Circular Business Models: What are They and why are They Important?

A circular economy is key to the EU achieving its goals of climate neutrality by 2050 —and businesses will play a crucial role. 

Transitioning to circular business models can help companies to meet business goals as well as environmental targets. Circular business models allow companies to decouple revenue from resource use. Circular products and services help businesses to stand out in an increasingly eco-savvy market and prepare them for risks like materials shortages or upcoming legislative changes under the EU Circular Economy Action Plan and Sustainable Product Initiative. 

But without the right expertise and planning, circular business models can fall flat, failing to achieve environmental or commercial sustainability. 

Take the recent debates about whether clothing rental services designed to extend the life of garments can actually produce negative climate effects. One study showed that some clothes rental companies may offset the positive environmental impact of their product by using unsustainable methods of packaging, transportation, and dry-cleaning. However, other fashion rental organizations show that it’s possible to achieve sustainability across the entire value chain through eco-friendly production, packaging, delivery, and garment-care practices. 

By knowing which factors to consider, companies can transition towards truly circular, truly sustainable business models. In this article, we’ll explain the opportunities and challenges of circular business models—and offer some solutions—to get you started. 

Want someone with deep experience and connections in the EU to help guide your sustainability strategy and transition to circular business models? Get in touch!

What are circular business models?    

Linear business models i.e. most business models that exist today, exploit natural resources to make products that eventually become waste. In contrast, circular business models aim to close the loop between waste and production, keeping products and materials in circulation for as long as possible by repairing, reusing, or recycling them. 

The EU is developing legislation that aims to make circular business models the norm. More and more businesses are innovating to minimize ecological costs and create supply chains that recover, share, and reuse materials.  

Ecodesign of products for longevity, repairability, and easy recycling is crucial. But as we’ve seen with the clothing rental example, circular business models go beyond product design to ensure sustainable practices throughout the entire value chain, including packaging, aftercare, and distribution. 

Circular business models also involve rethinking the way products are distributed and sold, prioritizing service models over product ownership and increasing the usage rate of each product. 

Many circular business models are developing in all forms and shapes as we speak, but key circular business models include: 

Product as a service

In product-as-a-service models, customers lease or rent the functionality and experience of using a product rather than the product itself. Companies offer customers reusable goods like cars, devices, or clothes as a service, including after-services like repair or re-use. As an example, Arket provides a rental service for children’s and maternity wear.  This model motivates companies to produce durable, high-quality, repairable products, thus decreasing product waste. 

Renewability and design for recycling

These models emphasize the use of renewable or recyclable materials and energy in product design and manufacturing. For instance, Adidas has created a running shoe that is “made to be remade”—it can easily be broken down for the secondary raw materials market. Brands like H&M offer incentives for customers to return used clothing that is either re-sold on the second-hand market or recycled into textile fibres. 

Product life extension 

Product life extension business models focus on keeping products in use, according to their original purpose, for as long as possible. This involves ecodesign of durable, long-lasting products as well as methods like regular product maintenance and repair. Companies like BackMarket refurbish electronics products to keep them out of landfill, while businesses like mooncup aim to extend the life of menstrual products which are usually disposable. 

Opportunities and challenges 

Companies and consumers alike are still learning how to move from linear to circular models—and it can be a tricky transition to get used to. 

So why should companies move to circular ways of doing business? 

Advantages of circular business models

• Essential for climate neutrality. The transition to a circular economy is necessary for the EU to meet its climate targets. Without adoption of circular business models, a circular economy is impossible. 
• First-mover advantage. The market is changing fast and companies are increasingly exploring and innovating circular business strategies. Companies who invest in circularity now will get a head start on the competition. 
• Builds customer trust. Consumers are increasingly demanding sustainable solutions. Bringing customers with you on your journey towards circularity means opening a dialogue with them so both sides can get familiar with new models of consumption.
• Adapt to changing environmental conditions. Circular models help companies to effectively manage resource availability risks, which includes preparing for raw materials to become more expensive and less available.  
• Prepare for upcoming legislation. EU legislation like the Sustainable Product Initiative will accelerate the transition to a circular economy. Moving towards circular business models helps companies to prepare for new requirements. 

