David Janků (Frank Bold Advisory): Companies are most confused about ESG reporting questions. But these are now absolutely crucial
15. 08. 2022
Reading time: 10 minutes
Both backed-up beer bottles and more modern elements of the circular economy are being advised by CIRA Advisory (CIRAA) for companies to introduce. The aim is to design and create products so that, ideally, no waste is generated. "The circular economy is not just about environmental sustainability, but must also deliver financial results. This is one of the main drivers of the circular economy," says CIRA Advisory's Albert Schandl in the Adastra podcast.
Ivana Karhanová: The war in Ukraine, lockdowns during the coronavirus epidemic, and a simple port blockade. This has unexpectedly disrupted supply chains in the last two years, showing companies the flip side of globalization. And so, in addition to optimization, the topic of the circular economy and material flows is increasingly coming to the fore. Therefore, our studio guest is Albert Schandl from the consulting firm CIRA Advisory, which deals with the circular economy. Hi, Albert.
Albert Schandl: Hi, Ivana. Hello listeners, and thank you for having me.
Ivana Karhanová: What is it that we now have or are starting to have a shortage of in Europe?
Albert Schandl: There are a lot of circuits, and it's getting worse. I think a lot of people have read the news about last year. Particularly in the construction sector, there was a big problem with materials. In Europe, we have a problem with precious metals, which we need for electronics. Traditional materials such as iron, aluminum, glass, and paper are becoming scarce. Many companies are now seeing their packaging prices increase several times because of this crisis.
Ivana Karhanová: Can the circular economy help us with this?
Albert Schandl: The circular economy is trying to help with this. It tries to set up the material cycle so that it does not leave us. Maybe it's important to say at the outset that at the moment, we work with materials in a way that we get them from somewhere - either we dig them out of the ground or they grow somewhere - then we process them, we make a product, whether it's packaging or even the product itself, and then we use it. Most of them end up in some kind of landfill, incinerators, and so on. That is the end of their life cycle. That is what the circular economy is trying to prevent because it is illogical to work with materials in this way and waste them.
Ivana Karhanová: Even though the European Union is gradually increasing the limits for sorting waste, most of it still ends up in incinerators or landfill.
Albert Schandl: Definitely in the Czech Republic. Let's talk about the municipal waste that we produce. Most of it ends up in landfills, some in energy recovery facilities, so at least some energy is generated from that waste. But if we talk about the circular economy, it is not just about waste. The circular economy tries to prevent waste and, if generated, to use it in some way.
Ivana Karhanová: If we move from ordinary consumers or ordinary people to the companies that use the environment or the resources the most, do they not recycle?
Albert Schandl: For secondary materials, that's partly how it works. Particularly in the case of metals, recycling is relatively well set up, or it exists and works, and there is some kind of recovery of those material resources. But again, it's not just that we use some secondary materials. The circular economy, as such, is already thinking about the design of that product and addressing whether it needs to be created. The simplest example is the packaging. Is it necessary for this bag to be created and for something to be packaged in it? If not, then don't let it arise. We are not going to use materials that we do not need. That is another fundamental thing. The circular economy is not just about environmental sustainability but must also produce economic results. That is one of the main drivers of the circular economy.
Ivana Karhanová: Is there a difference between the approach of large and small companies in this case?
Albert Schandl: It is company by company, sector by sector. Some industries have it much easier, setting the principles of the circular economy. In some places, it is much more difficult, either technologically or in terms of how the industry is set up. So I wouldn't say that bigger companies are better or worse, it's company by company. Another important piece of information is if the company has been involved in sustainability and the circular economy for some time. It is not a matter of days but years to set the principles. Closing material cycles is a long-term process.
Ivana Karhanová: How does material cycle closure work in practice then?
Albert Schandl: The circular economy runs through the entire company from development, production, and distribution to the final customer. So the company must understand the principles of circular economy or sustainability throughout the whole company, and it's not just a question of the marketing department, as we often see, but that the designers also design the product to be easily disassembled, repairable, or easily recyclable. And there are many more of those principles.
Ivana Karhanová: ESG reporting was originally supposed to be mandatory from January 2023. It will probably be postponed and will apply to larger companies. Do you think this mandatory reporting can help with greenwashing? You mentioned that companies often proclaim sustainability or recycling of their products rather than making it a reality.
Albert Schandl: I think that the European Commission or the European Union has already approved that there will be mandatory reporting for 2024 to 2023. This reporting can be crucial for companies when they have to present their non-financial performance regarding their environmental performance, social mindset, and management practices. So ESG is a term that we probably come across often or are increasingly seeing in various companies' communications. I can't say what the impact will be on greenwashing of companies because there are two major divisions of the effects, one is intentional, where the company is trying to show that it is better than it is, but often there are examples of unintentional greenwashing, where the company is trying to do something right. Still, the results may be untrue by not consulting with experts because the impact is not as big as they are trying to show.
