Where do the risks lie?

Jack Kruf | November 2021, B&G Magazine

In early 2021, the Netherlands Environmental Assessment Agency published the first Integrated Circular Economy Report (ICER 2021). The report outlines the progress of the transition to a circular economy in the Netherlands. I have summarised this comprehensive, highly informative report, with a focus on the major risks articulated by the authors.

The Dutch government aims to have achieved a fully circular economy by 2050. Monitoring the progress of this transition is essential. The ICER 2021 report is a significant milestone in this process. It highlights the interventions undertaken by the Dutch government to initiate and accelerate the transition to a circular economy, as well as the actions taken by civil society organisations.

Interventions and actions together form the transition indicators, which provide an overview of the extent to which and the ways in which businesses, consumers, and public authorities are preparing for a circular economy. These are described in this report, which was produced under the supervision of Dr Frank J. Dietz of the Netherlands Environmental Assessment Agency. Chapter 4 examines progress on the basis of eight key processes (p. 134):

• Entrepreneurship (experimenting with and scaling up innovations).
• Knowledge development.
• Knowledge exchange.
• Guiding the search process (goals and solutions).
• Market creation.
• Mobilisation of resources.
• Overcoming resistance (legitimacy and pressure for change on the established system).
• Coordination of a bundle of change processes in transition.

Key messages

The key message is that the transition to a circular economy has indeed begun, but is still only in its very early stages. It appears that we are at the start, and that much is taking place on a ‘voluntary basis’ and with ‘soft controls’.

Transition

The transition to a circular economy is on the agenda for many societal stakeholders. Progress in the transition is evident, among other things, in the increasing number of ‘circular’ businesses, scientific publications, educational programs focusing on circular issues, and financial resources allocated via central government support instruments for circular activities.

Initial phase

Despite the progress, the transition is still in its initial phase. At around 6 percent, the proportion of circular businesses in the Netherlands remains limited. Furthermore, the majority of the current economy still operates according to linear principles. There is still hardly any implementation of circular design or circular business models. The greatest environmental benefits are expected from ‘narrowing the loop’ and ‘slowing the loop.’

Narrowing the loop

Without further action, recycling remains the dominant approach in the transition to a circular economy. Recycling is indispensable in a circular economy. However, the greatest environmental benefits are expected to come from strategies that focus on reducing overall raw material use (narrowing the loop) and extending the lifespan of products and components (slowing the loop). To date, these strategies have received little attention.

Different rules of the game

The transition to a circular economy is not just about new technologies, but also about different rules of the game (institutions), different behaviour, new products, services, knowledge and alternative business models. These elements are still receiving little attention. The upscaling of circular activities faces various obstacles.

Efforts

Achieving the transition is a key objective of government policy. This requires efforts from public authorities, producers, consumers, NGOs, scientists, and administrators. After all, a transition cannot be steered and achieved by the government alone.

Risks

From the perspective of public risk management (PRIMO), an analysis of the key risks relating to content, process, and impact is therefore a logical step. The definition of risk here is ‘a potential deviation from, or damage to, the intended objective’. The following are specifically mentioned:

• Supply risk is the risk of not having access to a raw material for an economy or a business. The limited availability of critical materials poses a risk to the economies and living standards of importing countries.
• The risk of price volatility.
• If the sorting, repair, or recycling of these products is not carried out safely, the risk of serious pollution and health damage is high.
• Financiers see increased risk compared to the traditional sales model, due to existing accounting rules that hinder product-as-a-service companies, as their substantial assets (for example, the washing machines that are rented out) appear on the balance sheet and generate slow cash flow (rental income). These companies score poorly on creditworthiness (solvency) under the current calculation method. They require a relatively large inventory of products, which necessitates a relatively large initial investment. The resulting longer payback period is generally regarded by lenders as an increase in risk.
• However, licensing authorities and enforcement bodies use standard procedures to assess risks and process applications efficiently. These procedures are often risk-averse, even when laws and standards allow scope for change or experimentation. Furthermore, fearing legal consequences, licensing authorities often dare not deviate from a strict interpretation of laws and regulations. This can hinder new circular production processes.
• Risk assessment in the context of the energy transition is important because it is closely linked to the circular economy. The energy transition in the Netherlands is expected to lead to new supply risks. This is because the energy transition requires an unprecedented acceleration in the annual growth of production for many raw materials, leading to supply risks. On the other hand, linking waste incineration to energy supply systems such as district heating networks poses a risk to the transition to a circular economy. Significant investment is currently being made in this area. This link carries a risk of ‘lock-in’. The energy supply then becomes dependent on incinerating sufficient waste, creating an incentive to incinerate more rather than reduce waste and give the useful materials within it a new lease of life through recycling.
• The shift in waste processing from high-income countries to low-wage countries with lower environmental standards increases the risk of pollution havens emerging. Because waste export chains are not transparent, there is no clear picture of how the exported waste is actually processed, what the risk of negative environmental impacts is, and what value loss this entails.
• (Further) Negative effects may arise from the relocation of production chains, particularly affecting the poorest sections of the global population, with the risk of social abuses and violations of labor rights (including child labor). Local environmental impacts can also be significant.
  • A sustainability framework is required. Which material is sustainable under which production criteria or as a component of a product? There is also a risk of overexploitation here, preventing the stock of bio-based raw materials from replenishing and increasing the risk of depletion. This requires that bio-based raw materials be cultivated sustainably, soil fertility be maintained, and nutrient cycles be closed. The Dutch business community is taking steps, but by no means have all risks been addressed.
  • The spread of Substances of Very High Concern (SVHCs) is still insufficiently controlled and entails unforeseen risks. During reuse and recycling, SVHCs may be released or accumulate in products. These may also include banned substances still present in older products. New risks may also arise from the use of new combinations of substances. This calls for greater knowledge of the associated risks.
• Dependence on imports of critical metals poses a risk to the Dutch economy and standard of living. A few countries dominate the extraction of a number of critical materials, creating a risk of monopolistic behaviour

