ICAEW.com works better with JavaScript enabled.

Accounting for the circular economy in ESG reporting

Author: ICAEW Insights

Published: 13 Apr 2023

Circular economy principles are not just influencing companies’ manufacturing processes – they’re working their way into corporate reporting habits, too.

In early March, the Green Alliance urged the UK construction sector to join the circular economy. In its report, Circular Construction, the Alliance noted that the sector currently uses more raw materials than any other in the land, produces the greatest amount of waste and is responsible for a quarter of the nation’s carbon emissions.

The report called for an overhaul, based on “regenerating, reusing and recycling building materials already in use, at the end of their first life”.

The circular economy ethos, proponents of which include campaign groups WRAP and the Ellen MacArthur Foundation (EMF), is a direct challenge to the traditional, linear production model, often labelled ‘planned obsolescence’ – the expectation that what was once a shiny, innovative product (or building) will ultimately end up on the scrapheap (or demolition site), while another, made from virgin materials, moves in to take its place.

Now, importantly for accountants, circular economy principles are not only influencing companies’ manufacturing processes, but are also working their way into corporate reporting habits.

Reputational gains

A few weeks before the Alliance report appeared, EY published How circularity translates into nonfinancial reporting, highlighting the circular economy as a rising force in environmental, social and governance (ESG) disclosures.

As the guide points out, the rise of circular business models is being driven by a blend of regulation, investor interest and consumer demand. Therefore, as those models evolve, it will become more and more vital for organisations to report on their circularity initiatives – and to formalise their means for doing so.

With that in mind, EY’s guide notes, in addition to more general ESG disclosure frameworks, there are three routes focused specifically on helping corporates to quantify circularity:

  1. Circulytics – developed by the EMF – which enables companies to measure the level of circular activity they have achieved across their operations;
  2. Circular Metrics for Business A landscape study of tools that companies can use to track, measure and report on circularity, developed by specialist consultants; and
  3. Circular Transition Indicators (CTI) A self-assessment tool intended primarily as a springboard for internal reporting, but useful for providing companies with a foundation in scoring circular activity.

In the guide EY also ranks nine materials-intensive industries on the level of circularity reporting they are already providing through various avenues – with consumer products and apparel placing first and second respectively, and chemicals and aerospace trailing in eighth and ninth.

But perhaps most crucially, the guide’s final section stresses why finance teams should be more rigorous, open and organised in their approach to circularity reporting. Transparency of circular business models, it says, will help drive a company’s value by enabling it to improve the understanding of its impact and determine pathways towards reducing its environmental footprint. 

At the same time it can help finance keep pace with global regulatory and consumer pressures, and build brand recognition and reputation as a sustainability leader. Through continuous, circularity-based monitoring and reporting, EY notes, organisations can position themselves as leading, trusted industry partners. The resulting reputational gains will help them attract and retain new consumers, talent and capital.

Managing expectations

For Ann Stevenson, Circular Economy Lead at environmental consultancy Resource Futures, EY has highlighted a key aspect of the complexity of making the transition to circular models: how can we measure and compare circularity at a product, business, supply chain or industry level when production and consumption relationships are so complex – and global?

“More standardised ways of reporting may be useful in enabling high-level comparisons, and could act as wake-up calls for policymakers,” she says. “However, we must be cautious that they are not used as finger-pointers of misplaced blame that overlook the complexity of why sectoral differences exist.

“It’s good to see that organisations in most of the sectors in EY’s ranking are active in measuring and reporting on their circularity journey, irrespective of the metric they’ve used. But without the context of why – or whether – a particular organisation or sector has used a specific metric, what can we really infer?”

For some organisations, she explains, circular business models may be business as usual – with key stakeholders such as customers having no requirement for standardised metrics or public reporting. For others, though, such models could be completely new. So there is a need for research and testing to find out how public reporting could either overheat stakeholders’ expectations, or be called out as greenwashing when outcomes don’t go according to plan.

Future goals

Stevenson warns: “Organisations may be tempted to ‘brownwash’, and refrain from declaring commitments or reporting on what they’re doing for fear of being accused of greenwashing. That may be exacerbated by sustainability or circularity metrics often being defined not by the organisations that are looking to measure their performance, but by third parties who may not understand the complexity of companies’ supply chains.

“Having a one-size-fits-all, standardised reporting metric designed for comparator purposes and public reporting may not be the best solution for understanding and measuring progress and risks for organisations,” she says. “Given the complexities, I would argue that the value of circularity metrics shouldn’t be about comparing organisations or sectors, or standardising reporting, or highlighting weakness – but enabling organisations and engaged stakeholders to know where a business is at, where it’s going and how it’s going to get there.” 

ICAEW Technical Manager, Corporate Reporting, Laura Woods says: “Similarly to other sustainability disclosure frameworks, we strongly support efforts to encourage organisations to be transparent in this type of reporting, so they can explain their current position and any plans to meet future goals.

“The transition to circular models is clearly a complex area in nonfinancial statements – let alone in practice. But recent developments in climate reporting requirements have told us that end users value honest, transparent disclosures about where companies are on their sustainability journey.”

Discover more from ICAEW Insights

Insights showcases news, opinion, analysis, interviews and features on the profession with a focus on the key issues affecting accountancy and the world of business.

Podcast icon
Insights Podcast

Hear a panel of guests dissect the latest headlines and provide expert analysis on the top stories from across the world of business, finance and accountancy.

Find out more
Daily summaries
Three yellow pins planted into a surface in a row
News in brief

Read ICAEW's daily summary of accountancy news from across the mainstream media and broader financing sector.

See more
A megaphone
Stay up to date

You can receive email update from ICAEW insights either daily, weekly or monthly, subscribe to whichever works for you.

Sign up