Ivana Karhanová: Can we give some specific examples where companies have good intentions, but the implementation is worse?
Albert Schandl: I probably can't name brands directly. But a simple example is degradable bioplastics or oxo-plastics, where even the European Union has said for a long time that this is the direction we will take. Oxoplasts were traditional plastics that were supposed to be easily degradable in the air only. However, over the years, it has been discovered that these plastics only break down under certain very specific, even laboratory conditions. And often, microplastics are formed, so the environmental impact was quite the opposite of standard materials.
Ivana Karhanová: Do you think it is good that the European Union is enforcing a stricter approach to environmental protection and all the things that go with it, including, for example, the use of materials?
Albert Schandl: I think it is important for the European Union to show the direction we want to take. The EU, our government, or any regulator will always be slower than business. So I think it's more important that business shows which direction it wants to go, and the regulator, the European Union or the Czech Republic, limits that. Because often, the regulations that the European Union often comes up with that may be too late or are actually out of place.
Ivana Karhanová: Do you see anything positive about mandatory ESG reporting at the moment?
Albert Schandl: I think that as a stakeholder, that is a stakeholder in the business, I will have much more insight into how the company is doing on the non-financial side, which is one of the indicators if the company is behind or not. Stakeholders can be municipalities, customers, employees, and investors.
Ivana Karhanová: Does this mean that we will be able, with a little goodwill, to trace whether, for example, low product prices are not balanced by excessive pollution or negative impact?
Albert Schandl: I think it will be possible in the long term. We will also see how it will play out in 2024. When I talk to various colleagues and representatives of other companies and banks, they liken this coming legislation to GDPR, where it will also be such uncharted territory. Various companies will be treading paths and figuring out the barriers, how far they can go, what they can say, or if they don't want to report something, whether someone will enforce it. So at this point, nobody knows if it will have that impact.
Ivana Karhanová: Companies should stick to the three Rs (repair, reuse, recycle). The packaging materials that you mentioned are the most visible so far. How much are companies addressing them, and how much are they using them? More to present themselves?
Albert Schandl: There are as many as six of these Rs. Everyone uses a different one. But if we talk about packaging materials, for companies or even for us customers, it's the first tangible thing we associate with the product. According to our research with Charles University, they have the brand name on them, which is also one of the main deciding factors. So the packaging is linked to that brand, and that's often where the company tries to show how green it is. Whether it's greenwashing or not is then another question.
Ivana Karhanová: We often see only packaging materials. Then when we look at what happens to them next, that is, when we sort them, or even companies sort them - why don't we use recyclables and existing resources much more?
Albert Schandl: Again, I would like to reiterate that when something becomes waste, it is already a mistake or a consequence of the design and how the company thinks about that particular product. Working with recycling is the last possible step, but we must discuss different materials. If we look at paper, glass, and metals, for example, these are relatively easy materials to recycle and reuse for manufacturing. The big problem comes particularly in the case of plastics, where recycling is possible, but there are many variations of plastics, polyethylene, polypropylene, and others. They all have a lot of fillers, dyes, and additives that change their structure and function. So when mixed in the recycling process, it produces a material that is uninteresting to companies because it is mostly grey and doesn't have the properties that the company needs. The crucial information is that recyclate has been more expensive for a long time than virgin plastic. It was cheaper to make plastic directly from oil than to recycle it.
Ivana Karhanová: Is that changing now?
Albert Schandl: Basically, it depends on the price of oil.
Ivana Karhanová: What is the first step when you come to a company with CIRA and want to show them how to work with the materials?
Albert Schandl: The first step is communication with the person covering it in the company. Whether the ESG manager or the person who has decided to push sustainability within the company, it's an initial conversation where we need to find out where the company stands and if they're working conceptually with the information. And the second step is most often either some kind of seminar, where we try to explain to selected employees what circular economy and sustainability are, and together we try to figure out the possibilities of implementation. Of course, the seminar is not self-sufficient. There have to be follow-up consultations or projects. One of our products is a more common option, Quick Check. It's a non-depth scan where we go through their entire production or company with that company and find out their strengths in sustainability. This document is often important for companies already doing something in sustainability but doesn't have a conceptual grasp on it. It's more of an employee initiative. This document is beneficial for them because it brings it all together in one document they can go back to or start building their other strategies on.
Ivana Karhanová: Regarding material flow scans: material passports are being mentioned more and more often. Let's simply describe what this is supposed to do and what a material passport will contain.
Albert Schandl: The material passport will contain is being addressed now. Even the legislation following the Green Deal is coming up with the topic of material passports. The material passport tells us what the product was made of and passes on the information to other processors for the future, helping with repair or recycling.
Ivana Karhanová: Will companies be able to deduce, for example, the carbon footprint of the products they sell based on the material passports?
