Manufacturing Trends: Circular economy

The conversation around decarbonization has rightfully expanded to include evaluation of emissions along the entire product value chain. The manufacturing industry must adopt a holistic lifecycle-based approach for emission and waste performance measurement to maximize net-zero gains. To successfully move on from the traditional take-make-waste linear business models, authorities and industry players must formulate concise circular-economy strategies to tackle emissions embedded along all facets of product creation, use and disposal.

Presently, the world economy is 8.6% circular ¹. To close the emissions gap by 2032, circularity levels need to practically double until then. The driving force behind existing linear economic systems is resource extraction, which accounts for over 50% of the world’s carbon emissions and 80% of biodiversity loss ².

The world uses 60% more resources than the earth can regenerate yearly – or 1.6 earths ³. In line with current population growth projections, this number may rise to an unsustainable 3–4 earths by 2050 if left unchecked. Consumer awareness around sustainable business practices of producers is increasing and consequently impacting purchasing decisions. Hence, greater circularity will not only improve the environmental footprint of companies, but also bring them economic and financial benefits.

Manufacturers have started to take note. Several multinationals have announced ambitious targets to reach full circularity by the early 2030s. Although recycling materials has been the focal point of action thus far, companies are increasingly striving to keep products in circulation longer, whilst simultaneously reducing the amount of resources and virgin materials required to create and distribute them.

Designing products with reuse, repair and recycling in mind is crucial, since 80% of a manufactured item’s lifetime footprint on the environment is determined in the design phase. Material selection must weigh in factors such as recyclability, ecological impact of the production process and the sustainability quotient of supply chain partners. Manufacturing techniques that avoid harmful non-biodegradable solvents, reduce energy-intensive chemical bonding processes, and eliminate the need for water for fabric dyeing must be promoted.

Numerous circular economy initiatives are already underway. The EU’s ‘Right to repair’ scheme aims to enforce minimum repair and durability standards, with France even introducing a repairability index in 2021 to inform consumers on the ease of repair of electronic devices at the time of purchase ². Furniture, fashion and smartphone companies have piloted buy-back schemes, while food production waste is increasingly being reused in other items such as compostable packaging. From single material glueless shoes to remanufactured production-line robots, manufacturers have begun taking concrete steps to ensure their long-term viability by embracing circularity.

Ultimately, though, it is imperative to foster a product conception approach catered towards purpose-based creation. Modular designs that enable economical servicing, dismantling, and repurposing will also open up new asset deployment opportunities and usage-based revenue streams for manufacturers. Full economic circularity, however, warrants extensive knowledge and unprecedented transparency within supplier networks.

The supply chain accounts for over 80% of a company’s overall greenhouse gas emissions. ^5,6 Therefore, each single component must be addressed to facilitate the transition towards greater circularity. The EU has proposed using digital product passports (DPP) to improve transparency along product value chains as per the new Circular Economy Action Plan (CEAP) – a key component of the European Green Deal ⁷. Initial DPP deployment is expected to be in a limited capacity in 2023, with electric vehicle (EV) batteries and consumer electronics being the most likely application fields.

Further steps taken by the EU include requiring companies to quantify their environmental footprint claims using defined standards to ensure greater reliability and comparability, whilst also tackling greenwashing. These actions will help develop standardized solutions for identifying, tracking, mapping and sharing of product information along its lifecycle. Blockchain technology will play a vital role in this process.

Supply chain risk management capacities of Original Equipment Manufacturers (OEMs) and globally spread suppliers with a network of hundreds of sub-suppliers are thereby likely to be stretched to the limit. Partnering with certified vendors to audit and verify the origins and CO2 footprints of materials, parts and services will become essential. A standardized, thorough onboarding process will be key. The sheer complexity of modern-day value chains leaves the door open for malicious actors to conduct fraudulent activities that may subsequently result in reputational damage and increased litigation risks for the upper tier in the supply chain. Future value chain resilience efforts will necessitate close collaboration between companies and their insurers, with data-driven risk insights and services taking centerstage.

The move towards greater circularity will invariably lead to new risks and opportunities emerging. Refurbishment of safety critical products and components, the growing use of secondary raw materials and the advent of novel manufacturing processes affects product liability as well as recall risks.

The electrification boom in the mobility sector will increase the overall complexity of recycling operations, with limited expertise and experience with EV battery recycling available in the market today. New capabilities and technologies will first need to be established, and may warrant dedicated certifications and commissioning procedures. The prospect of third party contracting work on such facilities, combined with the fire risk associated with high energy density batteries will likely impact general liability and employers’ liability coverage.

References

¹ Circularity Gap Report 2021

² The Guardian, Resource extraction responsible for half world’s carbon emissions

³ France Ministry of Energy Transition, Repairability Index

⁴ United Nations Act Now

⁵ McKinsey, Starting at the source: Sustainability in supply chains

⁶ United States Environmental Protection Agency, Supply Chain Guidance

⁷ European Commission, Ecodesign for sustainable products

This article is an excerpt from the Manufacturing Industry Trends – Casualty Risk Landscape report.