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Talking ESG: The challenge – and promise – of a circular economy · PwC's accounting podcast

0:00
SPEAKER_00: Thought leadership from PWC's National Office.
0:06
SPEAKER_03: Particularly when we've been talking here about business model reinvention, the insights you can get from this type of data to how you have to de-risk your business, to think about opportunities for new products or services to be offered, and what that might mean for competitive advantage are huge in this space.
0:29
SPEAKER_03: Daunting, difficult, complicated, but ultimately the business models of the future will be circular business models.
0:36
SPEAKER_01: Today we're back talking ESG.
0:40
SPEAKER_01: This is PWC's Accounting Podcast.
0:52
SPEAKER_01: Like many topics the companies will be required to report on under CSRD and perhaps other sustainability reporting, such as the IFRS sustainability disclosure standards, the concept of quote, circular economy may be less familiar to you than more widely discussed topics such as climate change or even biodiversity.
1:12
SPEAKER_01: However, its importance is growing as companies look to minimize waste in their operations and stay ahead of emerging regulations aimed at making economies more sustainable.
1:23
SPEAKER_01: To discuss the topic, I'm joined by Tom B.
1:25
SPEAKER_01: Agent, a partner in PWC's sustainability practice.
1:28
SPEAKER_01: I learned a lot from my conversation with Tom, including a number of real-life examples from the work he's doing with clients.
1:35
SPEAKER_01: So stay tuned for a great conversation.
1:39
SPEAKER_01: Tom, thanks so much for joining me today on the podcast.
1:42
SPEAKER_01: And I know last time you were here, we were talking about nature reporting, and we've seen huge developments in that area since then.
1:48
SPEAKER_01: So perhaps you'll have the same good luck for today's uh topic of circular economy, which is one that I think many people are not very familiar with, even though we, you know, we do see reporting in ESRS that will be required.
2:03
SPEAKER_01: And so um I know that you're going to be convincing us today that the circular economy is part of a critical part of our sort of net zero transition.
2:12
SPEAKER_03: Yeah, thank you very much for having me again.
2:14
SPEAKER_03: Um, this is a really important topic.
2:16
SPEAKER_03: So I hope that it has the same effect as for nature, because I, you know, this is such a critical part of the change we need in our economy.
2:23
SPEAKER_01: Well, it's interesting.
2:24
SPEAKER_01: Uh, in preparation for this, I was asking different people what they knew about the circular economy.
2:31
SPEAKER_01: And the only thing anyone ever said to me is, oh, well, you need to recycle your cans and bottles.
2:35
SPEAKER_01: And I say, Yeah, that's not not quite it.
2:38
SPEAKER_01: So definitely a critical need for this, but maybe to the point of that that is not what we mean when we say circular economy.
2:46
SPEAKER_01: Can you give us the big picture?
2:48
SPEAKER_03: Absolutely.
2:49
SPEAKER_03: So we've built our economy on what I would call a linear economy.
2:53
SPEAKER_03: This is where we take things, we make stuff out of them, we use them, and then we throw them away.
2:58
SPEAKER_03: That's a huge waste of resources going on right there, a huge amount of value that's been lost as a result.
3:04
SPEAKER_03: So the concept of the circular economy, which has been around for a long period of time, is all about the Rs.
3:11
SPEAKER_03: Reduce, reuse, repair, refurbish, recycle, redesign, regenerate, ultimately rethink everything.
3:21
SPEAKER_03: So how do we actually bend the curve on a linear model into a more circular model?
3:26
SPEAKER_01: All right.
3:26
SPEAKER_01: So then I love all those R's.
3:28
SPEAKER_01: I think I'd only heard a handful of them before.
3:30
SPEAKER_01: And like I said, recycle was the only one anyone came up with.
3:34
SPEAKER_01: But so then if we actually start to get into it, how do you define a circular economy?
3:40
SPEAKER_01: And then it's sort of as a guiding principle.
3:43
SPEAKER_03: Well, if we take a step back from it and think about well, why is moving to a circular economy really important?
3:49
SPEAKER_03: Essentially, we've got a set of finite resources on this planet.
3:53
SPEAKER_03: Um, there's an organization called the Global Footprint Network that develops a uh a set of analysis each year that that comes up with what's called Earth Overshoot Day.
4:03
SPEAKER_03: Earth Overshoot Day is the day when we start to go into the red.
4:07
SPEAKER_03: We start to use more resources than the planet has got.
4:10
SPEAKER_03: About 40 years ago, that was on the 4th of December.
4:12
SPEAKER_03: So we sort of lost 25 days where we were in Earth Overshoot.
4:17
SPEAKER_03: Last year, that was on the 2nd of August.
4:19
SPEAKER_03: Oh.
4:20
SPEAKER_03: We essentially, as a planet, we are using 1.75 planets every year at the moment.
4:26
SPEAKER_03: And that is clearly unsustainable.
4:29
SPEAKER_03: It's also clearly really bad for business.
4:31
SPEAKER_03: Because if we can't get hold of the resources that we need, how would we be able to generate the products, the services, the profits of the future?
