Why nonfinancial reporting should include enhanced circularity aspects

As this model of business grows more prevalent, our study reveals trends in sustainability reports and communications across industries.

In brief

• Circular strategies to reduce and effectively use resources differ across industries and companies, but the principles are broadly adaptable.
• Frameworks exist for reporting on circular-related metrics, but these are not being sufficiently leveraged to consistently track progress, our study finds.

Amid pressure from investors, regulators, consumers and customers over damage to our environment, manufacturing companies today can use their materials more efficiently and minimize waste through the circular economy — a reimagining of the traditional linear models in favor of greater reuse and second lives for products. But how do different sectors demonstrate transparency over such sustainability practices and the impact of their products and services, and what steps should they take to get started?

Circular economy (CE) approaches can include transitioning to sustainable materials, pursuing business models such as product-as-a-service and integrating post-consumer recycled content. In addition to environmental benefits, shifting to circular and closed-loop models could increase profitability and shield companies from price fluctuations and material shortages. Manufacturing firms in Europe, for example, spend on average 40% on materials, according to the European Commission, creating an incentive for smarter approaches.

To maintain their competitive advantage and meet stakeholder demands, organizations will need to improve transparency over their sustainability practices and the impact of their products and services. An EY team scrutinized the current state of reporting on circularity to see what companies are doing today — described in greater detail in our full report — and suggest how organizations prepare for this change.

When looking across sectors, two popular frameworks for reporting on environmental and circularity metrics stand out, with many of the organizations we examined using both concurrently:

1. The Global Reporting Initiative (GRI): These standards are the world’s most widely used for sustainability reporting, designed for a broad stakeholder audience.
2. Sustainability Accounting Standards Board (SASB): These standards facilitate the disclosure of ESG information for investors and other rating agencies, enabling informed decision-making in capital markets.

Other frameworks that companies use to report on circularity include the Stakeholder Capitalism metrics and the Natural Capital protocol. Circular Transition Indicators and Circulytics are also used to measure circularity for internal purposes (e.g., hotspot analysis).

As companies seek to minimize their environmental impact, circular strategies offer a pathway toward reducing and effectively utilizing resources. Circular strategies differ across industries and companies, but the principles are adaptable to a broad spectrum of industries. Some industries are leading the way in their communication on the implementation of circular strategies and business models. Here are some examples.

• Packaging. The packaging industry is expected to be be an important factor in the overall transition toward a circular economy, as its products are used heavily and tend to be single use. The industry is taking active measures to design waste out of packaging by investing in materials that are recycled, renewable, recyclable, or compostable. The industry is also seeking to tackle plastic pollution and the impact of single-use products by researching bio-based alternatives or reusable packaging, for example. For companies with paper-based and pulp products, investing in sustainable forestry was a key priority to conserve ecosystems while maintaining a sustainable supply of raw materials. 
• Chemicals. This industry is playing a pivotal role in the circular transition by investing in new product technology, value chain partnerships, circular business models, waste management infrastructure and other partnerships. While the industry is at the vanguard of circularity, this is not fully reflected in the extent to which they report on their strategies, initiatives, and targets. Some organizations explicitly place their circularity programs at the forefront of their strategy and communicate on a range of initiatives, including new materials, advances in chemical recycling and new business models (such as chemical leasing).
• Technology and electronics. While the industry is taking ambitious actions to minimize e-waste, there were broad discrepancies throughout the industry on the level of reporting and communications. The most ambitious CE initiatives within technology companies focus on the elimination of plastic from packaging and incentivized device trade-in programs. Certain companies have even developed advanced mechanized disassembly methods that recover the most important materials for reuse. Alongside circular design, broader industry efforts focus on enhanced device integrity to further extend usable life.

On the other hand, some industries have an opportunity to improve on their circularity journey. Despite strong overall ESG reporting, the mining and metals industry was the least mature in discussing its circularity strategy (likely because it is at the front end of the value chain in a linear economic model). Lastly, while there are existing frameworks to report on circular-related metrics, these are not always being sufficiently leveraged to consistently track progress on how companies are performing to achieve their circularity objectives.

Looking forward

While capital markets and regulators are leading the way in defining the scope of nonfinancial reporting, currently only limited regulations and alignment exists on circular economy reporting.

Today, multiple frameworks are available, and circularity reporting is viewed as a competitive advantage instead of a norm.

However, we expect that to change in the near future. The next evolution of international reporting requirements and frameworks could introduce nonfinancial reporting on materiality related to the circular economy. And while companies are leveraging digital tools to streamline and facilitate data collection today, we expect the quality and robustness of data to significantly improve thanks to digital enablers. Over the long term, international reporting requirements are expected to drive standardization and convergence across geographic regions and frameworks, and real-time reporting on an organization’s circularity performance will be possible.

So what should companies be doing today? We recommend a four-step process to drive circularity in your organization:

1. Understand your environmental impact. Identify material ESG issues of your organization and supply chain, and leverage tools to measure the impact of your organization.
2. Develop a circular strategy. Identify your organization’s maturity regarding circularity and see how you compare to your peers. Set goals and objectives and a roadmap to achieve them.
3. Implement the circular strategy. Implement measures to achieve goals, and continuously monitor progress to identify operational efficiencies or roadblocks. Set in place mechanisms for rapid response to changing circumstances.
4. Report progress to relevant stakeholders to improve reputation and attract new opportunities.

Transparency over businesses’ circular models will help drive value by improving the understanding of their impact and informing pathways to reduce their environmental footprint/ecoefficiency, as well as by keeping pace with global regulatory and consumer pressure and establishing brand recognition and reputation as sustainability leaders. Achieving circularity will require collaborative approaches and could cause a ripple effect across the value chain.

Mayank Shekhar, Marina Guajardo, Charlotte Smith, Jinny Jeong and Gabriella Vozza of the Climate Change and Sustainability Services practice of Ernst & Young LLP contributed to this report.