Welcome! If you’re familiar with my weekly Subscribed column, you know that I’m a firm believer that the Subscription Economy offers a more sustainable path forward for both our businesses and our planet. But why exactly is that the case? I’ve been getting a lot of questions on this topic lately, so this week we went to get some expert opinions. Brendan Edgerton is the Director of Circular Economy at the World Business Council for Sustainable Development (WBCSD), a CEO-led organization of over 200 companies including DuPont, 3M, Nestle, BP, Danone, and Royal Dutch Shell. As you’ll see, Brendan is a sharp and lucid communicator, and I’m thankful for his insights.

Welcome, Brendan! Most folks are familiar with concepts like sustainability, but might not be that familiar with the circular economy. Can you describe the basic concept?

Sure. So today we live in a world where basic goods and materials are cheap and accessible. And that’s by and large a good thing — we all like our cheap television sets. But at the same time, there are a lot of hidden costs behind those materials that are not being considered: the costs to generate them, the costs to dispose of them, the potential costs to our health and to our planet.

So the circular economy is really about internalizing those externalities, bringing them into the system so they can be accountable for as a cost of doing business. This ultimately leads to using fewer resources, using them for longer periods of time, and then when we’ve gotten as much value out of those resources as we can, making sure we handle them properly so that they don’t wind up in a landfill. Ideally, they’re not being burned for energy, and they’re not even being recycled, but they’re being re-used or re-manufactured or refurbished in some way.

Another way to look at the circular economy is simply “going back to the way it was.” Before the Industrial Revolution, it wasn’t as easy or as inexpensive to get ahold of resources and materials. And so everyone was incentivized to be more responsible with whatever they owned or used, because they simply couldn’t afford a replacement, and they had to fix it if it broke. We had to make things that were truly durable. We need to bring those incentives back. The good news is that you’re really starting to see companies take this seriously. Ikea, for example, talks about how they put just as much energy and thought into how their products are disassembled and repurposed as to how they are manufactured and constructed.

It reminds me a lot of the old hiking mantra — pack in and pack out. We’re also seeing companies like Sonos offering upgrade programs that allow their customers to easily recycle their older models. They’re clearly thinking about the complete end-to-end lifecycle of their products. How can companies start thinking about this process in an applied, meaningful way? How does this transition happen?

It typically involves three stages. It usually starts with cost reduction measures: How can we divert more of our materials away from landfills towards recycling centers, and potentially reduce our costs and generate some meaningful financial gain from that process? Then it evolves into looking at the product itself: How can we make our product more circular, both in the materials that go into it and how those materials are eventually extracted from it? And lastly, it involves looking at new business models: How can we sell in a way that makes sure that we eventually get back all of our materials? Because that’s the only way this model makes financial sense for a company. And that’s where “as a service” models can play a key role, because if executed correctly they’re inherently circular.

Can you tease that last idea out? Just to play devil’s advocate, in strictly economic terms, doesn’t it make more sense for the consumer to have to deal with the materials, and not the company? Isn’t this that one of the reasons why we get to enjoy all those cheap TV sets?

But the way most businesses operate today, there’s a complete lack of transparency after the point of sale, isn’t there? Companies aren’t really sure how their products are being used, and for how long. It’s not only bad in terms of circular efficiency, but it’s actually a huge competitive disadvantage. So the subscription or “product as a service” model, where the company sells access to the asset as opposed to the asset itself, is one way to ensure that the company not only repurposes materials efficiently but also understands just how and why those materials are being used.

That’s a big shift in mindset when the manufacturer owns the asset, as opposed to the customer. You’re talking about a car company turning into something closer to a fleet manager, or a construction company turning into something closer to a work environment provider, or a big retail chain turning into something closer to an appliance library. How do you talk to companies about that, because you’re asking people to sell things differently, aren’t you?

I think leaders understand that the circular economy is an attractive business concept because it marries the idea of doing well and doing good. And the more you’re integrating sustainability thinking into the core business strategy and the risk management discussions, the more resilient the business will be in the long run. And so this is where increasingly conversations around new business models, not selling volume but selling access, is becoming more attractive.

It takes a while for companies to get down that road. And that timeframe really depends on the leadership of that company, and how aggressively they want to pursue this challenge. You see some companies already setting a hundred percent circular goals, not knowing how they’re going to achieve it, but setting those goals nonetheless. And you have others that are still dabbling in this landfill versus recycling versus repurposing discussion.

But probably one of the biggest challenges is status quo bias. This can seem like a difficult ask for people who have been running machines and systems and departments that at face value are doing perfectly fine financially. After all, there may be some short-term losses involved in this process.

This sounds very familiar to my discussions with companies exploring subscription models. It’s an idea that I recently talked about with Mark Garrett, the ex-CFO of Adobe. “Everything’s going fine, so why change things?”

It’s true. Lots of companies are doing well today, but there’s still such massive opacity all the way down the value chain, isn’t there? Across the board, all of these companies are looking for a better understanding of how their products are behaving, from material providers to retail channels to customers and beyond. That’s a big reason why our organization is CEO-based. This is an existential imperative for them.

Yes, it’s pretty clear that corporate sustainability has shifted from a “nice to have” to an absolute economic imperative. Let’s finish up with a quick industry-based lightning round. What are you hearing from the automotive industry on this issue? Younger people in particular just aren’t as interested in ownership. They’d prefer the ride, as opposed to the car.

They get it. They see that interest in vehicle ownership is waning. Especially here in Europe, where there’s so much great public transportation. They realize that they need to play a larger role in this larger grid of multi-model transportation: bikes, scooters, rideshares. The OEMS are trying to pick their spots and make smart investments because they see the declining volumes that they’re selling and they see the writing on the wall.

What about hardware? E-waste is obviously a huge issue. You’re seeing more companies like Sonos that allow people to subscribe to personal electronics. The same way companies got rid of their server rooms, people are getting tired of cluttering up their homes with obsolete electronics.

They’re probably at the forefront of all the industries in thinking about this. Many of them, of course, also have software businesses, so they’re looking at this from a different perspective. They really understand the product as a service model. They understand that the companies who take full ownership of their physical assets are actually much stronger in the end. They’re forced to innovate, and create better services.

Yes, I’ve written about how Google’s decision to own their data centers inspired a huge amount of innovation. How about appliances? Most of the new ones are connected devices. How does that play into sustainability?

They do, but when you think about the landfill problem in terms of pure volume, washing machines and refrigerators and larger appliances are a much bigger issue than phones and tablets. The fact that they’re connected and their manufacturers can now monitor their lifespans is a positive thing, but they obviously still haven’t figured out the re-use and re-purpose challenge. There are still a lot of broken appliances sitting out on sidewalks.

To sum up, it’s clear that corporate sustainability really isn’t a choice anymore. When huge investment funds like Black Rock are focused only on sustainable investing, it’s clear that there will be real consequences for companies who aren’t taking this issue seriously. Not to mention the fact that customers (and not just the younger ones) don’t want to do business with you if you don’t have a real sustainability initiative. But here’s the good news: the companies who are embracing these circular product models have huge competitive advantages! They have vastly more insight into their value chains, as well as their customer base.

Thanks so much, Brendan!

Thanks, Tien!