Circular economy in European sustainability reporting

Krista Leppänen’s blog text on the circular economy in sustainability reporting.

In recent years, we’ve seen an increase in corporate sustainability reporting, with more companies highlighting their efforts to be responsible. However, despite its growing importance, circular economy (CE) is still not as present in these reports as it should be. Dagiliene et al. (2020) point out that CE is barely mentioned in sustainability reports, and the included information is often limited to reducing materials. This is surprising, as the circular economy is becoming a relevant topic for companies looking to innovate and create long-term value. Yet, as Opferkuch et al. (2021) note, current reporting frameworks are not efficient in incorporating CE themes, as guidance seems to be far too general and inconsistent.

A New Framework for CE Reporting

A promising development in this area is the introduction of the European Sustainability Reporting Standards (ESRS) in European Union through the Corporate Sustainability Reporting Directive (CSRD). Compared to one of most widely used non-financial reporting framework, the Global Reporting Initiative (GRI), the ESRS demands more detailed disclosures about policies, targets, and action plans related to CE, pushing companies to be more transparent and comprehensive (Falkenberg et al., 2023). Specifically, the ESRS E5 standard focuses on resource use and the circular economy. It mandates companies to report on the impacts, risks, and opportunities of their CE activities, alongside how these are managed and measured through policies, actions, targets, KPIs, and financial effects. These requirements overlap with GRI framework, more precisely GRI’s 301 (Materials) and 306 (Waste) standards but goes further in demanding qualitative data.

Benefits and Challenges of Communicating CE Practices

According to Opferkuch et al. (2023), there are clear benefits and challenges that come with communicating CE practices. One major challenge is the lack of standardized benchmarks for assessing or reporting on CE efforts, making it tough for businesses to measure their progress consistently. Additionally, CE data is complex and hard to present clearly. There’s also an issue with consumer awareness—many people still don’t fully understand or appreciate circular products, which can reduce the impact of these efforts.

Despite these challenges, Opferkuch et al. (2023) offer compelling reasons for companies to embrace CE communication. The circular economy is rich in captivating stories that can educate stakeholders about sustainability, enhance transparency, and boost a company’s reputation. Sharing CE initiatives can also drive continued improvement and innovation. However, identifying the right risks and opportunities, along with setting meaningful targets and indicators, remains tricky. These elements are crucial for painting an accurate picture of a company’s CE efforts and their impact.

In a bigger picture, reporting and measuring circular economy can also support circular economy transition by allocating capital flows towards circular economy, offering comparative benchmarks to markets, aiding business decision-making, shifting mindsets, driving policy agendas and standardization (Ellen McArthur Foundation, 2024).

The Future of CE in Corporate Reporting

Experts are optimistic that the Corporate Sustainability Reporting Directive (CSRD), along with the EU Taxonomy regulation, will positively boost adaptation CE practices, though some uncertainties remain (Falkenberg et al., 2023). However, the fact that a company reports on circular economy themes according to standards may not necessarily correlate directly with the implementation or commitment to circular economy principles, thereby maintaining a gap between reporting and implementation (Van Grasse & Stiers, 2023; Falkenberg et al., 2023). As Van Grasse and Stiers (2023) state, it is not directly the CSRD and ESRS that act as a lever for the circular economy, but rather the companies within the scope of CSRD that are willing to seize the opportunity and embrace circular economy principles.

Krista Leppänen (krista.leppanen@uef.fi)

References

Dagiliene, L., Frendzel, M., Sutiene, K., & Wnuk-Pel, T. (2020). Wise managers think about circular economy, wiser report and analyze it. Research of environmental reporting practices in EU manufacturing companies. Journal of Cleaner Production, 274, 121968. https://doi.org/10.1016/j.jclepro.2020.121968

Ellen MacArthur Foundation (2024). Navigating the circular economy reporting landscape. https://www.ellenmacarthurfoundation.org/navigating-the-circular-economy-reporting-landscape [Accessed 24.5.2024]

Falkenberg, C., Schneeberger, C., & Pöchtrager, S. (2023). Is Sustainability Reporting Promoting a Circular Economy? Analysis of Companies’ Sustainability Reports in the Agri-Food Sector in the Scope of Corporate Sustainability Reporting Directive and EU Taxonomy Regulation. Sustainability, 15(9), 7498. https://doi.org/10.3390/su15097498

Opferkuch, K., Caeiro, S., Salomone, R., & Ramos, T. (2021). Circular economy in corporate sustainability reporting: A review of organisational approaches. Business Strategy and the Environment, 30(8), 4015–4036. https://doi.org/10.1002/bse.2854

Opferkuch, K., Walker, A. M., Roos Lindgreen, E., Caeiro, S., Salomone, R., & Ramos, T. B. (2023). Towards a framework for corporate disclosure of circular economy: Company perspectives and recommendations. Corporate Social Responsibility and Environmental Management, 30(5), 2457–2474. https://doi.org/10.1002/csr.2497

Van Garsse, S. & Stiers, M. (2023) CSRD as a leverage for a more circular economy? In Grmelová, N. (Eds.), Conference proceedings 15th International Scientific Conference “Law in Business of Selected Member States of the European Union” October 25–27, 2023, Prague, Czech Republic. (p. 84 -94). Oeconomica Publishing House. http://hdl.handle.net/1942/42303