What is the circular economy, and why is it important?

Sustainable Investing team, 09/19/22


  • “Circular economy” refers to an economic model that emphasizes cycles of reuse, recycling, and repair versus a linear model of extraction, consumption, and disposal.
  • Adapting business models to be less resource intensive may create opportunity for environmental and economic benefit.
  • In a circular economic model, pollution and waste are minimized, products and materials are used longer, and natural systems are more able to maintain health and regenerate.

More than 100 billion tons of resources enter the economy every year, ranging from metals, minerals, and fossil fuels to organic materials derived from plants and animals.1 Of this, just 8.6% gets recycled and used again.2 The utilization of resources has tripled since 1970 and could double again by 2050 if “business as usual” continues.3

Moving away from “take, make, and waste” models

This resource-usage trend implies the overall material intensity of economic growth worldwide remains high and that most businesses are still relying primarily on linear “take, make, waste” models. However, adapting business models to be less resource intensive may create opportunity for environmental and economic benefit. As a potential solution, the “circular economy” refers to an economic model that emphasizes cycles of reuse, recycling, and repair versus a linear model of extraction, consumption, and disposal.

Just 8.6% of resources is recycled and used again.

In a circular economy, products are designed with goals of efficient resource use, extended usage life, and improved ability to repair or recycle and reuse material components. Pollution and waste are minimized, products and materials are used longer, and natural systems are better able to maintain health and regenerate. While some of the inherent design challenges are significant, the eventual reward is great: A circular economy approach presents potential for economic growth to be decoupled from ever-increasing natural resource use, including the related negative impacts on environmental and social systems.

Within the context of increasing resource constraints, global warming, and still-rising worldwide demand for goods, circular economy design principles and business structures offer immense opportunities for the creation of new processes, practices, and businesses with meaningful benefits. The Platform for Accelerating the Circular Economy has identified 21 key solutions that offer potential to decrease resource extraction by 28% and to reduce greenhouse gas emissions by 39%.2

Circles within the circle: Understanding all parts of the business models

While the circular economy is often presented as a single loop, we, as fundamental analysts, aim to understand all parts of the business models of companies we research. Therefore, we find it is helpful to illustrate the “circles within the circle” to uncover more functionally specific insights. For example, before a product is even created, it is possible to design it for modularity, reuse, and ultimate decomposition. Sharing-economy solutions, rentals, and resale offerings focus on extending the useful life of products within the consumption phase. And repair and recycling practices create different flows between the inputs phase and ultimate decomposition or disposal, lowering ongoing use of raw materials and waste rates.

Circular economy model

The circular economy offers multiple intervention points

The circular economy offers multiple intervention points

Sources: Putnam Investments, Ellen MacArthur Foundation

We view the circular economy as one of the most far-reaching frameworks for the development of sustainable solutions. To learn more, read our research paper, Toward a circular economy, which offers comprehensive analysis and discusses the topic in greater detail.

link to how much do you know about the circular economy

1 [Subscribers only] National Geographic, “Here’s how a ‘circular economy’ could save the world," February 18, 2020.

2 The Circularity Gap Report, 2020

3 United Nations, Global Resources Outlook, 2019.

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