ESG in Operations Part 1: Going circular to address Scope 3 emissions

As the world becomes increasingly focused on environmental action, businesses are re-evaluating their practices to ensure their processes and operating models are fit for a sustainable future.

Most value chain emissions are upstream in Scope 3, with the use of purchased products and materials often contributing very little to a company’s overall footprint, whilst recycling and other environmentally friendly initiatives are becoming essential levers to reduce emissions throughout the value chain.

“Circular” opportunities live upstream and downstream 

Another key area of focus is the circular economy, which prioritises recycling and reusing materials to reduce emissions and limit the use of newly manufactured ‘inputs’ to the production process. Such re-examination – and reimagining – of long-time practices stands to uncover short-term financial wins and longer-term returns.

Automotive is one of just a few industries where a large proportion of emissions are linked to the end consumer’s use of the product, in this case driving the manufactured vehicle. This is changing as we transition to zero-emission vehicles; however, even with this transition, becoming truly carbon net-zero also requires integrating circular economic principles, reducing emissions inherent to sourced parts and products.

Consequently, in certain industries, companies are now requiring suppliers to provide products with a certain share of recycled materials, making embarking on the recycling journey necessary for those suppliers to secure future business. Companies that move beyond quick wins – such as energy-efficient lighting or electrified fleet vehicles – to circular models for packaging and sourced products and materials can also further reduce emissions, costs, and secure access to alternative inputs.

Consumers increasingly value these efforts too – particularly in a B2C environment. According to a recent study by the University of Pennsylvania’s Wharton Business School and First Insight, there is a willingness among almost 90% of Gen-X consumers (those born from the late 1960s to 1980) to pay up to 10% more for products they perceive as sustainable.

However, while passing costs through to customers may be a viable strategy in the medium term, it should be noted that the current cost-of-living crisis creates a potentially significant barrier to overcome at this time.

Striking the planet and profit balance

The real winners in implementing circular economy practices will be the businesses that can effectively realise the environmental and financial benefits by introducing solutions that work for both planet and profit margins.

This journey starts from the point of product concept, where modularity should be considered alongside variability to make products easier to repair, upgrade, and adapt to changing needs.

Designing a robust and reliable process for recycling the product is also essential: as much effort should be invested in ensuring a product is as easy and efficient to disassemble and separate into the different components or materials as it is to assemble them in the first place. For example, the use of multiple and different (even composite) plastics in a product may prove a major hindrance in increasing the share of recycled material in products, as quality requirements often cannot be compromised.

Adapting business models is also an important consideration. For example, developing a paid subscription or “loan” service to exchange products (such as the Porsche Drive scheme introduced by the automaker) or to simply hire them when they are needed for a short period rather than outright purchasing (including BMW and Mercedes-Benz’s joint venture, Share Now, soon to be within the Stellantis portfolio).

Regulation requires rapid assessment and prioritisation

Regulations, such as CSRD in Europe, are also driving re-use by imposing greater accountability and transparency requirements on a company for the whole lifecycle of its products, from mode of production to end-of-life disposal. These rules can be even stricter at a country level. In Denmark, for example, the National Strategy for Sustainable Construction outlines efforts to decarbonise the construction industry, taking a lifecycle approach to the impact that new buildings will have, as well as making voluntary standards mandatory for certain new buildings from this year.

Given the building regulatory imperatives, and the clear environmental and business benefits, Operations teams must rapidly assess how easily they can board the circular economy ‘train’:

• Can the appropriate adjustments be made to product – and production – specifications?
• Are there enough alternatives – and access – to the required recycled materials?
• Do you have clarity on consumer expectations – in terms of relevance, demand, and propensity to pay a premium? Or is it a hygiene factor, whereby a certain share of recycled materials is a prerequisite for selling to certain markets?
• How will you involve – and incentivise – your suppliers (and customers) in driving down carbon emissions?

From here, win-win solutions can be rapidly prioritised and implemented. To make changes manageable, businesses can start in a small, controlled manner, by piloting initiatives in one market or region and iterating as needed.

Adopting circular economy practices is not just an environmental responsibility but also a business opportunity. By implementing sustainable practices, businesses can reduce costs, access alternative inputs, and appeal to environmentally-conscious consumers. While the transition may be challenging, there’s no doubt that it is essential to meet the growing mandate for environmental action and secure a sustainable future.