economy practices are outlined as well as approaches to overcoming them. Each of the barriers can be framed as industry and country-specific.


Key insights:

  • Sustainability practices create new opportunities and openings in the job market, consequently expanding the job market.

  • Partnerships, education, and increased outreach must be implemented to facilitate a sharing platform to support actors in overcoming business barriers to a circular economy.

  • Collaboration throughout the value chain and the creation of financial instruments to invest in a chain or network of businesses rather than in a single business are of great relevance.

  • Social acceptance of sustainable practices plays a large role in public behaviour, which has the potential to influence companies to shift their business models towards circularity.



Contents:

1. Organizational barriers

2. Cross-value chain cooperation

3. Financial barriers

3.1 High initial investment costs

3.2 Lack of scale

4. Technological barriers

5. Political barriers

6. Social barriers


1. Organizational barriers

Organizational barriers refer to barriers to the information flow between the various stakeholders in a company. Such barriers may include the extra time, resources, and efforts necessary to implement the change to circular practices. Most often, even if one part of the organization is ready for the change, it lacks implementation support from the higher management team.

For people and companies to embrace a circular economy (CE), knowledge and a common understanding must be cultivated. Since CE practices are still relatively new and businesses are used to conducting activities following a linear economic system, companies lack education in the CE approach. Such knowledge can range from the very first step in a value chain of redesigning a product to the end of the value chain involving the handling of materials and waste. A lack of knowledge is closely connected to a heightened perception of the barriers to transitioning to a CE approach. Since CE is still a relatively new concept, businesses are afraid of high risks and would rather opt for small safe steps than completely transformative changes and development. Furthermore, implementing circular approaches requires numerous efforts in change management in order to integrate them into the existing business strategy and company structure.

Discussion:

There is no doubt that there is a gap in the current market regarding the implementation of sustainable practices. Nonetheless, the demand for such practices brings new opportunities and openings in the job market, consequently expanding the job market. Training programs and courses facilitated by experts must be introduced for employees and organizations to build their skills and capabilities.


Besides training, many companies are introducing a corporate social responsibility (CSR) report by which companies make a concerted effort to operate in ways through which they can give back to the community and create positive social value. Such a report serves as a comprehensive plan to design, execute, and analyze their CSR initiatives.


CSR is the most common element of such corporate reports and analyses; others include environmental, social, and governance (ESG), the triple bottom line, and managing environmental impact measures. Nestle is a good example, offering an insight into their strategy and goals (called “Creating Shared Value”) including long-term goals of serving individuals, families, communities, and the planet, as well as measurement procedures.

2. Cross-value chain cooperation


For CE to be fully implemented, the whole supply chain must work together. A sustainable product is one that considers the social and environmental impact it causes throughout its lifecycle. In terms of social and economic aspects, this means respecting labor and human rights, whereas environmental aspects involve reducing toxic production inputs, sourcing sustainable materials, creating products designed to be returned, repaired, and recycled, as well as implementing effective waste management. This is no easy task, especially as businesses today seek short-term results rather than long-term benefits. In addition, small businesses usually possess low bargaining power and influence over their suppliers' engagement and commitment to CE practices. Suppliers are reportedly reluctant to foster a greener supply chain due to the potential costs that could impact their competitiveness.


Discussion:

Partnerships, education, and an increased outreach must be implemented to facilitate a sharing platform to support actors in overcoming business barriers to CE. If stakeholders, governments, and technology developers play their part, the transition to a CE will be much faster and easier. This also leads to the importance of collaboration across industry actors. It is important that partners’ business models are compatible with each other in the sense that they reflect and incorporate CE principles and activities.

It is important to remember that changes towards CE don’t happen overnight and that new actions will gradually be implemented and expanded over time. Partnering with suppliers and vendors or other companies can help organizations learn together and share best practices. An example of such a partnership is between re:newcell, a Swedish startup, and the fashion giant H&M. Re:newcell produces Circulose—a new material made of recycled cotton and viscose. The startup wants to create a loop where clothing materials are re-used instead of sent to landfills, which aligns with H&M’s sustainability and CSR goals. Another great example is Adidas who is working with Parley for the Oceans, a nonprofit environmental organization focusing on protecting the oceans. Together, they are cleaning up beaches to produce shoes, which are made from recycled ocean plastic.


3. Financial Barriers


3.1 High initial investment costs


The cost of shifting business practices towards a circular approach is still seen as one of the biggest barriers to the transition. A typical linear-model business today has investors to please that seek fast results. The issue is that most investors view CE as a high-risk investment, where returns will be generated only in the long term.


For example, a business would need high investments to create its own on-site recycling infrastructure as it is a complex and costly process. Aside from the purely financial cost, there might also be hidden costs such as time and human resources that businesses incur to develop CE initiatives. This increases the management and planning process due to more complex practices.


3.2 Lack of Scale


Current CE initiatives lack scale. The higher investments that they incur are often passed on to users as increased transaction costs, which users, in turn, are not willing to incur. This is accompanied by high operating costs of initiatives and a lack of market-wide standards. Standards such as recycling can only be adopted on a larger scale if a larger market share adopts them.


