Businesses must measure and report on non-financial information to estimate future risks and optimise performance, as well help companies stay competitive while improving their environmental and social impact. This is according to a new Circle Economy Coalition Circular Accounting (CCA) white paper—published with the Royal Netherlands Institute of Chartered Accountants and Invest-NL—which suggests a way to measure circular impact data and identifies next steps for businesses, financiers and accountants.
This is especially important as an increasing number of businesses are reshaping the linear ‘take-make-waste’ economy into a circular economy—sustainability is big business. If digital was the trend of the 2010s, sustainability and the circular economy are the focus of the 2020s—driven by consumer and investor demand, as reported by Forbes. Eyes are on the business world to reduce greenhouse gas emissions and waste, as well as prioritise employee wellbeing—among other environmental and social indicators.
Today, financial statements are the primary sources of information on a business’s current and future performance. They are also the primary base upon which management and investor decisions are made. But here lies the problem—current statements have a very narrow focus. They do not fully reflect the short- and long-term constraints and impacts of non-financial aspects, such as resource depletion, social inequalities or climate change.
The CCA’s new white paper, How to find the value of circular impact in business, says positive and negative social and environmental impacts need to be integrated into financial reporting and, ultimately, governance and financial decision making processes.
‘A company’s value will be increasingly tied to its environmental and social impact—so it must become a matter of routine to integrate impact information in all strategic decision making processes.’ says Aglaia Fischer, project manager of Circular Finance at Circle Economy.
Profit has long been the language of business. But now, businesses and investors should consider reporting on circular and non-financial impact in financial statements to enable more substantiated decision making and unveil a company’s long-term opportunities and risks.
Circular impact means implementing circularity in business activities. This essentially entails incorporating externalities (i.e. impact) in the business and revenue model. Circular companies may have a lower financial performance compared to linear ones, due to the costs incurred for activities that have a positive economic, environmental or social impact, but it's likely they have a far higher sustainability performance. Therefore, in striving for a fair assessment of a company’s performance, it is key to create a level playing field and rate all companies the same way. This requires different information and different assessment frameworks, that do consider factors such as employee wellbeing, pollution and scarce materials use. Circular impact data measures this, giving businesses an incentive to change their behaviour for the better, and investors a chance to prioritise companies that do this.
We already know one thing: what gets measured, gets managed. And this white paper confirms that. To provide a clear account of the potential of circular impact and a possible methodology, the CCA worked with knowledge partner Impact Institute on an impact case involving Meerlanden, a Dutch material and energy recovery company. They measured how waste is collected and processed into new resources in the company using the Integrated Profit and Loss (IP&L) method. This method measures impact against six capitals: financial, manufactured, intellectual, human, social and natural.
The analysis uncovers that circular organic waste recycling has a far lower negative environmental impact than non-circular residual waste incineration. This impact case proves that environmental and social impacts considerably affect a business’s operations and prospects for the future, and that the method of IP&L can be scaled across different business processes in a variety of sectors.
The authors spotlight three next steps: