The circular economy heralds a paradigm shift in the way organisations operate. The business model has evolved from the ‘take-make-dispose’ mindset towards a more sustainable regenerative approach.
Sustainable business practices have become more popular with consumers in recent years. In fact, 78% of consumers surveyed by McKinsey say that sustainability is important to them. Researchers also found that brands actively improving their Environmental, Social, and Governance (ESG) rating attract 32-34% repeat business rates.
However, this eco-friendly approach has significant implications for accounting practices. For example, an accountant needs to adjust their valuation methods and resource efficiencies and advise on sustainable waste management protocols.
This article will examine the various ways accounting teams can help businesses thrive in the emerging circular economy. Read on to learn more.
Understand the Principles of the Circular Economy
In a nutshell, the circular economy aims to help businesses eliminate waste and maximise resource allocation. On a granular level, this may look like:
- Designing a business model that eliminates operational waste and minimises pollution as far as possible.
- Ensuring that customer-facing products and operational materials can be reused or repurposed.
- Actively making efforts to regenerate natural systems and the environment at large.
However, accountants can face a number of challenges in capturing circular economy principles in traditional financial reporting processes. For example:
- Product-as-a-service models may generate lower upfront revenues despite creating long-term value through customer loyalty and improved resource efficiency.
- Traditional accounting methods often fail to account for business activities’ full environmental and social impacts.
- Valuing the intangible benefits of circular practices, such as brand reputation or risk mitigation, can be difficult.
Capturing the True Value of Sustainable Reporting in the Circular Economy
Several sustainable reporting frameworks are developing to help accountants address circular economy principles. These include:
- The Global Reporting Initiative (GRI): This financial reporting initiative has developed specific standards for recording waste and materials that align with circular economy principles. For instance, companies can report the percentage of recycled materials used in supply chains.
- The International Integrated Reporting Council (IIRC): This framework encourages companies to report on multiple capitals including natural and social capital, which are crucial in circular economy valuation.
- Task Force on Climate-Related Financial Disclosures (TCFD): This initiative recommends adapting financial reporting to incorporate circular economy risks and opportunities. For example, it can recommend recycling targets, waste reduction, or designating a certain percentage of products to contribute to the circular economy.
Accountants should familiarise themselves with these standards and other green accounting principles to help them successfully integrate circular economy metrics into their existing financial reporting practices.
INAA: Helping Accountants Raise the Professional Bar in Expertise
Here at INAA, we like to keep our fingers on the pulse of financial market and regulatory changes. We operate a network of global accounting and auditing professionals, providing events, educational resources, and one-on-one networking opportunities to help members raise their game and sharpen their accounting skills.
So, if you want to learn more about how INAA membership can help you and your organisation, check out our INAA benefits page and sign up for INAA membership now.