ThinkTWENTY20

Accounting and finance have the potential to drive the transition to a circular economy, says a newly released report from the Royal Netherlands Institute of Chartered Accountants (NBA) and Circle Economy. The two bodies founded the Coalition Circular Accounting (CCA) to identify and overcome accounting related challenges that hinder the transition to the circular economy. “Current accounting and reporting techniques that have been designed for the linear economy are often ill-equipped to truly capture the value and positive impact of circular businesses.”

Circular accounting describes the practice of measuring, analyzing and reporting on a company’s financial and non-financial performance, to truly reflect the value and impact of circular businesses on all relevant stakeholders. According to the report, “the transition to a circular economy will require rethinking our present way of doing business – and we must not overlook the pivotal role of accounting.”
Realizing a circular economy is essential for mitigating the worst impacts of climate breakdown and will deliver heightened profit and resilience, trumping our current systems, says the report. “We are living in a time of rampant pollution and waste, resource scarcity, biodiversity loss and rising global temperatures – all of which are linked to our increasing consumption rates. Circular strategies and business models offer solutions, creating an economy that eliminates waste and pollution, keeps products and materials in use and regenerates nature.”

Warns the report, “in a business-as-usual situation where we continue to live beyond the means of the planet, businesses will also suffer and be prone to a range of risks, including price volatility and supply chain failure. Circular businesses have proven to be resilient to such risks and will – in the long term – amass more profits than their linear counterparts.
“To reap the benefits of a circular economy, we need to measure the social and environmental impacts of a company, as well as its financials. This is circular accounting. It moves beyond the limited finance-based accounting of a company and rather represents its broader impacts on the environment, society and the economy. A shift to a circular economy will change corporate risks, cash flows and customer relations for businesses.”
The report urges the financial profession to adapt to these changes to offer the tools and services businesses will need – including suitable accounting. “To push forward the circular transition and unlock business opportunities, we must redefine how we approach value, impact and risk. Redefining involves finding new ways of managing these areas and rethinking our existing approaches, assisted by a change in our mindset and vocabulary.”

The circular transition calls for multi-stakeholder engagement. “To achieve large-scale systems change, all relevant actors must change their mindset and way of doing business. We call on accountants and auditors, financiers, businesses and regulators to act now and play a part in the circular transition. Only cross-sector collaboration can enable a timely and systemic shift to a circular economy. The time is now for this economic shift toward a more resilient and sustainable way of doing business.”

The report then goes on to propose, in detail, how this can be achieved. You can pick it up at financial-accounting-in-the-circular-economy---cca-overview-paper--january-2022.pdf (nba.nl).