Every year, Earth Overshoot Day – the point in the year at which we begin consuming beyond the Earth’s capacity to regenerate resources – comes a little earlier. At the current pace, we would need three Earths to sustain our consumption and production systems by 2050. Shifting to more sustainable, circular, business models is now an urgent priority, and SMEs hold the key to the transition.
Environmental pressures are mounting
By 2030, the global middle-class is expected to reach 4.8 billion people – 1.3 billion more people with increased purchasing power than today. This new demand will drive growth, but also heighten pressure on raw materials and natural ecosystems. Global annual plastic waste has more than doubled in the past twenty years, with nearly half coming from packaging. Barely 9% is recycled, 19% incinerated, and the rest is landfilled or mismanaged, resulting in leakages to the environment and the food chain. Firms need to rethink their approach to deliver radical change.
The circular economy offers a way out
The circular economy promotes resource efficiency, re-use, repair and recycling. Beyond the environmental benefits on offer, its approach cuts costs for businesses and consumers as well as reduce dependence on fragile and volatile markets for raw materials. It also creates new jobs: across the EU, 700,000 jobs could be added in the circular economy by 2030.
These new models require innovations in materials and design to promote disassembling, recycling and remanufacturing. Many of these innovations are coming from small businesses. Businesses like LumiAdd (UK), which manufactures lighting from plant-based bioplastics, using 3D printing to customise design and limit waste, no tooling costs, and a return system so luminaires can be re-used, re-manufactured or composted.
Making products live longer requires maintenance, infrastructure and technologies for tracking, collecting and reverse logistics, and marketplaces for refurbished and second-hand products. Here Smart2nd (Finland) is providing a marketplace for second-hand electronic devices. The company refurbishes pre-owned smartphones, certifies data integrity and erasure, and provides accessories, finance options, insurance, and repair services.
Sharing requires integrated solutions and platforms for pooling, access and co-ownership. Again, small businesses have solutions: Zupply (Denmark) connects construction actors to optimise the supplies and logistics of building materials between sites. The platform leverages data and automation to monitor workflows, generate digital twins throughout products life cycle, and shares inventories with users.
Rentals, pay-as-you-go models, and after-care services are expected to flourish. Signify (Netherlands) offers “lighting-as-a-service” for a monthly fee, operating lighting systems with artificial intelligence and internet of things for energy savings and longer use.
We need to pick up the pace of the circular transition
https://doi.org/10.2908/ENV_AC_CUR
To act quickly, SMEs can make the difference – but more need to go circular
SMEs’ smaller size, agility, and local knowledge are real assets, helping them spot and exploit opportunities to close the circle. Moreover, those who do so perform well. Recent OECD research shows that SMEs adopting circular practices tend to be more productive, invest more and pay higher wages.
The same research shows that merely 38% of small firms, and just over half medium-sized firms, engage for the environment. This is not enough. But for greater engagement, SMEs need a hand. SMEs face challenges that larger firms do not, particularly in dealing with complex regulation or environment, or in accessing technology, skills and finance. This is where governments can step in.
First, in supporting SMEs to use digital solutions and data to improve design and resource efficiency. Here, Finland has adopted a strategy for sustainable manufacturing, focusing on the digital readiness of industrial SMEs. The “Fit for Digital” programme helps SMEs design digital improvement plans and develop data- and platform-enabled business models for the circular economy.
Second, in making connections and supporting cooperation. The circular transition calls for collaboration along the value chain, between designers, cleantech engineers, software developers, entrepreneurs, customers and government, and requires spaces for experimentation, co-creation and networking. Denmark runs the Beyond Beta start-up programme to grow business in clean tech and circular economy, including an accelerator, an online toolkit, peer-to-peer network support, and cooperation amongst national clusters organisations.
Third, in supporting SMEs to tap into specialised global networks to source solutions. The Slovak Republic has established the Regional Innovation Industrial Cluster REPRIK in the agricultural region of Banská Bystrica to promote the emergence of SMEs in the circular economy and in the field of innovative recycled materials, through cross-border SME-industry-science cooperation.
Fourth, in designing SME-friendly regulations and supporting compliance. Climate regulation is fast-evolving, as new rules are set to promote durability and recycling or enforce minimum environmental performance. Extended Producer Responsibility systems place for instance the cost for final recycling or disposal on producers. SMEs – like large firms – are covered by these requirements, but with uneven capacity to scan the regulatory landscape. Compliance is critical in supply chains that remain their prime channel to access knowledge and resources. Here, the Netherlands provides a three-year subsidy to companies to align with OECD guidelines and enhance sustainability within their value chains. France and Spain offer financial support to SMEs for certification and integrating norms and standards in their operations.
Picking up the pace
Despite a recent surge in interest in circular models, in 2022, only 11.5% of material use came from circular and recycled input in Europe, with only slow improvements made over a decade. As we look to square the circle in the years to come, policymakers need to bolster their support for SMEs to lead the way.
See the recent OECD SME and Entrepreneurship Outlook for more information about why SME networks matter for innovation and sustainability, and explore the trajectories they could take.
OECD SME and Entrepreneurship Outlook 2023 – https://doi.org/10.1787/342b8564-en
OECD Data Lake on SMEs and Entrepreneurship – https://www.oecd.org/cfe/datalake.htm
See OECD (2020), The Circular Economy in Cities and Regions: Synthesis Report, OECD Urban Studies, OECD Publishing, Paris, https://doi.org/10.1787/10ac6ae4-en for more examples of how cities and regions support their businesses in the circular transition.
See OECD (2024), Reaching Climate Neutrality for the Hamburg Economy by 2040, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/e1e44672-en for a deep dive on Hamburg’s shift towards the circular economy and the role of the business sector in the transition.
See OECD (2022), Policies to Support Green Entrepreneurship: Building a Hub for Green Entrepreneurship in Denmark, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/e92b1946-en for a deep dive on Denmark’s experience in developing its Action Plan for Circular Economy.
See OECD/European Commission (2022), Policy brief on making the most of the social economy’s contribution to the circular economy, OECD Local Economic and Employment Development (LEED) Papers, No. 2022/01, OECD Publishing, Paris, https://doi.org/10.1787/e9eea313-en for more examples of how social enterprises active in the circular economy can give inspiration to other SMEs.
Sandrine Kergroach is Head of SME and Entrepreneurship Performance, Policies and Mainstreaming unit at the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE). She leads the work on innovation, internationalisation and the scaling up of SMEs and start-ups, their productivity and ESG performance. She supervises activities related to policy monitoring, the development of data infrastructure and the OECD SME and Entrepreneurship Outlook. She also leads efforts for mainstreaming SME&E policy considerations. Sandrine holds a Doctorate in Economics (TU Berlin), a Master in Strategy and Management (Paris Dauphine-PSL), a Master in Modern History (Paris Sorbonne) and a Bachelor in Applied Economics and Statistics (Paris Dauphine-PSL).
Lenka Wildnerova is a former junior economist at the Economic Analysis, Data and Statistics Division of the OECD Centre for SMEs, Regions, and Cities. Her work focused on the analysis of firm performance using firm and employee data. She holds a PhD degree from Universite Paris-Saclay in international economics.