4:39
SPEAKER_03: So that's the planet as a whole.
4:42
SPEAKER_03: As people aspire to a higher standard of living, then we start to use more and more of the Earth's resources.
4:47
SPEAKER_03: So let's just have a look at the US for a moment.
4:50
SPEAKER_03: In the US, Earth Overshoot Day is on the 13th of March.
4:55
SPEAKER_03: Or to put it another way, 294 days of the year, the US is in overshoot.
5:02
SPEAKER_01: It's for the listener's benefit, since you can't see me, my face just dropped.
5:06
SPEAKER_01: So obviously the US is a large contributing part of this problem, then.
5:11
SPEAKER_03: Not on its no, not its own.
5:13
SPEAKER_03: So in the UK, our Earth overshoot day is the 19th of May.
5:18
SPEAKER_03: So we're in overshoot for 227 days.
5:20
SPEAKER_03: And if you look to China, an emerging economy where yes, there is a rise of the middle class and affluence there, but still perhaps lots of people that aren't using resources at the same rate as uh UK or the US.
5:34
SPEAKER_03: Their Earth overshoot day is the 2nd of June, so 213 days in overshoot.
5:39
SPEAKER_03: So we do have a real problem that needs to be solved around this.
5:44
SPEAKER_03: It was interesting.
5:45
SPEAKER_03: I was looking at this data the other day, and I was looking at the effect of the pandemic, where we saw quite a significant change in resource use.
5:54
SPEAKER_03: We actually only gained as a planet two extra weeks of time back on it.
5:59
SPEAKER_03: So you can sense from that the scale of the change that is needed to our economy as a whole.
6:05
SPEAKER_03: So essentially, we're looking at business models that can thrive without using so many resources.
6:13
SPEAKER_01: So it's a very interesting point because again, I'll go back to the recycling.
6:17
SPEAKER_01: People sometimes think some of this is an individual solution, and clearly individuals have a place, but this idea is much bigger, and it has to be then business, and there has to be a role for government as well, I'm assuming, or is it really more of a this is something where businesses can benefit the planet and themselves?
6:37
SPEAKER_03: I I think a really good example is um batteries for electric vehicles.
6:42
SPEAKER_03: They require a huge amount of critical raw materials like lithium, cobalt, manganese to actually be produced, and they're a critical part of sort of the future of net zero transportation.
6:55
SPEAKER_03: And the resources, therefore, the resource use is coming in in the making of those things as a large extent, not so much in the sort of end-of-life end of end of the spectrum.
7:06
SPEAKER_03: We've also got a huge amount of carbon emissions that come with the production, and that feeds into the sort of circular economy principle as well, because actually we we're talking about not just the resources that are being used, but the impacts that are created from uh our economic model around this.
7:22
SPEAKER_03: So as a whole, I think that it's not just about solving what what we do when we throw it away, we're actually consuming too much.
7:31
SPEAKER_01: So you made a point there about the inner relationship then with carbon, because it's a huge amount of carbon being produced.
7:37
SPEAKER_01: So, how what is the relationship then between circular economy and net zero?
7:41
SPEAKER_03: Producing anything requires resources to go into it and it creates emissions as a result of it.
7:48
SPEAKER_03: Um, if we are using too many resources, at the same time, we're creating too many emissions.
7:55
SPEAKER_03: So it doesn't matter what you're producing, you are likely to be creating some resources as a whole.
8:00
SPEAKER_03: And therefore, when we're at the position where we're using 1.75 planets worth of resources, we're clearly creating emissions associated with that as well.
8:08
SPEAKER_01: Well, and then if I think about the last time we spoke and we were talking about biodiversity and nature, then there has to be the same in the same interconnection.
8:16
SPEAKER_03: Um if you're producing uh apparel, for example, you've got a huge amount of resources that are coming straight from nature.
8:24
SPEAKER_03: You've got a huge amount of agricultural supply chains that are dependent on nature.
8:28
SPEAKER_03: Um, so yes, much like climate, nature is intertwined with this concept as well.
8:33
SPEAKER_03: Essentially, the circular economy is about using things more efficiently and using less of them.
8:39
SPEAKER_03: Now, every time we use anything, it creates emissions, it's dependent on nature, it uses resources.
8:44
SPEAKER_03: So that's what we're trying to change.
8:46
SPEAKER_01: So if I'm in business thinking about this issue, is this really an issue more for businesses that are producing goods and that you know are using, as you said, batteries and otherwise, or is it really something that all businesses can benefit if they have a bigger focus on this?
9:04
SPEAKER_03: I think it's a good question.
9:06
SPEAKER_03: It applies to every business.
9:08
SPEAKER_03: Like if you're a service business, there's perhaps there's more opportunity in there, looking at new service opportunities that can take advantage of a shift in an economy.
9:19
SPEAKER_03: Essentially, we're looking at a seismic change in our economy as a whole, in the way everything is done.
9:24
SPEAKER_03: All business models need to sort of change and evolve.