Albert Schandl: The carbon footprint is a big topic. It is calculated in three Scopes. The first is the emissions that a company produces directly at its site. This includes gas boilers and similar sources. The next Scope is mainly the carbon footprint from purchased energy, mainly electricity or heat.
Ivana Karhanová: I heat, I cool...
Albert Schandl: Exactly. Those are the emissions. Those two scopes are relatively easy to count, and most companies only report them nowadays. Thus, we often see companies saying: We are carbon neutral. But then there is a third Scope, where everything else, especially materials, purchased products, and so on, plus possibly other services, where the calculation is much more difficult, where you have to ask your suppliers what their carbon footprint is, what the carbon footprint of a car is, or indeed of any service or material. And when we return to the material passport in this roundabout way, the option is there. As long as that company knows its carbon footprint, we go back to the ESG Report, where the calculation of the carbon footprint is critical or is often one of the values reported within that report.
Ivana Karhanová: So basically, unifying some game rules will allow us to calculate the carbon footprint and see the impact of, for example, our consumption or production on the environment.
Albert Schandl: That's certainly one way. It is also important to say that the carbon footprint is not our only impact. The carbon footprint calculation tells us how much C02 equivalent we emit. Still, products and services also impact the soil, the ozone layer, water consumption, biodiversity change, and more. This calculation is then used to do what is known as LCA (life cycle assessment), where this calculation is much more difficult because, again, you need to know your whole supply chain and also the end of your life cycle. Within this calculation, the scientific work tells you what the overall impact actually is. As far as I know, Skoda Auto, for example, calculates this footprint for its cars, or Kofola calculates the total impact of its packaging materials.
Ivana Karhanová: Is this the direction we are heading in as a company? That is, the bigger ones will put pressure on the smaller ones in the supply chain to be able to give them these numbers.
Albert Schandl: There are several pressures for numbers and higher sustainability at the moment. It's not just the European Union. The European Union is one of the motivators or entities pointing that direction. But we have banks giving better loans to companies with well-set up systems or systemic sustainability. But there are also buyer-supplier chains where companies put elements of sustainability or circularity into their procurement. We see this in the automotive industry, for example.
Ivana Karhanová: We were still discussing that materials should stay in one place. Let's put those concepts into material flows.
We now see the example of China, which owns up to 90 percent of the precious metal mines if I have the right figures. So it is strategically important to process these materials and keep them within the European region. That is one of the reasons that the circular economy is one of management. As a company, if you have set up the cycles well to get the materials back, you stop being dependent on imports from China and the geopolitical situation. And whether it's China, Iran, or Russia. If you're able to keep those materials with you and you're in control, you've hedged your input prices, which not only gives you a competitive advantage, but you're much more attractive to banks because your business is built on stronger legs. It's also much more interesting for customers because your carbon footprint is likely to be much lower than if the steel came from China by ferry. Or, when we talked about aluminum, it took a lot of coal to make it in the first place. If we can recycle locally, the carbon footprint is up to 90 percent lower.
Ivana Karhanová: To what extent do companies perceive this advantage, and do you have to explain it to them?
Albert Schandl: Again, it's company by company, person by person. It also depends on whether it's a corporate structure with a sustainability strategy delivered from its mother or a local company with a business as usual. They are trying to work as they always have, but we all see that the world is changing, and we need to be ready for that, be ready to set up elements of the circular economy. So sometimes it's necessary to explain to companies why it's necessary. It's not some environmental activism. It's risk management that maybe even banks or your customers will require you to do. We try to put it in context for companies. We're trying to make sure that the elements of the circular economy that the company can implement make economic sense in the short and long term.
Ivana Karhanová: From the way we talk about it, it sounds like it's technically or technologically challenging, even process-wise. But we can build a circular economy by changing the business model. For example, we were talking about the library together. So let's give some more examples of when I don't need terrible data and calculations, and it's just about thinking about what's happening with my product.
Albert Schandl: The circular economy is on some spectrum of difficulty and technological change. If we want to change the business model and apply elements of the circular economy, the whole company needs to understand it. It must not be a decision from the top that nobody understands. It must permeate the whole company and understand its needs. We have plenty of companies that are applying elements of the circular economy. We can talk about the simple ones that have been around for a long time because they made sense, whether it is a library that made sense historically because it was not so easy to print books. Now it makes more economic sense. A very simple example is beer bottles. It's a system that circulates glass containers and tries to reuse them multiple times. But there are more and more examples. It's also a dematerialization of things; I don't need a physical object to make them work anymore. We have companies like KOMA Modular, for example, that make modular buildings that can be built in one place, and if you don't need them, you pick them up and build them somewhere else. There's also the Zemanka Biopark, which has set up elements of a circular economy. But again: the circular economy has to make financial sense and be understood by the whole company.
Ivana Karhanová: Says Albert Schandl of CIRA Advisory, a consulting firm that deals with the circular economy. Albert, thanks for coming into the studio. See you sometime.
Albert Schandl: Thank you, see you later. Have a great day.