Theory and Practice, mixed together... in a wash

Theory and Practice, mixed together... in a wash

Nancy Bocken is Professor in Sustainable Business Management and Practice at The International Institute for Industrial Environmental Economics at Lund University, Sweden and Associate Professor at Industrial Design Engineering at Delft University of Technology. She is also Fellow at the Cambridge Institute for Sustainability Leadership. Nancy’s main areas of interests around sustainability are: business models, business experimentation, innovation for sustainability, scaling up sustainable businesses, and closing the 'idea-action' gap in sustainability.

Hi Nancy, thanks for taking the time to sit at the table with me. Let me start this conversation by hinging from your experience as an academic researcher. To begin with, at which stage is academic research on the circular economy?

An article by Fenna Blomsma and Geraldine Brennan, published in 2017 in the special issue on Circular Economy in the Journal of Industrial Ecology, gives a clear overview on the different stages of the circular economy concept. They trace the origins of the concept back to the 60s or so, when maybe it was not called circular economy, but rather ‘closed loops’ or other terms. With the help of the Ellen MacArthur Foundation, there was excitement and hype in the early 2000s and I would say that it is still a hype item in academic literature. Currently, we are moving into the validity challenge period, trying to validate some of the claims that people make about the circular economy and the use of resources. Now we are really coming to terms with the facts about the circular economy, trying to reach theoretical and pragmatic clarity regarding the circular economy concept.

You have highlighted the importance of conceptual clarity about the term ‘circular economy’. Do you think we have reached it?

Well, I think that’s a yes and a no. If you look at sustainable development, for instance, we have the triple bottom line, but people still argue on what the triple bottom line is. So, I think we will never reach a kind of agreement of what the circular economy is, and maybe we don’t need that, because we cannot have one dictionary definition. What I do emphasize myself when I talk about the circular economy is the resource perspective, because I think that’s the powerful thing behind the idea and the most important driver towards a circular economy. I created this framework of slowing, closing and narrowing resource loops with colleagues at TU Delft, and for me it simplifies talking about what it actually means to create a circular economy. We foremost need to slow resource loops and consumption, by making a product re-use possible and make it last as long as possible. After the re-uses, we start talking about closing the resource loop, as with recycling. Finally, it’s about narrowing loops, so everything around efficiency and product design. I use this slowing, narrowing and closing framework to basically say: ‘hey, hang on, we first need to think about making stuff that lasts as long as possible and also slowing consumption patterns’. I think that’s one argument that is sometimes missing in the circular economy. Until at least a couple of years ago, the discussion was mostly focused on recycling, and only now we are slowly shifting away from that.  So, I want to emphasize slow consumption and slowing the loops perspective.

Which research fields have not entered the debate yet and you think might provide an important contribution?

As an academic who tries to be interdisciplinary, it’s always hard to see what is not being done at the moment. I think that, luckily, a lot is happening in the Circular Economy space, also in unexpected areas. For instance, maybe in the area of law we could do a lot more, regarding what it really means to have a fully circular economy, and not only concerning recycling, but also including topics such as remanufacturing and consumption patterns. So, there might be space for improvement over there, but I am not fully aware of what is happening in law faculties in the area of the circular economy. In any case, it seems to be one of those areas that would definitely be required. Moreover, we should not forget that we are talking about changing the world economy. And, how do we rethink the whole economy? This question has a lot of practical challenges and academics, of course, can help.

What about the contribution coming from the economics and business field?

Yes, the term circular economy is appearing in business journals but I think there needs to be a lot more.  Moreover, we need to better study both the microeconomics and the macroeconomics of the circular economy. These studies will probably need to change. Then, of course, the Nobel Prize this year was won by Richard Thaler, a behavioural economist. We also have people at our institute at Lund University, IIIEE working on this.  For instance, we have a professor (Luis Mundaca) working on policy analysis and governance for a research resilient and low-carbon economy (basically the circular economy) focusing on behavioural economics. I believe that behavioural economics can provide an important contribution to changing consumer behaviour and for running (policy) experiments.

In one of your recently published articles, Geissdoerfer et al. (2017), you directly compare the concepts of circular economy and sustainability. There you argue that  [among the two] “there is also a difference in agency, influencing the understanding of the agents that should influence system changes […] while agency is diffused in the case of sustainability, the CE has a clear emphasis on governments and companies”. Do you think other actors should be ‘conferred’ agency in the systemic change towards a CE? What about the role of consumers?

