Financial and Monetary Systems

Why we need a circular economy

Frans van Houten
Chief Executive Officer, Co-Chair PACE, Royal Philips
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Financial and Monetary Systems

In the 16th century, the German astronomer Nicolas Copernicus made a profound discovery: the sun and not the earth was the centre of our universe. At the time, this idea went against established Christian doctrine and was heretical to many. It was also an audacious insight that sparked a revolution in science, ultimately paving the way towards a new world view and great improvement of prosperity.

For all the good it has brought us, our economic model is in need of a new direction. The global population will continue to grow, the middle class is set to top 5 billion by 2030, and many emerging nations will look for increased prosperity. This is putting enormous stress on our environment and our resources, which are becoming more difficult to extract. Our myopic focus on producing and consuming as cheaply as possible has created a linear economy in which objects are briefly used and then discarded as waste.

Alternatives exist, however, and we only need to look to nature to be inspired. Just consider the resilience and longevity of forests: ecosystems in which the seasons are perfectly harmonized with the lifecycle of all species. Waste does not exist in nature, because ecosystems reuse everything that grows in a never-ending cycle of efficiency and purpose.

Our intellectual take on this concept is called the “circular economy”, an economic system in which no materials are wasted. Products are designed and built so that they are part of a value network where reuse and refurbishment on product, component and material level assures continuous (re-)exploitation of resources.

This requires a fundamental redesign of business and our end-to-end value chains. Instead of selling products, we should retain ownership and sell their use as a service, allowing us to optimize the use of resources. Once we sell the benefits of the products instead of the products themselves, we begin to design for longevity, multiple reuse, and eventual recycling.

This requires a new generation of materials as well as innovative development and production processes. In addition, we need to define new business models and redefine the concept of legal ownership and use, public tendering rules, and financing strategies. And we need adaptive logistics and a leadership culture that embraces and rewards the circular economy.

Apart from strong moral arguments, the transition to a circular economy will be driven by the promise of over one trillion US dollars in business opportunities, as estimated by the Ellen MacArthur Foundation. This includes material savings, increased productivity and new jobs, and possibly new product and business categories. All in all, the circular economy will lead us towards a future in which 9 billion people in 2050 can live well and sustainably.

Society needs to play an active role, too. We need to shift from optimizing on lowest initial cost towards maximizing the total value and total cost of ownership, while at the same time taking the health and wellbeing of people into account. Governments should change their tendering processes and implement requirements for circularity that can drive demand for new solutions. Customers and consumers should change their consumption patterns and move from owning to using products. And since the circular economy is inherently systemic, it can only succeed if all stakeholders co-design, co-create and co-own.

Philips is committed to the circular economy and is applying its principles throughout the organization. We are redesigning our products and looking at ways to capture their residual value. We are shifting from transactions to relationships via service and solution business models. And we are changing our culture to focus on the long term and to cooperate closely with our customers and suppliers. It is not easy to change, but we feel called upon to assume leadership and inspire others.

Like all major transitions in human history, the shift from a linear to a circular economy will be a tumultuous one. It will feature heroes and pioneers, naysayers and obstacles, and moments of victory and doubt. If we persevere, however, we will put our economy back on a path of growth and sustainability. Perhaps five hundred years from now, people will look back and say it was the Circular Economy Revolution that ushered in a new era of wisdom and prosperity.

Read the World Economic Forum’s new report on the Circular Economy 

Read more blogs for the World Economic Forum’s Annual Meeting in Davos 2014.

Author: Frans van Houten is chief executive officer of Royal Philips

Image: A long exposure picture shows the trail of the planet Mars. REUTERS/Shamil Zhumatov

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Related topics:
Financial and Monetary SystemsFuture of the EnvironmentEconomic ProgressCircular Economy
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