9:27
SPEAKER_03: So it doesn't matter which part of the economy you're in, change is going to happen.
9:31
SPEAKER_01: So then, how what are the steps then?
9:34
SPEAKER_01: If I think seismic change, that's a lot.
9:38
SPEAKER_01: And for so for an individual business, and if you think about businesses and broader economies, how then do you transition from this idea that everything is linear to trying to become more circular?
9:49
SPEAKER_03: You essentially need to start to think about how how you do things and what you do from scratch to really think about because we're talking about change that is almost ripping up the business model of today and starting to think about it again.
10:04
SPEAKER_03: Um so if we're looking at more efficient use of resources, less emissions that are coming out as a whole, how can we think about everything from the amount of products that you produce?
10:17
SPEAKER_03: Is there a different way of thinking about it?
10:19
SPEAKER_03: For example, do you need to be selling loads of things, or is there a reuse or a lease models that are associated with it, which means the same number of things can provide the same uh or a smaller number of things can provide the same amount of benefit as a whole?
10:34
SPEAKER_03: I always think one of the one of the greatest uh examples in the early days of the of the circular economy was a was a DIY uh outlet in the UK that said people don't want to buy a drill, they want to buy a hole in the wall.
10:48
SPEAKER_03: As soon as you use that thinking, it changes the way you approach the problem and how you would go about servicing it.
10:54
SPEAKER_03: So that's where the idea of renting a drill out rather than selling it.
10:58
SPEAKER_03: So because most people's drill they use for a couple of holes in the wall a year and it sits in a cupboard.
11:02
SPEAKER_01: Exactly.
11:03
SPEAKER_01: Or then they wind up throwing it out and they move and and then it's just an alien fill.
11:07
SPEAKER_03: So And so that's so that's an example of how you can think about that.
11:11
SPEAKER_03: You can think about design in terms of durability.
11:14
SPEAKER_03: Half the challenge that we have is many things are designed these days so that they wear out really quickly, so you're forced to buy something else.
11:21
SPEAKER_03: I mean, that clearly doesn't make a huge amount of sense.
11:24
SPEAKER_03: I can understand the sort of profit motivation mindset within that, but that only works when you've got access to resources.
11:30
SPEAKER_03: If we go back to the beginning about we're using more resources than we have as a planet, that's a supply chain risk within business.
11:37
SPEAKER_03: Yes, there's an important part about using renewable materials, uh, bio-based materials that can be renewable, using recycled content in what you're producing as a whole.
11:49
SPEAKER_03: And to your earlier point about I think about recycling as part of this, yes, there's definitely something about when we close the loop at the end of life, how do we bring all those materials back in and start using them as recycled content?
12:00
SPEAKER_03: Things like upcycling, downcycling.
12:02
SPEAKER_03: How can we get the most value out of those materials?
12:05
SPEAKER_03: And what it what it results in is a change in the in the look of the business model about where you make your profit.
12:12
SPEAKER_03: So at the moment, in a in a linear business model of take, make, use, dispose, you make your money one time when you first sell that item.
12:22
SPEAKER_03: And then after that, it's left to the system to deal with it.
12:25
SPEAKER_03: Imagine if you are taking some of those resources back in and making giving them a second life in some way.
12:32
SPEAKER_03: You've got another profit opportunity around that.
12:35
SPEAKER_03: Or if you are reusing things uh and bringing them back in or repairing them, you're using resources, you're getting a second opportunity, third opportunity to make money out of the life of any materials.
12:47
SPEAKER_03: So it's a well perhaps a more complicated ecosystem that you end up operating in, but it's got more opportunity to drive value out of the limited resources that we have.
12:56
SPEAKER_01: So then if I think I have a couple examples I want to talk through with you.
13:00
SPEAKER_01: So the first one is cell phones.
13:02
SPEAKER_01: Yeah.
13:03
SPEAKER_01: Because I think, you know, for a long period, most people just thought of their cell phones.
13:07
SPEAKER_01: You got a new one every couple of years, and then you leave it in a drawer, you do something else.
13:11
SPEAKER_01: But now there's such a push from the manufacturers to turn your cell phone back in, they're gonna pay you for it, or they'll repair your screen for you, or they'll tell you how to maximize your battery life, or otherwise.
13:23
SPEAKER_01: So it seems though, it is those businesses incentivizing consumers to do something different.
13:29
SPEAKER_01: That's what's driving the change in behavior.
13:32
SPEAKER_03: Cell phones is a really great example because the value in the materials that sit in a cell phone, I can't remember the stats, but the amount of gold that sits in a cell phone is you know crazy if you think about it.
13:43
SPEAKER_01: Yeah, and there's rare earth metals, rare earth metals and so on in there.
13:46
SPEAKER_03: If you by taking them back at the end and putting some value on that, you can control that.
13:51
SPEAKER_03: You have that asset and you can reuse it and find a way of doing it.
13:56
SPEAKER_03: And when we're looking at critical raw materials in particular at the moment, there's not enough supply to meet the demand, especially with the rise in electric vehicles and the demand for batch materials.
