Circular economy efforts must link across organizations and all sustainability

Sustainability must include the entire global context: 17 UN Sustainable Development Goals (SDGs), each underpinned by roadmaps covering all environmental, social, and governance (ESG) factors (see Exhibit 1 and our outline). Creating a more circular economy is an effort running through all SDGs and ESGs—from emissions, waste, and water to labor practices and risk management. Too often, however, circularity efforts in organizations lack context. These efforts might target one outcome—efficiency, traceability, or ensuring fair wages, for example—but seldom align with the global context and the long list of achievable sustainability and business outcomes. Connecting circular economy efforts to organizational-level strategies and all sustainability goals requires clarity of what circularity means, why it matters, and how it is measured.

Circularity, in this case, is broadly considered as minimizing impacts across the sustainability factors in a product’s life cycle—including efforts to recirculate, repurpose, reuse, remanufacture, reduce, repair, and recycle.

We spoke to a global European specialty chemicals company about its work with EY in quantifying circularity throughout its product and application portfolio, embedding these measures throughout the organization, and aligning circularity to its broader sustainability strategy. After initial company efforts aimed to roadmap emissions reductions across its sites and set science-based targets, it became clear that emissions are only one part of the broader frame of sustainability.

Our company-level sustainability targets cover emissions, waste, water, biodiversity, and much more.

— Vice President of Engineering, global specialty chemicals company

Exhibit 1: Breaking down the global sustainability context from goals and roadmaps throughout systems and organizations

Source: HFS Research, 2022

Ecosystem leadership exists in a constant battle with industry dynamics and the need for regulation

The chemicals company has set a carbon-neutral target for 2040; it would like to be ahead of its peers to see what is possible and have a hand in setting the bar the industry and regulators follow. But customer demands and challenges combined with industry dynamics dictate limits. These dictations manifest throughout the company’s customer industries, such as the automotive sector, which is pressured by global sustainability trends like electrification and the circularity of materials (in car bodies and batteries, for example).

The company is also bound to geopolitics. While it takes a global approach to sustainability and the circularity efforts we’ll discuss below, it uses European regulations as a baseline. Many geographies are behind the EU in setting broad sustainability regulations, making following these standards a form of global leadership. Markets in Asia also focus on circularity, but mostly related to its link to future business (meeting customer demand and efficiencies linked to improved materials use, for example) rather than Europe’s more heavy-handed regulatory stance on emissions and waste.

Sustainability must cascade from the global context and organizational-level strategy throughout all business functions and entire value chains

When it first focused on emissions reduction, the chemicals company found it relatively easy to set goals and implement the lowest-hanging fruit. But the challenge of cascading the whole frame of sustainability throughout all departments, including operations, procurement, strategy, development, and customer touchpoints, proved more daunting. The plethora of industries the chemicals company supplies adds to the complexity of addressing sustainability; each industry has its own dynamics and mandates to its suppliers, and they all must address the same global sustainability context.

Translating the demands of the industry, customers, globally varying regulations, and company strategy into a sustainability plan is far from easy. Consider the circularity example of a car

A vehicle can be handed back to the supplier at its end of life, dismantled, parts distributed to their original manufacturer, separated into their base components, and sent back a further tier into the supply chain before ultimately complex and often energy-intensive processes are isolated and recycle the raw material. Clearly, partners, suppliers, and customers must closely collaborate to align strategies throughout the entire value chain.

Circularity is a core focus area for addressing the chemical company’s sustainability goals and aligning with the European Union’s (EU) circular economy mandate. We’ll touch on the link between circularity and broader sustainability later. The 7R’s-based framework EY developed for this analysis describes and quantifies the circularity of products and their applications in Exhibit 2.

The complexity and range of products and applications add to the circularity challenges posed by system dynamics

An unexpected headache emerged while trying to understand circularity and arrive at a measure for a product. For each of our specialty chemical company’s products, there are perhaps 20 or more applications, and each application might have very different impacts on various sustainability factors throughout its value chain and life cycle. To prioritize efforts based on materiality, our company had to first find the product and application combinations that represented the biggest impact on end customers and their industries.

Sustainability efforts must begin at the CEO and board levels if strategies are ever to be turned into metrics, targets, accountability, and incentives throughout organizations

Most of our research indicates that a dismal number of CEOs and boards play even a supporting role in organizational sustainability levels—let alone a leadership one. We commonly see levels of 25%–35%. This isn’t good enough. A sustainability leader and team existing in a silo will never be able to change behaviors across an organization’s other functions. We presented this disconnect to COP26, the 2021 UN climate summit. Little has changed in our data since, showing not only the lack of top-level leadership but also that CEOs’ and boards’ priorities are drastically different from those leading functions critical to circularity efforts, such as procurement and supply chain.