I am not sure whether you are aware of it, but I also have a start-up, called HOMIE pay-per-use, where we developed a pay-per-use business model for washing machines. With this business model, we try to be circular and low-carbon and to influence individual consumer behaviour. In general, I am of the strong opinion that it should be with the consumers the responsibility of being aware of what you buy, how much you buy, and whether you can consume less energy and products. But I know that many colleagues in academia have different opinions from me and believe that we need to be able to sustain our consumption patterns. At Homie we are breaking our own profits structure by saying that you should wash less. We are challenging our business model by challenging the customer.

And what about the role of the financial sector?

We know that this business model comes with challenges from a financial perspective. You can imagine that if you do a pay-per-use business model, you only retrieve the money for washing machines or whatever is the pay-per-use model over a long-term period. It might pass one year or maybe three years before you actually get the money of your initial investment back. So, what you would ideally have is banks saying ‘ok, we do a lease arrangement’, but banks are quite reluctant. They know how to provide small business loans for instance to hairdressers to buy equipment or to other familiar business types. When it comes to new economy projects and, especially when you have a start-up, that is really something they don’t yet understand and cannot cope with yet. What we saw by interacting with the banks is that banks find it very exciting, and they want to support for instance by  providing a platform for ‘pay per use’, but what really worries us is the financing of assets that we have. I think banks need to move from ‘oh, we can help them with all kinds of interesting things that benefit us’, to ‘ok, let’s think together about what the real challenges are and how we can solve them’. Probably there is willingness on their side, but being a very conventional sector it will take some time before they catch up with the actual means of start-ups and circular business models. Once they do, the role of banks will be very important. 

I didn’t hear about Homie Pay-Per-Use, and, now that you mention it, I got curious. Might you tell us something more about it and the idea behind it?

Sure, HOMIE is a spin-off of TU Delft, and we are partially funded through the Dutch government, a funding to work on a project that is both academic and contributes to a societal challenge. We started working on Homie in 2015, but the actual company really started operating in Netherlands in 2016. The idea was just to see whether you could create a connected washing machine as part of the circular economy proposition. You know the devices by Miele and Bosch or other big companies? They are sort of connected devices, but it is still exactly the same business model: they sell the product and might get interesting data from using the device, but the business model hasn’t actually changed. In our case, we want our business model and connected washing machines to actually influence the number of washes by the costumers and directly influence consumer behaviour. To do so, we send them a feedback at the end of the month, saying ‘You did 20 or 30 washes at 30 degrees Celsius, and a few 90 degree washes…maybe you should always try 30 degrees’. We also charge less for 30 degrees washes than for 90 degrees washes, so in many ways it is the idea of behavioural economics trying to influence people, also applied to this start-up. You are probably aware of Bundles, who are selling bundles or packages. Differently from them, we basically sell a wash, with zero upfront costs. Ours is a pure pay-per-use model.

So far, you have recurrently mentioned the importance of changing the behaviour of consumers. Which tools do you envision to do so, especially in relation to what you said before about the potential role of behavioural economics?

I think that we have at our disposal a whole spectrum of measures, from informing people up to banning. So it’s all the way from ‘I think you should do this’ (e.g. you should wash at 30 degrees), up until the ban of certain products. And in between you can do positive and negative nudges. An example of negative nudge would be a message saying ‘a polar bear dies if you shower too long because of climate change’. I think we need the whole spectrum of instruments. Behavioural economics can be super powerful as an approach, because it’s about testing real things, looking at social norms and the wider context, and how people can control their individual behaviour and are able to make the change. I think we can do much more with that in practice.

Let’s come to the social aspects of the transition. Do you see any clear social benefit coming out of a large-scale implementation of the CE? For instance, do you believe that the often-cited benefits in terms of greater employment (i.e. a more labour-intensive economy) and a fairer tax system (i.e. lower labour tax) will necessarily accrue or are they rather the result of specific assumptions that might not hold in reality? What about social ‘dangers’?