14:08
SPEAKER_03: Automakers are really worried about where they can actually get those materials from.
14:12
SPEAKER_03: And let's be honest, a lot of those materials are coming from uh countries that either have very bad human rights records or are not that they're not easily to get control of in the global markets.
14:26
SPEAKER_03: So if you can find ways of getting them back out of what's already been done, you're reducing the risk from availability of critical raw materials.
14:34
SPEAKER_01: Yeah, well, I read an article in the past couple weeks that it was either the moon or Mars that they were thinking they might be able to get these rare metals from.
14:42
SPEAKER_01: And so it sounds expensive.
14:48
SPEAKER_01: Yes, and then but I think a key point there then is that the the phones have to go back to the right person because if they just wind up in landfill, then as nothing's gonna happen.
14:57
SPEAKER_01: But then the other one that is often talked about is fast fashion, yeah, and this idea that garments might be made to be and people only wear them once or twice, they fall apart, the the black is now gray, and you know you just uh you know move along and buy a new one versus uh I still remember my grandmother remaking things and shortening a pair of socks, exactly, and shortening and lengthening and everything else, her clothing.
15:25
SPEAKER_01: And so, how how do you think about fashion then?
15:29
SPEAKER_03: From an environmental perspective, our consumption of fashion has got out of control.
15:34
SPEAKER_03: Um in the last 20 years, fashion volumes have grown at a faster rate than the growth of GDP, so we're consuming more than we are growing as an economy.
15:45
SPEAKER_03: The utilization of those items is 40% less than it used to be.
15:50
SPEAKER_03: So that means we're using things for a shorter amount of time, they're sitting in our wardrobes, we're going out there and getting the latest fad.
15:59
SPEAKER_03: And there's no doubt the fashion industry has fuelled this.
16:03
SPEAKER_03: Shorter uh runs of items, driving more and more sort of short-term, faster fashion.
16:09
SPEAKER_03: Um, and it's got us into a real situation.
16:12
SPEAKER_03: Um, about five percent of the of our world's greenhouse gas emissions come from fashion.
16:18
SPEAKER_03: That's third, only behind food and construction as a source of emissions.
16:24
SPEAKER_03: 70% of those emissions come from within the supply chain.
16:27
SPEAKER_03: So that's in the production of the materials that come through.
16:30
SPEAKER_03: If you think about our fashion, we're essentially got a number of natural materials and a lot of synthetic materials these days.
16:38
SPEAKER_03: Synthetic materials, even if we could decarbonize power, we're still going to require hydrocarbons, oil and gas to be able to produce the synthetics for our clothing.
16:46
SPEAKER_03: And with the rate of consumption that's going up, how are we ever going to reach net zero in that sort of world?
16:52
SPEAKER_03: Oh less than one percent of uh fibres from fashion are recycled today.
16:59
SPEAKER_03: More than 70% end up in landfill.
17:02
SPEAKER_03: That is scary stuff.
17:03
SPEAKER_01: I know, I didn't to I'm not even sure how to respond to the to some of these statistics.
17:08
SPEAKER_03: So this is where the circular economy comes in.
17:10
SPEAKER_03: I mean, how do how do you actually rethink this as a problem?
17:14
SPEAKER_03: Um yes, you can use a lot more what's called more sustainable materials, whether they are in the the production processes or the recycled uh materials, but ultimately we need to work out how to consume less.
17:29
SPEAKER_03: There was a study done uh by the European Commission in 2020 that was looking at the difference between recycling things versus sort of a reuse resell model and looking at greenhouse gas emissions.
17:41
SPEAKER_03: Uh recycled content within an item reduces the greenhouse gas of this was on a t-shirt by 5%.
17:49
SPEAKER_03: If you can get to a reuse and resell model, you can save up to 60%.
17:54
SPEAKER_03: But it's much harder, right?
17:56
SPEAKER_03: It's much easier to go and say, I'm just gonna change, not gonna change my business model at all.
18:00
SPEAKER_03: I'm just gonna see if I can go and pay a little bit more for some recycled content and bring that into the mix.
18:04
SPEAKER_03: To work out how to take things back, get them ready for resale and resell them is much harder.
18:11
SPEAKER_01: Well, and then the quality to begin with has to be higher because again, I gave briefly that example.
18:17
SPEAKER_01: If you buy a black t-shirt and after three washings, it's gray, it's gray.
18:22
SPEAKER_01: You're not maybe you'll wear it around the house, but you're not, you know, you're not really getting the use out of it versus a shirt that you can wear for years.
18:30
SPEAKER_03: This is where we get into all the re's.
18:31
SPEAKER_03: This is all about re-redesign and thinking about durability in that design.
18:36
SPEAKER_03: The reality is that luxury high-end fashion holds its value much better because it's durable, as well as perhaps longer term desirability.
18:46
SPEAKER_03: Well, you've got things that are produced as cheaply as possible to be used for a short amount as possible, the resale model doesn't stack up.
18:53
SPEAKER_03: It's not possible to make the commercials work on on that sort of model.
