There are clear financial aspects and implications for businesses and organisations engaging in the circular economy, highlighting various roles for accountants and financial experts in areas such as planning, decision-making, and reporting. As policy developments suggest an expectation that all entities will engage in the circular economy in the coming years, the development of knowledge and skills in this area is a priority for third-level accounting and finance programmes and for continuous professional development.

Currently, Irish companies are not required to adopt any of the international sustainability reporting standards. Nonetheless, Irish firms listed in the UK are required to adopt the TCFD and those standards currently under development by the ISSB may become relevant vis-à-vis IFRS. Interestingly, none of the standards directly prescribe a circular economy approach to reporting. While large and listed firms are increasingly building in-house teams to manage sustainability and related communications, smaller firms are referring to their accountants for the measurement and reporting of environmental impact (IFAC, 2021). Given that sustainability reporting is a new departure for the profession, navigating the landscape of reporting standards in itself may be challenging. Many bodies have already begun to devise models as to how this may be achieved in a manner consistent with the circular economy. Business In The Community (BITC) UK, for example, has devised a circular economy maturity matrix which is consistent with the TCFD standards. This is based on three indicators- material flows; governance, strategy and processes; and carbon impact, although more indicators may be added or alternative indicators used as companies deem appropriate. The matrix may be adopted by businesses which are at different stages of progress or maturity in measuring and reporting their participation in the circular economy. For instance, gathering data on emissions from both upstream and downstream is complex, such that the company in the illustration has indicated acknowledgement of the need to report this information in the future.

Aligned to the CSRD and particularly significant in the context of the circular economy is Regulation (EU) 2020/852 which establishes the basis for the EU Green Taxonomy. The Taxonomy Regulation establishes six environmental objectives, including that of the transition to a circular economy. A first delegated act on sustainable activities for two of the objectives, climate change adaptation and mitigation, was published on 9 December 2021 and is applicable since January 2022. A second delegated act for the remaining objectives will be published later in 2022. The Regulation contains ‘Do No Significant Harm’ (DNSH) criteria, which require that companies, in addition to disclosing their contribution to relevant objectives, provide assurance that their activities do not impede achievement by others of the objectives, consequent to a risk-based assessment. While currently, only certain business activities are deemed eligible to report alignment with the Taxonomy, further activities are expected to be included later in 2022. Current guidance on disclosing Taxonomy alignment, issued by the Technical Expert Group on Sustainable Finance, focuses primarily on reporting contribution to the first two objectives but it does include advice on disclosing adherence to the DNSH criteria for the circular economy. For a company manufacturing cement, an eligible activity for the purposes of the Taxonomy, a disclosure would be expected as to whether the manufacturing plant accepts alternative fuels such as solid recovered fuel. For a cement production site using hazardous wastes as alternative fuels, the disclosure should confirm whether its waste management plan that meets EU standards exists. DNSH to the circular economy disclosures for a company manufacturing low carbon technologies, another eligible activity, would be expected to confirm that embodied carbon emissions represent less than 50% of the total carbon emissions saved by the use of the energy efficient equipment.

July 2022 saw the introduction of 13 Regulatory Technical Standards (RTSs) under the Sustainable Finance Disclosure Regulation, which were published in the Official Journal of the EU on the 25th of the month. Applicable from 1 January 2023, the standards require a wide range of financial market participants to produce a statement on the principal adverse impacts of investment decisions on sustainability factor, and also to provide a description of the principal adverse impacts of investment decisions on sustainability factors² using a range of indicators set out within the regulation³. With regard to waste, investors must disclose the weight of non-recycled waste generated by investee companies per million Euro invested (expressed as a weighted average). In terms of recycling of water, disclosures of the weighted average percentage of water recycled and reused by investee companies must be provided. The standards are particularly significant for the construction sector in that they require real estate investors to achieve an indication of the share of raw building materials (excluding recovered, recycled and bio-sourced) compared to the total weight of building materials used in new construction and major renovations. The share of real estate assets not equipped with facilities for waste sorting and not covered by a waste recovery or recycling contract must also be disclosed by investors.

Gaining sufficient environmental literacy and accessing the requisite data to take relevant measurements for materials, water, waste, and emissions is a challenge for many; yet, the CCA point out further issues facing the accounting profession in the future with respect to reporting for companies engaged in the circular economy. While in the circular economy, waste should theoretically cease to exist, residual resources, or by-products, will remain. In the absence of mature markets, pricing of such resources may be difficult. The CCA advises that these are best treated as contingent assets, to the extent that their future economic value is yet to be determined and will depend on future events that are not under the control of the company. Furthermore, assets which are deployed in the circular economy, in theory, should have an infinite useful economic life. On this point, the CCA suggests the term ‘scrap’ or ‘residual’ value be replaced with the term ’harvest’ value, i.e. the value of the benefits that may be derived from an asset at the end of its UEL. The body encourages accountants to discuss this with clients and adjust depreciation schemes accordingly. Indeed, the balance sheet as a whole may take on a new form such that it represents not just the firm’s position in terms of financial capital, but also in terms of social and environmental capital. Future audits may require a redefinition of risk to encompass aspects relating to the societal and environmental impacts on a double materiality basis, i.e. incorporating the impact of the company’s business on society and the environment as well as the impact of society and the environment on the business.

Global multinational and other large companies increasingly establish and expand departments solely tasked with transitioning to this new economic model and providing related reports and disclosures. However, smaller companies will face difficulties due to a lack of necessary resources, likely leading them to refer to their accountants who have traditionally served as sources of financial advice and reporting functions. Leading to the conclusion that education and training in accounting for sustainability and the circular economy is a fundamental priority, one which much of the national and international policy formation discussed in this article has devoted little attention to.

Circular Online/BITC UK. (2022). A Circular Approach to Reporting Resource Use, 19 July. https://www.circularonline.co.uk/features/a-circular-approach-to-reporting-resource-use/

Department of the Environment, Climate and Communications. (2022). Press release: Landmark Circular Economy Act signed into law, 22 July. https://www.gov.ie/en/press-release/4546a-landmark-circular-economy-act-signed-into-law/#

Ellen MacArthur Foundation. (2022). Circular Economy Introduction. https://ellenmacarthurfoundation.org/topics/circular-economy-introduction/overview

EU Technical Expert Group on Sustainable Finance (2020). Taxonomy Report: Technical Annex. https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf

IFAC. (2021). Sustainability Information for Small Businesses: The Opportunity for Practitioners. https://www.ifac.org/knowledge-gateway/preparing-future-ready-professionals/publications/sustainability-information-small-businesses-opportunity-practitioners

1. COM/2021/189, para 42.
2. Article 1
3. Article 3