Governance

The word ‘governance’ appears for the first time on page 198: ‘To reach agreements on targets to be achieved and actions to be taken in the next phase of the transition, a clear division of roles between the various parties involved is essential. Creating greater clarity about the responsibilities of the various stakeholders and engaging in dialogue on this matter are, therefore, key components of strengthening the governance of the transition to a circular economy. ’

A comprehensive risk analysis of the realisation of a circular economy is lacking, but the building blocks described provide an initial indication. It will be an exciting process, and, given the objectives set, more systemic interventions, particularly by the government, are to be expected. Administrators and public leaders would be well advised to read this report and to ensure that its great value is reflected in the decisions to be taken. After all, ‘to govern is to look ahead’. A valuable report and, in terms of its comprehensive and, above all, transdisciplinary approach, the first of its kind. A work of expertise.

What happens next?

The concept of the circular economy is so vast and ownership of the transformation or transition so fragmented that lethargy at the individual organisational level is a real risk. Caspar Boendermaker, Frank Dietz, Bob Hoogenboom, Jack Kruf, Hans Krul, Bart van der Linden, Leen Paape, and Peter Robertson put their heads together in June 2021. A deliberately assembled group with expertise in public management, finance and investment, corporate management, and academia.

It was a meeting with an open agenda, in which we were guided by the statement in the ICER report (page 198) regarding governance: ‘To agree on targets to be achieved and actions to be taken in the next phase of the transition, a clear division of roles between the various parties involved is essential. Creating greater clarity regarding the responsibilities of the various stakeholders and discussing this is therefore an important part of strengthening the governance of the transition to a circular economy.’

High demand for knowledge and education in the circular sector

Given the tasks at hand, their nature and complexity, it quickly became crystal clear to the group that the demand for knowledge and education in the circular sector is very high. It also emerged that knowledge is currently fragmented and that the range of educational provision is still in its infancy. Furthermore, it became clear that the transition is a top priority for the vast majority of the organisations involved, as numerous new links among strategy, management, revenue models and implementation must be designed and implemented – often simultaneously.

Impulse for renewal

We concluded that it is not simply a matter of ‘purchasing something different’. New forms of collaboration will also need to be established, often with different partners. This will create a growing need for senior advisers, coordinators, and program managers. This trend in demand is already evident. The existing educational provision in the fields of complexity, risk, resilience, and scenario thinking, therefore, requires significant impetus for renewal. The traditional approaches of today will not suffice, was the conviction within the aforementioned group.

Targeted educational programmes

A logical, immediate next step is to focus on knowledge and educational infrastructure. Targeted educational programs are therefore an obvious choice. Programs that operate across the boundaries of current institutions and sectors, thereby establishing new connections. New alliances, revenue models, legislation and regulation, forms of public-private partnership, as well as political engagement, councils, and integrated governance will be essential for success. So, considerable attention will need to be paid to how content and governance can be reconnected.

Going to school together

Going to school together – always a strong concept in my view – certainly offers great opportunities for the circular economy here and now. After all, discovering together, learning together, enduring together, and finding solutions together. It is a must. The circular economy simply must replace the old economy, for the sake of Mother Earth, for our children, and us. Is it not this insight that once again shows us the way:

‘Education is the most powerful weapon which you can use to change the world.’ – Nelson Mand

Driven by social impact

Every organisation can contribute in its own way to the desired impetus for renewal and to going to school together. BNG Bank wants to work with its clients to explore and find solutions to improve the funding and financing options for circular construction and renovation projects. Through our commitment to the Sustainable Development Goals, we want to work with our clients on the transition to (more) circular and bio-based construction. We want to listen to their concerns, thereby contributing to the development and strengthening of this challenge.

Bibliography

Kruf, J. (2021). Op weg naar een volledig circulaire economie. B&G Magazine Online. Bank Nederlandse Gemeenten. https://www.bngbank.nl/magazine/Overig/Op-weg-naar-een-volledig-circulaire-economie

Planbureau voor de Leefomgeving (2021). Integrale Circulaire Economie Rapportage 2021. Den Haag: Planbureau voor de Leefomgeving, PBL-publicatienummer: 4124. https://www.pbl.nl/sites/default/files/downloads/pbl-2021-integrale-circulaire-economie-rapportage-2021-4124.pdf