18:57
SPEAKER_01: Right, but this seems like it's both a business and a consumer issue because you do have this mindset of, oh, this has a tiny hole, I'm gonna go get a new one, or oh, I don't like the style so much anymore.
19:09
SPEAKER_01: I'm gonna go try something else.
19:11
SPEAKER_01: And you don't think, oh, maybe I can borrow this from my friend, or maybe I can, you know, and even we've seen some business models that have tried to rent clothes and otherwise, and you know, it hasn't been consistently as successful.
19:24
SPEAKER_01: So, how how do you change that consumer side of things as well?
19:28
SPEAKER_03: It's gonna be hard.
19:29
SPEAKER_03: I agree.
19:30
SPEAKER_03: I I I I'm certainly from the wrong generation, perhaps, for this, but if I look around the office that uh sort of younger graduates are coming in, they're only buying clothing on resale sites and so on.
19:41
SPEAKER_03: That's a different mindset that they're taking to it.
19:43
SPEAKER_03: We're seeing more and more retailers look at repair services associated with things.
19:47
SPEAKER_03: So rather than you doing it yourself, they'll provide that as a service.
19:50
SPEAKER_01: Yeah, our alternate ratio.
19:52
SPEAKER_01: We've lost those skills.
19:53
SPEAKER_01: Yes, yes, yes, exactly.
19:55
SPEAKER_03: As a whole.
19:56
SPEAKER_03: Um, so uh resale platforms are becoming a a bigger thing.
20:01
SPEAKER_03: Um, I've done quite a bit of work with uh one that's called Vestiaire Collective, um, where some of the analysis that we that we did with them showed that 82% of purchases on their resale platform uh replaced first-hand purchases.
20:16
SPEAKER_03: Now they're a luxury goods player, so perhaps they've got slightly different dynamics, but if you look at the average of that 82% that's produced by all the sort of resale platforms, which includes your sort of far-fetched, your vintage, your real reels, and so on, it's about 60%.
20:34
SPEAKER_03: So that's actually quite a significant reduction in just demand for new things that comes through from those sorts of circular economy business models around it.
20:43
SPEAKER_03: We also the analysis that we did with them showed that the environmental impact, including nature, climate, water, everything, is 90% lower if you buy something on a resale platform than if you buy something new.
20:58
SPEAKER_01: Wow.
20:58
SPEAKER_03: That's a massive difference.
21:00
SPEAKER_03: Mainly because, I mean, it's obvious if you think about it, we're not using any new materials that are coming into it.
21:05
SPEAKER_03: It's it would have had an end of life anyway.
21:08
SPEAKER_03: We just it still have an end of life, but it's going to be later on, and you've got some other use that comes in.
21:12
SPEAKER_01: And it's not just sitting in someone's closet or going to your point to a landfill.
21:16
SPEAKER_01: Correct.
21:17
SPEAKER_01: Instead, someone else is actually making good use of that item.
21:21
SPEAKER_03: Um, we've just published a paper in the last few weeks that looks at uh the sort of circular models for the fashion industry.
21:28
SPEAKER_03: And one of the challenges that it's highlighted is that there's a cost to taking something back, getting it ready, repairing it maybe, getting it ready, marketing it for resale that in the UK is somewhere between five and seven pounds per item.
21:46
SPEAKER_03: Now, clearly, if you've got fast fashion, low cost point, low durability, that doesn't stack up.
21:53
SPEAKER_03: Whereas if you go into the luxury end of the market, that's at almost an immaterial cost associated with.
22:00
SPEAKER_03: So at the moment, two things have got to change from a business model reinvention or innovation perspective.
22:08
SPEAKER_03: One is improve the durability and quality of things so that actually they've got more desirability.
22:15
SPEAKER_03: People are willing to pay a little bit more for them.
22:17
SPEAKER_03: But the other side of it is how can we reduce that five to seven pounds down to something lower to enable more products to be able to sort of survive in this reuse economy?
22:27
SPEAKER_01: Well, and so that's a really good question.
22:29
SPEAKER_01: And one I was going to bring up just about equality, because you you know, when you were giving your examples of the countries that are using resources so quickly, obviously those of you know sort of first world countries.
22:42
SPEAKER_01: And then if you think about these fashion we're talking about high-end goods, they will last, they are resellable and otherwise.
22:50
SPEAKER_01: And so then if I don't have the resources to purchase that expensive t-shirt, and I, you know, I'm happy with the one that initially only cost$10, but I can only wear it a couple of times.
23:01
SPEAKER_01: There's an equity issue there, it feels like.
23:04
SPEAKER_01: Which I know is much more complicated than you're planning to get into, but I think it's at least dimensions.
23:10
SPEAKER_01: It's real.
23:11
SPEAKER_03: And and I I was shocked at some of the statistics that we came up with while we were doing the report on fashion.
23:17
SPEAKER_03: It was it was a European or UK focused analysis, but the weight of fashion that a UK consumer is buying every year is about 27 kilograms.
