January 25, 2022

Businesses must measure more than just financial impact to survive in the 21st century, new report finds

The start of 2022 brings new opportunities to make good on climate targets: helping circular businesses thrive should be top priority

Accounting and financing are catalysts for circular change—and adapting them to work for circular businesses is crucial to drive the transition forward. This is according to a new report by the Coalition Circular Accounting*, a collaboration between Circle Economy and the Royal Netherlands Institute of Chartered Accountants (NBA), Financial accounting in the circular economy: Redefining value, impact and risk to accelerate the circular transition. Scaling circular business models is crucial to accelerating the circular transition, unlocking the profitability of businesses in a rapidly changing world and reaching key climate goals, such as net-zero. However, the current challenges associated with financing and accounting for circular business are major obstacles that prevent their wide-spread and successful adoption. This new launch explores practical guidance to overcome these challenges and capture the value of circular business.


Ten years to double global circularity

A circular economy is essential to preventing the worst impacts of climate breakdown—and if carried out on a global level by 2032, it provides the answer to limiting global warming to 1.5-degrees. Excessive pollution and waste, rampant resource extraction, biodiversity loss and fluctuating global temperatures are the markers of our time; but circular strategies and business models, which eliminate waste, keep products and materials in use and regenerate nature, offer solutions. Businesses have a key role to play in mitigating climate change by moving to circular models. They also stand much to gain: in the long term, circular businesses can be more profitable and are resilient to risks. But how can we ensure the transition runs smoothly?


It's hard to go circular in a world dominated by linear practices and mindsets: circular businesses often struggle to entice investors, who may be used to working with linear business models—yet financiers are increasingly searching for financially-safe, sustainable investments. Accountants are also grappling with new roles in corporate disclosure on sustainability and circular impact. Without a shift in financing and accounting practices that accommodate pioneering firms, circular progress may grind to a halt. 


With generous support from InvestNL, the Coalition Circular Accounting embarked on a two-year-long research trajectory to begin to uncover and devise solutions. This latest launch—a collection of learnings from a series of four papers—explores the current arsenal of accounting and reporting solutions for circularity through the lens of real-life business case studies, providing guidance for new directions to support the circular economy. 


Redefine value, impact and risk to push the circular transition forward and unlock business opportunities

The key to truly reaping the benefits of a circular economy for business? Measuring companies' social and environmental impacts—not just their financials. Doing so will capture the true positive impact of circular businesses. But it will require an overhaul of how we define value, impact and risk: rethinking existing approaches, shifting mindsets and transforming vocabulary to support circularity. 

  • Value. We must learn to appreciate and quantify the value generated with circular business models beyond monetary terms. This includes reassessing what we call 'waste' and introducing concepts such as residual value. We should also move away from the existing approach whereby value is considered primarily in the short-term—products being purchased and then disposed of—to one where materials are kept in use for as long as possible.
  • Impact. Impact must be understood (and measured) to capture the long-term social, environmental and economic impacts organisations have on their stakeholders. Non-financial impacts should be listed on companies’ income statements and balance sheets alongside financial factors..
  • Risk. A new approach to risk is needed to steer capital away from non-circular (and often riskier) businesses, and towards ones that promise long-term, stable value creation and positive impact. We need holistic risk assessments which take into account a company’s total long-term impact and relationship with the human and natural environment—not only financial returns.


Changing the way we do business, for the better

Everyone has a role to play in making large-scale systemic change a reality: from accountants and auditors to financiers, businesses and regulators, all actors must embrace a shift in mindset to truly change the way we do business. And the time is now: in the wake of COP26, investments to mobilise climate action are more crucial than ever in limiting the impending crisis.  


*The Coalition Circular Accounting has been founded by the Royal Netherlands Institute of Chartered Accountants (NBA) and Circle Economy to identify accounting related challenges in the circular economy. The coalition includes experts and scientists in the field of finance, accounting and law, who together create solutions to overcome barriers to circularity. 


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