The need to transition is clear. But companies implementing circular business models still face several obstacles. By understanding the issues, we can work towards resolving them at the level of policy and individual business. 

Challenges of circular business models

• Profitability concerns. The current market and production environment is geared towards linear business models, which often makes it difficult for circular business models to turn a profit. 
• Lack of infrastructure and technology. Since circular business models are relatively new, companies may find themselves without the necessary infrastructure or technologies they need for circularity, or without the economies of scale that come from established manufacturing and distribution methods. 
• Consumer expectations. Customers’ current ideas around product ownership, price, and convenience can be an obstacle to the adoption of circular business models, which may at first seem more inconvenient or expensive. 
• Need to adapt the entire value chain. The current debates around clothing rental companies show that it’s possible to undermine a promising circular business model by failing to consider sustainability across every part of the value chain. 

Transitioning towards circular business models

There’s plenty that companies can do to overcome these challenges and make the move towards circular business models. Here is our top advice:

Think holistically

Every step of the process must be driven by circular, sustainable principles, from sourcing materials and manufacturing to distribution, repair or aftercare, and disposal. Companies should pay special attention to the climate impact of logistics as well as design and production. 

It’s important to engage in concrete analysis to determine whether a circular business model will actually reduce your emissions and other negative climate impact—and if not, to redesign it. For example, clothing rental companies should ensure that clothes are delivered and washed sustainably and that they are actually being used for longer when they are leased than they would be when purchased by an individual. This could mean that instead of renting clothing to individuals for a single occasion, they rent for longer periods, encouraging each customer to wear items several times before they need to be deep cleaned and repackaged. 

Participate in EU policy development 

Economic and policy incentives are crucial to the success of circular business models. For companies to transition smoothly and profitably from linear to circular models, public investment in technology, infrastructure, upskilling, and educating consumers is key. Economic incentives like different forms of taxation for linear versus circular products could also be vital. 

The EU is committed to investing in a circular economy, but companies need to make them understand the obstacles they’re facing and the kinds of support they need. 

​​It’s important to participate in public debates and EU consultations like the Sustainable products initiative consultation to get your voice heard and highlight the need for favourable incentives for companies to take on circular business models. The recent Sustainable textiles strategy consultation also specifically asked stakeholders to outline the tools and technologies they need to go circular. 

To have your say on circularity, it’s important to stay up to date with the policy timeline. Here’s what’s coming up:

• The EU Commission will publish the legislative proposal for the Sustainable Product Initiative in December 2021, which will tell us how they plan to regulate and incentivize circular business models. 
• In 2022, the EU Parliament and Council will debate the bill and propose amendments. This is a key opportunity for organizations to advocate for their needs and ask the EU to address any obstacles to circularity. Take a look at our guide on how to engage with the EU for tips. 
• Our prediction is that we’ll most likely have the final legislation in 2023 and it will be implemented in 2024 or 2025 (but this could change!). 

Circular business models are the future of business 

Circular business models minimize ecological costs by keeping products and materials in circulation for as long as possible with durable products that are repaired, reused, or recycled, rather than disposed of. 

Upcoming EU legislation is heavily focused on circularity which means companies should get prepared. There are many advantages to moving towards circular business models as part of your sustainability strategy, including climate risk management, sustainable production, and market competitiveness with increasingly eco-savvy consumers. 

However, there are also obstacles. Current infrastructure is geared towards linear production, which can make circular methods expensive or difficult, and circular business models need to take account of the entire value chain. 

At the company level, businesses can take action on developing sustainable, circular business models. By measuring climate impact and considering every aspect of design, production, and logistics, companies can make their models truly effective and truly circular. 

But it’s also crucial that organizations get their voices heard in public affairs spaces. Companies need to advocate for economic incentives to make circularity environmentally and financially sustainable and for investment in technology and infrastructure to support circular ways of doing business. 

With key debates in the EU Parliament and Council in 2022, it’s time to prepare your position papers and have your say on circularity. 

Want someone with deep experience and connections in the EU to help guide your public affairs engagement and transition to circular business models? Get in touch!

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