23:28
SPEAKER_03: Now that's about 38 pairs of trousers or 411 pairs of socks.
23:33
SPEAKER_01: That's a lot of socks.
23:35
SPEAKER_03: That's a lot of socks, right?
23:36
SPEAKER_03: So, to what extent is that level of volume enabled by just because it's so cheap, I can versus I can't afford something else?
23:47
SPEAKER_03: There's something that's it's not just about an equity issue in here.
23:50
SPEAKER_03: There's something about the business model as a whole that's that is fueling this.
23:54
SPEAKER_03: UK, by the way, was from the analysis the worst in Europe.
23:57
SPEAKER_03: So I don't know what we've got wrong going on in the UK.
24:00
SPEAKER_01: So so then if I'm a company and I'm stepping back and saying, okay, I understand this, and I don't want all the waste maybe that I have in my production line, or I do want to be able to bring my goods back in, or otherwise, going from where you are now to getting to even what a new business model may look like, that's a huge leap to use the word before, seismic leap.
24:26
SPEAKER_01: And for all companies to do that, it feels like there needs to be some other force that's helping with this.
24:33
SPEAKER_03: Yes, you're right.
24:34
SPEAKER_03: This this is hard, right?
24:35
SPEAKER_03: We're talking about the sort of change that we haven't seen in industry for for decades, the sort of scale of change we're talking about.
24:43
SPEAKER_03: So why would you do it, right?
24:44
SPEAKER_03: It's yes, it'd be expensive, it'll be hard.
24:47
SPEAKER_03: Um, there are a few pioneers who are showing the way, but the majority of businesses are leaving this in the too hard box.
24:55
SPEAKER_03: So regulators are stepping in around these areas.
24:58
SPEAKER_03: I think one area where, which is probably closest to the consumer's consciousness and where regulation is really stepping in is packaging.
25:07
SPEAKER_03: And I'm sure we all get a little bit frustrated with the amount of packaging that we have to deal with all the time.
25:12
SPEAKER_03: Home delivery certainly is increasing all of these sort of areas.
25:16
SPEAKER_03: Um in the EU, uh, there's a piece of regulation called the packaging and packaging waste regulation, which is trying to increase the uh amount of packaging that is recycled up to 65% by 2025 and 70% by 2030.
25:33
SPEAKER_03: And the reason for that is there just isn't enough infrastructure to actually process the amount of waste that we've got.
25:39
SPEAKER_01: Right.
25:40
SPEAKER_03: And so it it it doesn't make sense.
25:42
SPEAKER_03: So how do you how do you drive businesses to change?
25:45
SPEAKER_03: Well, first there's been some things that have been outlawed, plastic straws.
25:49
SPEAKER_03: Now the little bottles of shampoo you used to get in hotels, they're beginning to sort of disappear because they're sort of seen as a complete uneconomical silly waste of resources.
25:58
SPEAKER_03: But we're we're seeing everything from the idea of reusables being brought in into sort of like restaurant settings and and and takeaway settings and and that sort of environment through to saying how much air should you have in a in a in a packet versus well, fruit and veg that doesn't really need plastic at all.
26:15
SPEAKER_03: Why have we got into this situation of banning things like that?
26:19
SPEAKER_01: So it's a really interesting point.
26:22
SPEAKER_01: I was with my team a couple of weeks ago, the team actually working on the GHG chapter of this guidance we're putting out.
26:30
SPEAKER_01: And we were talking about packaging because the other part of packaging is the more you order things, the more packaging you have.
26:38
SPEAKER_01: And so is there a way you were talking about recycling the packaging, but almost seems like redesign.
26:44
SPEAKER_01: Redesign and and changing again behavior to consolidate orders, order less, you know, all these different we were we were talking about all these different alternatives.
26:54
SPEAKER_01: Because but again, that's like a lot of change that has to happen, not just from the companies, but from consumers, but from a business person or perhaps government perspective to get these recycling centers set up.
27:05
SPEAKER_01: Again, what's going to kind of force that?
27:09
SPEAKER_03: Um firstly, I'd actually try to think of flip some of these problems on their head.
27:12
SPEAKER_01: Okay.
27:13
SPEAKER_03: Rather than see them as, ah, how do I deal with all of this sort of stuff?
27:17
SPEAKER_03: Look at the business opportunities that are in there.
27:19
SPEAKER_03: If you can find solutions to some of these problems, you're going to be the winner.
27:23
SPEAKER_03: Yes, because the resources have value to them around it.
27:27
SPEAKER_03: If you look at the regulations that are coming through on packaging, there are things like extended producer responsibility, which is putting the cost of getting all of those materials back and making productive use of them in the economy onto those that are producing the packaging in the first place.
27:44
SPEAKER_03: So that's putting a an a financial burden on you if you're producing packaging.
27:49
SPEAKER_03: We've got plastic packaging taxes in the UK, for example, that mean you've got to pay for the amount they're using.
27:56
SPEAKER_03: If you've got low recycled content, you pay more.
27:59
SPEAKER_03: So there are taxes, there are these EPR schemes which are coming in, which are driving costs from being a sort of externality that no business has to deal with to being an internal cost to the business.
