Issue Briefs

SME Participation in the Circular Economy

The conventional manufacturing and consumption economy hinges on a model of converting raw materials into usable products, which are then disposed of. According to the UNEP Global Waste Management Outlook 2024¹ , municipal solid waste alone contributes 2.1 billion tonnes of waste, and accelerates climate change, adds to pollution and exacerbates biodiversity loss. The direct costs and net externalities (after recycling) added up to an estimated USD 361 billion in 2020.

The UNDP finds that in 2019, material consumption had crossed 95 billion metric tons. About 30% of food was wasted between the farm and the consumer. Electronic waste also increased to 7.3 kilograms per capita².

To address this colossal challenge of mounting waste and to extend the life cycle of products, it is necessary to reconsider the traditional linear ‘take-make-dispose’ way of production and consumption. The circular economy concept is not really new, but focuses the spotlight on the return of valuable and finite resources to the economic system. In doing this, waste is reduced and the maximum value of the material realized. Some of the methods that should be strengthened in the move towards a circular economy are reuse, repair, recycle, and refurbishing of products, so that they can be used as long as possible.

The scale at which circular practices can be adopted is variable – benefits can be realized at household level, community level, city- and state-level, and then at the national level. The adoption of circularity principles and practice has several benefits: resource use is maximized, opportunities for jobs are created, businesses become more competitive, less waste is generated and carbon emissions reduced.

The UNDP states that a circular economy that uses and reuses industrial materials, such as cement, steel, plastics and aluminum, more efficiently can help to reduce global greenhouse gas emissions by 40% by 2050. The International Labour Organization has estimated that activities such as recycling, repair, leasing and refurbishing can create over 6 million jobs globally by 2030³.

In the Global South, adoption of circular models can create livelihoods and provide greater opportunities for contribution by the informal economy. Recognizing the role informal workers already play is the first step on the path to a just transition in which workers are provided adequate social security and healthcare. It is estimated that almost 40% of people working in the informal sector in 2019 were in roles related to waste management, of which 45% were women⁴. Waste management itself has the potential to become a full-fledged sector of the economy of such countries with trained and skilled workers at its core.

Microenterprises, small businesses and self-employed workers carry out a large proportion of reuse, repair, waste collection, transport, sorting, returning of materials to the market and disposal in developing economies. They risk being marginalized as waste management becomes more formal via stricter regulation which is observed worldwide, yet they are an asset with an important part to play in circular business models.

In most economies, SMEs account for a significant share of output. They account for 90% of enterprises and more than half of all employment in the world. Small formal enterprises alone contribute about 40% of GDP in emerging economies, where the share of informal enterprises is not known but would be significant⁵ . These enterprises exhibit flexibility, agility and responsiveness and their deeper participation in circular manufacturing would be instrumental in its success.

Challenges for SMEs in the Circular Economy

The largest challenges in adopting circular economy practices can be simply a lack of awareness of how to assess material consumption and of methods or technologies to increase efficiency. Gaps in availability of funding can also be a constraint, as can the absence of enabling regulatory incentives.

UNIDO⁶ highlights the various barriers faced by SMEs in environmental innovation. Social and institutional challenges include misaligned incentives, lack of regulation and non- harmonised institutional framework and rigidity of consumer behaviour in accepting or paying more for sustainable products.

Economic and financial barriers include the lack of capital investments, significant transaction costs and uncertain return and profit. Among technological barriers, UNIDO lists lack of advanced technologies, misalignment between design and diffusion and lack of technical support and training as obstacles for SME.

Opportunities in circular economy for SMEs

SMEs would benefit greatly from circular economy practices that reduce waste, maximize resource efficiency, and create new value streams, provided the requisite funds and knowledge are readily available.

One of the primary advantages of embracing the circular economy is the potential for significant cost savings. Operational costs for SMEs can be lowered by reducing wastage and better and more efficient use of resources. Strategies like recycling and upcycling allow companies to transform by-products or waste materials into new products or dispose of them to waste managers that help create additional revenue streams.

SMEs can also be key users of leased or rental models instead of purchasing required machinery and equipment. With platforms that can serve to enhance shared use of resources and transportation, the costs can be lowered.

SMEs, especially startups, can also support the circular economy with innovative new products. It is estimated that design contributes significantly to the circularity of a manufactured product and SME can participate effectively in this endeavour by designing products that are easier to repair and recycle.

An SME’s engagement in the circular economy would attract larger corporates seeking vendors that align with their sustainability objectives. The large corporates aim to satisfy consumer preferences for sustainable goods and also must meet certain regulations in their home countries. SMEs that are able to support this would gain an advantage while submitting business proposals.

For making the shift to circular practices, SMEs can be helped to develop new capabilities and technical expertise. A strong internal communication system would help to create buy-in from all stakeholders, while external communication would support collaborations that are critical to circularity success. Innovation is also key to success, including in products, management capabilities and training of workers⁷.

To conclude, for the world to fully embrace the circular economy, the entire value chain must adapt to imbibe circularity across all enterprise sizes, both upstream and downstream. The transformation of supply chains requires a close collaboration between large enterprises and smaller enterprises with rethinking of processes for transition management. This must be supported by governmental policies for training, innovation, funding and related infrastructure.

B20 Brasil in its policy paper on Energy Transition and Climate made a key recommendation ‘promote efficient use of global resources and circular economy by developing policies considering the entire materials life cycle and fostering financing and awareness programs to enhance the adoption of circular practices.’ This is all the more relevant for creating a nurturing such practices among SMEs of developing economies.

With the expansion of the circular economy a key to overall environmental and climate change endeavours, the participation of SMEs must be augmented in all countries in mission mode to accelerate the progress towards sustainability.

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