Financial accounting in the circular economy

Financial accounting in the circular economy

Accounting and financing have the potential to drive the circular transition. 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, analysing 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. 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. Realising a circular economy is essential for mitigating the worst impacts of climate breakdown and will deliver heightened profit and resilience, trumping our current systems. 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. 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 financial profession will need to adapt to these changes to offer the tools and services businesses will need—including suitable accounting.