28:13
SPEAKER_01: It does seem though, again, if I go back, we go back to the clothing example, and you know, I've referenced my grandmother, Depression era, everything was reused because there was a huge scarcity, if you think back to the world wars, huge scarcity.
28:26
SPEAKER_01: But now there does seem there's just an abundance, and people almost lean into that abundance.
28:33
SPEAKER_01: And so, again, as a company, if I'm the one that's sort of no, we need to change things, how do you bring consumers along with that?
28:42
SPEAKER_03: First, I challenge the view that there is an abundance.
28:45
SPEAKER_03: I come back to the one and 1.75 planets we're using today, and it's only getting worse.
28:49
SPEAKER_01: So I should say perception of abundance, perhaps.
28:52
SPEAKER_03: Companies like to be able to give consumers choice.
28:56
SPEAKER_03: Choice requires abundance.
28:59
SPEAKER_03: I mean, I just look at the choice of what you get in a supermarket these days, right?
29:03
SPEAKER_03: It's crazy.
29:04
SPEAKER_03: It's crazy.
29:04
SPEAKER_03: The amount of resources that have to be used to enable that to happen is because the feeling is the customer needs to get what they want when they want it.
29:11
SPEAKER_03: There's a breaking point though within here that we can already begin to see in certain areas.
29:15
SPEAKER_03: I think the the electric vehicle batteries is an interesting one.
29:19
SPEAKER_03: But actually, there isn't that abundance.
29:21
SPEAKER_03: And if you can't get access to those resources, you can't sell your products.
29:25
SPEAKER_03: You can't produce them, you can't sell them.
29:26
SPEAKER_03: You can't.
29:27
SPEAKER_01: Yeah, so we saw some of these supply chain issues, even in the pandemic.
29:30
SPEAKER_01: People saw that you couldn't get every single possible size and otherwise and somehow managed managed to survive without everything.
29:38
SPEAKER_03: Yeah.
29:39
SPEAKER_03: So it's always um a six of one, half a dozen of the other situation.
29:44
SPEAKER_03: Is the problem driven by the consumer in what they are saying they're asking for?
29:48
SPEAKER_03: Or is it driven by the choices that are provided by the retailer?
29:53
SPEAKER_01: And then it's hard to be the one, the retailer who's out in front and saying, I am going to offer less because is that going to be successful or otherwise?
30:03
SPEAKER_03: Um, Patagonia is one that is sort of forging ahead with this, where I think it's rather than the Black Friday sale, it sort of says we're not going to sell anything on a Black Friday because we think consumers should be using less.
30:16
SPEAKER_03: Now it had a reverse psychology effect to it, I think, but that sort of mindset putting that out there goes to show that there is increasing awareness of this as a problem around it.
30:26
SPEAKER_03: And I think some of the companies that are pretending it's not a problem are probably the ones who are going to get bitten first.
30:33
SPEAKER_01: Yeah, and I mean you mentioned when you were talking about uh large carbon emissions agriculture, it's another place where there is a lot of waste, a lot of well, just a lot of issues that can be dealt with.
30:44
SPEAKER_01: So I guess it's another area where you could look at this to see different ways to do things.
30:50
SPEAKER_03: Food is is a is uh a really good example because everyone talks about food waste, and in your mind you think about, oh, what's in my kitchen?
30:57
SPEAKER_03: What do I take out of my fridge and have to put it in in the waste?
31:01
SPEAKER_03: Really, the majority of food waste happens sort of in the field and in the processing plants.
31:06
SPEAKER_03: Um, even things like wonky vegetables, the idea that you can't sell it there's a lot that gets left in the field is deemed as un undesirable, even when you take into account that a lot goes into animal feed and that's that sort of area.
31:18
SPEAKER_03: Um, because of the way that we sort of either we've set up our supply chains to be able to do things at at speed or supply things at the drop of a hat, or they have to look and feel a certain way.
31:30
SPEAKER_03: There are there are lots of things that we need to rethink in the way that we we run our economy.
31:36
SPEAKER_01: So then let's bring it back to reporting, and then maybe we'll get into some practical advice.
31:42
SPEAKER_01: So for companies reporting under CSRD, we have E5 talking about circular economy, and again, for some companies, they have probably not thought about any of this, or it's very superficial they're thinking.
31:55
SPEAKER_01: So, how are you recommending that companies start to get ready for that?
31:59
SPEAKER_03: I think E5 under the CSRD is going to be a shock to many.
32:04
SPEAKER_03: It essentially is saying, how do you use resources?
32:08
SPEAKER_03: What actions have you taken to reduce them?
32:10
SPEAKER_03: And what are your future plans to tackle them?
32:12
SPEAKER_03: But also, what are the risks and opportunities posed to you by availability of resources?
32:17
SPEAKER_03: Where do you have a strong dependency on certain resources and what's the potential financial effects as a result of that?
32:24
SPEAKER_03: How many businesses have got that level of thinking within their organization?
