Navigating the impact of the EU Digital Product Passport (DPP) on the future of value chains
By Hasan Alkabeer, Partner, and Stefano Castoldi, Principal, Boston Consulting Group (BCG)
Humans need to move towards greater circularity if we want to live within the limits of the planet in the future while also fostering economic growth. This will allow us to tap into the USD 4.5 trillion worth of value in circularity by 2030 and secure a sustainable future. By increasing the circularity of waste streams, some of this value can be unlocked. For example, recycling rates for the most environmentally hazardous waste streams are only 25-35% at present.
By increasing these recycling rates to 80-90%, we can achieve global CO2 savings of 40-50 billion tons by 2040 (for comparison, this is more than the global CO2 emissions for the entire year of 2019, which totaled 36.7 billion tons) and promote resource consumption that respects planetary boundaries.
A robust tool for promoting transparency and enabling circularity
Digital Product Passports (DPP) by the European Union (EU) are the first regulatory tool of its kind to be designed with circularity in mind. The use of DPPs will facilitate information sharing about a product throughout its entire lifecycle, thereby, increasing transparency and fostering circularity. The DPP regulation is currently being drafted by the European Commission, with final approval anticipated in the year 2024 and implementation of the first product groups scheduled for the year 2026/27. This has been specified for eight priority industries, which are – electronics, vehicles, textiles, plastics, construction, buildings, furniture, and chemicals.
Despite this, many aspects of the EU DPP, such as its scope (for example, the application level), its technology (data storage, carrier, and access), and its data (data requirements and governance), remain undefined and have varying degrees of maturity. For instance, implementation across industries will take a very long time because the European Commission is developing DPPs that are specific to product categories.
Despite the complexities, decoupling economic growth from the extraction of resources, the generation of waste, and emissions of greenhouse gases can be facilitated by prompt action and early transparency enabled by DPP. This will have a significant impact, not only on the condition of the planet but also on the general well-being of humanity. When developing the next phase of the DPP regulation, it is essential to keep in mind the importance of speed to impact. This is especially necessary, considering the immediacy of the circularity challenge as well as the benefits to corporations of avoiding regulatory uncertainty.
Most businesses will be impacted by the EU DPP in the years to come. For example, 16% of global plastics are recycled, despite a 75% collection rate. There is a continued challenge of a mismatch driven by the difficulty to recycle plastics due to their material composition, and DDP as a digital enabler is expected to help tackle the issue by designing less complex and easier recyclable plastic products to facilitate increased recycling rates mitigating impact from bans. Taking immediate action can be beneficial for businesses because it enables them to exert more influence over regulation, improve compliance and resilience, unlock investment synergies, and increase transparency.
In the end, the success of the implementation of the EU DPP will largely depend on the degree of collaboration that exists between the various stakeholders. While the European Commission may require time to finalize the direction to implement DDP due to a large number of uncertainties in defining the role of DDP, companies today should start preparing to get ahead of the curve and to make the shift to circularity.
A global impact beyond EU borders
Why should businesses act now? There are multiple compelling reasons for companies to take immediate action. Businesses are already faced with a wide variety of important challenges revolving around ESG, such as those related to reporting and the environment, amongst others.
Within the next few years, companies that want to sell their wares on the market in the EU will be required to adhere to the DPP regulation. If businesses get a head start on their preparations for the DPP right away, they will be able to lessen the impact of issues like these on their operations and enjoy a wide range of other advantages.
The European Commission is planning for the first regulation to govern product groups to go into effect in either 2026 or 2027, as illustrated in the figure below:
By taking charge now, companies can also demonstrate their commitment to sustainability and corporate responsibility, to further improve their reputation and attract environmentally conscious customers. Additionally, implementing DPP regulations may lead to improvement in compliance and resilience. This will also aid in raising the level of transparency, unlocking investment synergies, and positively impacting the regulatory environment.
How to prepare now as a company
Companies across all industries can take action to prepare for the DPP implementation today to ensure preparedness for future reporting and circular economy transformation. The following figure shows four key actions that companies can take, with immediate next steps to embark on their journey today.
1. Engage in shaping the regulation: While specific regulation for DPPs is still in the process of being developed, businesses can seize the opportunity to shape it and ensure its efficacy. Through stakeholder consultations, businesses can specifically contribute to the discussion of unresolved issues and the formation of related decisions.
2. Assess data availability and fill the gaps: Companies can already assess which product data is currently available, identify data gaps, and start collecting missing data. More specifically, companies can start mapping the data points that will likely be included in the DPP and additional upcoming regulations or global standards to get a view of the data requirements they may face in the coming years. Beyond that, companies can map the data that is available internally to identify potential gaps with upcoming requirements and start filling these.
3. Enable your organization: The DPP implementation will impact most departments in a company. A dedicated DPP expert can ensure that all relevant teams are informed and involved in the process to avoid siloed implementation. This way, the DPP can be implemented not just as an additional requirement but as a tool that can benefit the company and help it reach its circularity goals.
4. Plan for changes in technology: The European Commission is likely to provide general guidance for technological aspects of the DPP, focusing on key principles and goals, rather than specifying which technologies to use. Companies can thus assess which options could be most suitable for data storage and access or which data carrier works best for their products.
In conclusion, the EU DPP is an innovative circularity tool that is still in its early stages of development. Consequently, many topics are currently unresolved and the EU’s DDP is the first of its kind, and there could be more similar policies that will be developed by other nations. Finding the optimal solutions will be a challenging task requiring a careful balancing of speed to impact and implementation complexity to ensure a successful DPP rollout. Although implementing the DPP is a very complex endeavor, tremendous value can be unlocked if businesses, NGOs, and the European Commission work in tandem. By acting now and responding to the EU DPP framework, companies can be ready for its impact if they currently sell into the EU, but also be ready for any other similar regulation that may be put in place in other countries and geographies around the world.