Walter Stahel has written a lot more about this. I warmly advise you to check out his work. When it comes to social aspects, I think the same argument with respect to business models applies: the system needs to be designed to have those intentions, to create those outcomes. It all stands on the design of it. So, if you want to create greater employment, that is something that needs to be designed for. A lot of work has been done on the resource perspective and I think that’s a nice thing about the circular economy because it starts to make sustainability easier to comprehend, focusing on the resources and the economy, without including the more difficult factors of the social elements. But, do we know whether taxes on labour will become cheaper? I don’t know, I cannot predict the future. We also have the emergence of robotics—robots that that can assemble and disassemble products—so lots of the promises of the circular economy in terms of that might not hold. Some of the jobs might be replaced by robots, also 3D printing will likely change lots of things, so there will definitely be some unexpected radical innovations that will influence the system. We need to be prepared to think about the people in this economy, and to think how we design and take into account the positive role of people in the circular economy. I don’t think it is a given and a lot of what we currently hear around the social benefits of the CE is just promotion talk.

In your recent book, ‘Circular Business: Collaborate and Circulate’, you stress the crucial role of cooperation among firms. Why is cooperation so important and does it matter when you start cooperating with whom? 

Right now we have a linear value chain, in which each time we shift one product from one place to the other, and possibly there is some reverse logistics when there is a product failure or some repairs are needed. If you want to create a more circular economy, you could potentially do everything vertically integrated and everything yourself. But it is hugely complicated and when you watch Milton Friedman’s talk about the pencil (how no person alone can even create a pencil), then you already know that collaboration is a requirement in any economy. I don’t believe in a fully vertically integrated and isolated value chain; we need to create collaborations to create the reverse flows and systems of maintenance and repair. So, that’s why cooperation is important.

And why would you want to create this collaboration early on?

Well, I think one of the challenges is the anxiety or uncertainty that people or companies might already feel associated with this shift to the circular economy. For example, retail shops would disappear if we only do online shopping, so this is something they already fear. I think that the circular economy can be an opportunity to see what is the new role of retail, but then you also need to rethink the financial model. For instance, if people go shopping to a physical shop because they value it as a fun experience, plus the service of maintaining and repairing, but the main seller is somewhere distant and far away, how do you distribute the finances?  In our book, Circular Business, we basically say that through a circular economy you might actually increase the total value pie, because you add much more services to the customers, but cooperation is required early on to make sure that everyone gets their piece of the pie, and that the piece they get is the one they deserve.

I am fascinated by your dual nature of academic researcher and entrepreneur. Let me ask you a question that mixes these two universes. In your research, you have extensively focused on the role of business model innovations in this socio-technical transition. Talking with start-ups and financiers, I have often encountered dissatisfaction with how the value proposition of circular start-ups is communicated. Which advice would you give to a start-up that is just starting a circular business when formulating their value proposition?

Very broadly, I think there might be two extreme types of circular economy entrepreneurs. The first type comes from the business side and brands slightly greener products as super circular or sustainable. The second type might be some kind of very ‘green person’, who may forget to emphasize the consumer proposition. I think the answer is somewhere in the middle, and circular entrepreneurs need to create a triple value proposition: an environmental value proposition, a social value proposition and a consumer value proposition. With respect to the environmental value proposition, I think a problem with the hype of sustainable business models is that few people have actually tested whether the environmental value proposition is correct, i.e. whether their system is better for the environment. So, we still need to do that. Regarding consumers, at HOMIE we have very green customers, but there are also customers that like the flexibility of being able to give the washing machine back when they move and then we come and pick it up. Others care about cost control, and with our products and services, if they don’t have the money, they don’t wash or wash less. So, it might be cost, convenience or maybe sustainability. I think it’s very important to have multiple propositions to appeal to multiple consumers groups.

Let’s conclude with a broad overview on this systemic change. Different stakeholders are called to do their part, but do you see one part of the system as having greater responsibility for change, i.e. a first mover? Can we identify a main trigger or it doesn’t really make sense to talk in these terms? 

We definitely need a systemic perspective, by which I mean awareness of who is around us, which different disciplines need to contribute to solving specific issues, which stakeholders need to be involved. We need to be aware of the fact that we cannot solve an issue from only one perspective. It’s always nice to think about one being the real trigger, but I don’t think this really exists.  It’s individual responsibility and awareness of people, the role played by companies, governments and the financial sector. If everyone feels that they are the most important players, that’s a good thing. Everyone should feel as responsible as the others to make the change.

I share your sentiment. Here we come to the end of our conversation, thank you very much for sharing your ideas and projects with us. Good luck with your future research and business adventures, Nancy!

November 2017