Discussion:

Since financial funds are necessary to implement and develop CE initiatives, it is relevant for companies to access different funding options. When it comes to bank financing, SME’s face difficulties as banks often consider SME financing a risky decision. Despite this, public funding is starting to be increasingly invested in CE projects to provide support for the trasnition. Examples of such can be found in the European Union, which is providing several funding programmes in order to support the transition to CE, such as the European Structural and Investment Funds, Horizon Europe and the LIFE programme.


As previously mentioned, the key to prepare businesses to transition to CE lies in collaboration throughout the value chain and creating financial instruments to invest in a chain or network of businesses rather than in a single business. This way, risks and rewards can be shared and incentives to collaborate arise to create a circular chain in which all participants earn a piece of the pie.


4. Technological barriers


Another common barrier to the implementation of a CE approach is that a typical SME requires a lot of innovation in their current linear model in order to initiate the transition to a circular model. Even though technical development and support are crucial, such expertise and technologies are still lacking in sustainable practices. Adding to the lacking technology, many businesses don’t have the capacity and assets to implement new technologies in the first place. This further adds to the technological barrier as there is a large need for technical and technological expertise.


Discussion:

Technological barriers are a current issue that society is tackling with the creation of innovations, and new technologies and business models. An approach to facilitate this process for the future is by designing products and services with circularity in mind from the start, or supporting platforms like Trove or ReBag that resell to brands and retailers, delivering profitable and sustainable growth at scale while promoting CE. This would immensely optimize the process of closing the loop. Furthermore, there are alo companies like PICVISA , a specialised supplier that designs, manufactures and supplies optical sorting equipment for the sorting of materials, recovery, and valuation of waste.


5. Political Barriers

Governments play a crucial role in encouraging and supporting the transition to a CE. An unsupportive regulatory framework has a large influence on the transition from a linear to a CE system. Even though there currently exist multiple regulations regarding recycling and waste management, policy coherence is lacking and, thus, has limited influence on driving CE initiatives and their adoption. The lack of a stricter legislative framework often influences the decisions made by businesses when integrating sustainable solutions into their existing operations. This is reinforced by the fact that small firms are more influenced by regulators and local authorities regarding the improvement of their environmental performance than larger companies.


Discussion:

Businesses should set up regional or local networks of SME CEOs and working groups to develop joint problem articulation, understanding, and resolution. While the above aspects seem to be within the reach of policymakers, it has also been highlighted that SMEs currently often require customers to be willing to pay more for sustainable services and products. This could be facilitated through policy support (e.g. tax rebates for sustainable services and products), as well as wider societal support.


Progressive law and a clear set of guidelines could help advance the implementation of CE initiatives. Such examples are currently found in France where the new Anti-Waste Law, also called AGEC law, introduced in 2020 sets progressive methods and targets for plastic reduction, reuse and recycling to tackle existing environmental and social issues. The law aims to eliminate waste and pollution from the design stage and transform the system of production, distribution, and consumption from a linear to a circular economic model. The main goal is to achieve zero disposable plastic by 2040 and this ban will happen in 4 periodic stages (2020-2025, 2025-2030, 2030-2035 and 2035-2040). By January 1st 2023, for instance, disposable tableware must be replaced with reusable tableware in fast-food restaurants.


6. Social Barriers

Consumers' shopping habits have changed tremendously over the past years. Today we live in a convenience economy that has brought about a large shift in consumers' expectations. It involves the presence of multiple channels through which consumers are able to acquire a product or service in the fastest and cheapest way. The barrier to behavioral change is likely the most challenging one. Social acceptance of CE practices plays a large role in public behavior, which has the potential to influence companies to shift their business models towards greater circularity.


At the same time that businesses must develop and adopt sustainable practices, consumers must equally become more aware and incorporate sustainable attitudes in their behavior. Education, communication, awareness creation, and economic factors have a major impact on the behavior of the population and the adoption of CE practices at all levels.


It is important to remember that companies can be led by consumer demand for sustainable products and services. A continued lack of awareness about the environmental impact of goods and activities on the part of consumers will only continue to postpone the transition to a CE.


Discussion:

The shift in consumption behavior won’t change overnight. However, by being completely transparent about business operations and engaging consumers in discussions and workshops on CE-related topics, businesses can integrate consumers in the transition process and engage them in creating and developing effective CE solutions.


One of the best examples of changing norms in the apparel industry is Patagonia. The brand has dedicated itself to creating a new and better solution for the industry. Their efforts go across everything they do. The business model is aimed at creating high-quality, long-lasting products, and offers a repair and reuse program (Worn Wear e-commerce). In addition, their self-imposed Earth tax, 1% for the Planet, provides support to environmental nonprofits working to protect and regenerate the air, land and water around the globe. All of this is clearly communicated and supported across all of Patagonia’s channels and operations. An important learning for other businesses is to align activities to environmental objectives in order to implement an effective strategy that supports the CE transition.