By Melanie Merlo, Lead Manager of the Climate Transition Strategy at EFG Asset Management
Today’s linear economy is failing. Using finite resources to make products that are used and disposed of perpetually, is unsustainable. By creating conditions that support life in all its forms, regeneration has a positive impact on nature, society and the economy. ‘Doing less bad’ is no longer enough. Regeneration goes beyond sustainability and seeks to ‘do more good’.
Step 1: Recognition that the linear economy is failing
The Industrial Revolution that began in the 18th century laid the foundations for today’s economic system. It has brought many benefits, in particular the mass production of goods, with significant economic growth, job creation, improved standards of living, technological advancements and improvements in infrastructure. . Yet, it is evident today that the design of that system is fundamentally flawed. It challenges the existence of the living world by depleting the resources needed to sustain it.
The ‘fast fashion’ industry is one example of this linear economy. The disposal of clothing generates significant amounts of textile waste, which can take hundreds of years to decompose in landfills. According to the Ellen MacArthur Foundation, the equivalent of one garbage truck of textiles is landfilled or incinerated every second.
Step 2: Moving beyond linear cause-and-effect thinking to a circular economy
This linear model fails to consider the environmental and social costs involved. At a time when the world is more chaotic and overcrowded taking a narrow view of complex systems is no longer an option. The concept of the circular economy, aims to overcome the limitations and narrowness of the linear economy. There are three key elements of this approach:
1. Making products which last longer through reuse, recycling and repair;
2. Designing out waste and pollution in manufacturing and consumption processes; and
3. Renewing and regenerating the raw materials that are used.
We see the circular economy as an intermediate step towards a much more holistic view of the interconnectedness and interdependence of environmental, social and economic systems.
Step 3: The transition to a holistic perspective
Taking such a perspective addresses the challenges and opportunities in a comprehensive and integrated way. It considers the long-term impacts of our decisions on environmental, social and economic systems, as well as the way these systems interact. Crucially, it helps identify unintended consequences, and to develop more sustainable solutions..
In the production of goods, this can involve a range of strategies and initiatives such as using sustainable materials, implementing closed-loop systems to recycle or repurpose materials advocating policies that support a more sustainable industry, or educating consumers about the ’throwaway’ culture .
Sustainability is often focused on ‘doing less bad’ rather than actively improving things. Regeneration goes one step further and seeks to ‘do more good’. It actively restores degraded ecosystems, boosts biodiversity, and improves the health and resilience of the natural systems we rely on.
Transition speed and grounds for optimism
Speed is of the essence. Clearly, there is pressure for a swift move, demonstrated by campaigns such as ‘Just Stop Oil’. Of course, the answer is not as simple as that slogan suggests but the urgent need for action is more broadly recognised these days.
There are grounds for optimism. Kingsmill Bond, for example, shows that the transition to new modes of transport and new sources of energy can be very quick. In the past, the spread of new innovations has typically followed a logistic or S-curve.
Successful new technologies typically spend decades in development before being deployed. At first, adoption is slow and prices are high but. typically, sales will grow from around a 10% to 80% market share in a decade or so. Figure 3 gives a schematic presentation of the transition and Figure 4 shows some historic examples. The stock of assets using the new technology obviously takes longer to adjust but, slowly and inexorable, with depreciation and redundancy of old-technology assets, it does.
Black swans, ugly ducklings and green swans
A colourful, narrative of that process is provided by John Elkington. The old linear economy has often seen ‘black swans’. ‘Green swans’ in contrast, are welcome beneficial changes brought by rapid change (the spread of clean energy usage and electric cars, for example). The crossover transition period can seem like an ‘ugly duckling’ – elements of the old and new co-existing as new technologies become more widely adopted. At the moment, we seem clearly to be in that ugly duckling phase.
John Elkington also developed the concept of the ‘triple bottom line’: a focus on People, Planet and Profits. The transition from the old economy to the new seems to be well described as a move from a shift in the primary focus between those three pillars. From a primary focus on financial return (‘profits’) to the current focus on ESG considerations to a more holistic consideration with a focus on ‘people and planet’.
We are in a period of transition to a regenerative economy that will see the restoration, renewal and regrowth of environmental, social, and economic systems. Taking such a holistic perspective creates a thriving balance between the different systems and allows them to flourish together, rather than one being traded off against the other. The transition phase in which we now find ourselves may well be shorter than many expect, if the adoption of new methods progresses quickly, as has been the case in the past.