32:28
SPEAKER_03: Not many.
32:29
SPEAKER_03: Yeah, when it comes to the sort of data, which is what we often we we think about with reporting, uh aside from the sort of the the risks, the opportunities of the strategy side, sort of metrics that they're looking at is looking between resources inflows, outflows, and then what happens at the end of life in terms of waste.
32:47
SPEAKER_03: So inflows, they're not just talking about the amount of resources.
32:50
SPEAKER_03: It's really important to think about the type, whether they're critical raw materials, rare earths, whether they are technical materials or biological materials that have been used.
33:01
SPEAKER_03: And when we're thinking about outflows, we need to think about what happens to all those materials that come as an inflow.
33:06
SPEAKER_03: Where do they all go?
33:07
SPEAKER_03: What goes into products, what goes goes into uh waste streams, if it's going into waste, what is happening at the end of life?
33:13
SPEAKER_03: How's it falling into the sort of the waste hierarchy that ultimately gets us to reuse?
33:19
SPEAKER_03: And as a result of that, you get into metrics like circular material reuse rates.
33:25
SPEAKER_03: So you start to think about inflows and outflows and the rate rate of that driving that.
33:30
SPEAKER_03: Um, how you've got reuse rates of uh primary raw materials versus critical raw materials, also asks you to report on things like the use of circular design, which we've talked about a little bit on here, durability and areas like that, to really start to get under the skin of the scale of this challenge.
33:49
SPEAKER_03: And that's a lot of data that in my experience most companies do not have today.
33:53
SPEAKER_01: Well, and if you put it in the context of you're also dealing with E1 climate, you know, E2, S1, like there's so much else they're also dealing with, and maybe they're a little ahead on some of those, but even you know, going back to our episode on nature and biodiversity and e4, it's a whole other challenge that companies have.
34:15
SPEAKER_01: So it's not like they're you're you you can just deal with this in a vacuum either.
34:20
SPEAKER_03: I I would recommend not to treat this as a reporting problem that needs to be solved.
34:24
SPEAKER_01: Well, for all of CSRD, that's probably a fair, a fair piece of advice.
34:29
SPEAKER_03: Particularly when when we've been talking here about business model reinvention, the insights you can get from this type of data to how you have to de-risk your business, to think about opportunities for new products or services to be offered and what that might mean for competitive advantage are huge in this space.
34:52
SPEAKER_03: Daunting, difficult, complicated, but ultimately the business models of the future will be circular business models.
34:59
SPEAKER_01: Yeah, I mean, this is to your point, there is a huge amount of opportunity.
35:03
SPEAKER_01: And again, when you're thinking of CFSRD or any sustainability reporting, there's so much focus on risk.
35:09
SPEAKER_01: But maybe for companies to think of this as an opportunity, as a place that they can be the leaders, then that shift of mindset will cause this seismic change that you were talking about.
35:22
SPEAKER_03: That's the hope, right?
35:23
SPEAKER_03: That's the hope.
35:24
SPEAKER_03: I guess that's sort of why we've got CSRD and I SB standards and so on, is companies aren't doing enough without being forced to.
35:32
SPEAKER_03: Shining a light on this stuff.
35:34
SPEAKER_03: So the reporting that will come out as a result of things like E5 will make it much clearer about which companies are part of the problem and which ones are part of the solution.
35:42
SPEAKER_03: And that's going to be embarrassing if you're part of the problem.
35:45
SPEAKER_03: It's going to drive, you hopefully drive behaviors.
35:48
SPEAKER_03: And that's the idea of sort of mandatory reporting.
35:51
SPEAKER_01: Yes.
35:51
SPEAKER_01: Well, this is a fascinating subject.
35:54
SPEAKER_01: Any final thoughts?
35:56
SPEAKER_01: I mean, I think you've left us with a lot to think about here.
35:59
SPEAKER_03: I think the key thing is to think about this as a business model opportunity.
36:04
SPEAKER_03: Everyone's struggling to find the next area of value creation.
36:07
SPEAKER_03: This is it, right?
36:08
SPEAKER_03: There's so much within this whole topic.
36:11
SPEAKER_03: And I do believe that successful businesses of the future will be circular businesses.
36:16
SPEAKER_01: All right.
36:17
SPEAKER_01: Well, we definitely need some very smart minds thinking this through.
36:21
SPEAKER_01: And uh, for our listeners' benefit, I can see Tom's report that he was referencing numbers from as has some very interesting information in it.
36:29
SPEAKER_01: So we'll make sure to include some links to that and to some other materials in the show notes.
36:34
SPEAKER_01: But Tom, this was great.
36:35
SPEAKER_01: I definitely think we're gonna need to have a follow-up episode.
36:38
SPEAKER_01: But thank you so much for joining me.
36:39
SPEAKER_02: Absolute pleasure to be with you.
36:40
SPEAKER_02: Thank you.
36:42
SPEAKER_01: That's our show for today.
36:44
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36:50
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37:04
SPEAKER_01: From Thought Leadership at PWC, I'm Heather Horn.
37:08
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