Initially, the chemicals company ran an initiative for circular plastic, focusing on the chemical recycling of plastic. It aimed to produce products allowing customers to recycle. This effort and its KPIs were presented to the company’s board so it could better understand circularity measures within the whole Environment, Safety, Health, and Quality (ESHQ) group and why a broader measure of circularity was required. In doing so, circularity in the company became a dual top-down and bottom-up approach.

400 product and application combinations have had their circularity quantified and linked to the organization’s sustainability strategy

Based on an existing relationship, the chemicals company partnered with EY to contextualize and quantify circularity throughout the company’s product portfolio. Qualitative descriptions of products were initially the only existing measure of circularity. EY was tasked with baselining a quantitative value of all products and applications to determine the total degree of the chemicals company’s portfolio qualifying as circular. EY then tied that assessment to the company’s overall sustainability strategy and goals.

The first step was to fit products and their applications into a framework that would ultimately lead to a circularity score. EY helped draft the 7R method in Exhibit 2. EY also screened customers’ industries to identify how they used products and determine which product application had the most material impacts. This effort required a substantial team. Eventually, more than 200 products and 400 applications were scored against the 7Rs. The company then transferred these scores into the overall strategy covering waste, water, emissions, and biodiversity goals.

EY had a reputation and the expertise for deep involvement in sustainability, supply chain, and circularity—especially in dealing with the complexity of our product and application portfolio throughout the value chain.

— Vice President of Engineering, global specialty chemicals company

The importance and context of circularity were also transferred throughout the company’s departments, including the marketing and sales teams

The Engineering VP we spoke with praised EY for its understanding of markets and advice on implementing and communicating circularity throughout the company.

Next year, the chemicals company will baseline circularity for the whole firm with a heavy business focus, considering industry dynamics and mandates that it must integrate into circularity and a broader sustainability strategy. For example, in the procurement function, which currently has a Scope 3 (value chain) emissions focus, the next focus will be circularity. Raw materials are procured from different industries and geographies, and the procurement team will need to incorporate the 7R framework and align its activity to the global context and organizational roadmap.

Exhibit 2: EY developed the 7R circularity assessment framework for a global chemicals company

* Colors are illustrative examples only and do not refer to this case study
Source: EY and HFS Research, 2022

Circularity must address the product and the application

Scenarios arise in our chemicals company’s portfolio where a product might improve the circularity of its customer’s application but in and of itself might not be circular (an additive produced from oil or in an intense chemical process, for example). This situation requires a full value chain approach, including working with competitors to address the global sustainability context. Everyone must understand their impacts and how they cascade throughout a value chain.

New business development, efficiencies, and broad sustainability and business outcomes are on the horizon through circularity

The 7R framework and assessments have been taken back to the board. The next step is to develop a broader circularity strategy for the whole company—including its interaction with all customers and industries. The chemicals company believes this is the industry’s most progressed version of circularity scoring. In the past, its own commentary of circularity may have been included in sales presentations as a means of comparing to competitor products—but it would not have been not as quantitative as the 7R framework.

A future company aim is to link circularity scores to broader sustainability and business outcomes, for example, creating models assessing impacts on cost, recyclability, water, emissions, and much more based on circularity, and vice versa. Reaching new customers and markets are also viewed as targets in all sectors—as globally, firms look to find their own version of a circular economy.

The company is also improving collaboration throughout its ecosystem. A circular plastics program involves close collaboration with suppliers and customers to find new ways to recycle, reduce, or reuse plastics, for example. The company also sits with competitors to assess how regulations are changing. The EU’s mandate is to reduce plastic use and tightly link circularity with business impact. In the context of the chemicals company, an example could be producing additives that reduce the need for plastic or improve recyclability.

The Bottom Line: Circularity touches all areas of sustainability and, therefore, the whole value chain. That makes it complex. Visibility and collaboration are essential to link circular economy efforts to the global sustainability context

Despite the successes of EY and the chemicals company profiled here, circularity is not as easy as it sounds (if it ever sounded easy). With so many products and applications, circularity is impacted and impacts all areas of a value chain and all manner of sustainability and business outcomes.

Visibility is, in many ways, the supply chain’s golden end state—but that needs a tremendous amount of context. The benefits are broad across the UN Goals and all ESG factors: route and process efficiency; benchmarking emissions, water, and wider environmental impacts; transparency into labor practices including modern slavery or child labor; risk management including predicting disruption; building trust through traceability; waste management; the information to start building a circular value chain.

To improve visibility, move toward circular value chains, and address broader sustainability, alignment and collaboration must be prioritized for customers, suppliers, and all partners. Within the global context, aligned collaborative ecosystems and contextualized target outcomes might provide a chance to embed circularity and sustainability throughout all organizations and value chains.