Posted in GreenBiz
March 18, 2022

The missing 45%: The role of circularity within climate disclosure


ESG disclosure is rising in priority among corporate sustainability agendas — just look at the number of jobs available on LinkedIn. Simultaneously, it’s becoming more well-known that transitioning to a circular economy — pursuing economic activities that minimize waste and regenerate nature — is critical in eliminating the 45 percent of emissions that arise from how products are made, used and discarded. What is lacking is standardized measurement and disclosure about how companies are using circular initiatives to combat the impacts of climate change.

For each company pursuing circular strategies, the vocabulary differs. A closer evaluation of companies’ public reporting around their circularity efforts shows that how companies strategize for circularity, measure progress and report on the impact delivered is ad hoc and inconsistent. Research shows that companies’ definitions of what makes a “circular economy” varies significantly: Phillips sees a circular economy as keeping products, parts, and materials at their highest utility and value as they circulate between customers, while its competitor LG describes a circular economy as “eco-friendly social contribution programs aimed at establishing a healthy future.”

The result? Conflicting and incomparable data about measurable circularity progress. With companies largely determining their own metrics and successes, achieving circularity becomes a self-serving effort. Any disclosure towards this end would fail to capture accurate circularity-related risks and opportunities facing companies.

When we think about optimizing the role of corporate environmental disclosure, we turn to the acronym soup of ESG standards and frameworks. Do ESG scores effectively measure climate progress? Likely not. But they do accelerate environmental data collection, a crucial first step in decarbonizing our economies. However, a survey of leading ESG reporting standards and organizations shows that circular economy topics rarely make an appearance in the questionnaires, frameworks or guidance of such organizations.

Let’s take corporate reports to CDP as an example. Companies can use their CDP disclosure to convey how circularity fits within their climate-related risks and opportunities, Scope 3 calculation approaches and supply chain engagement strategies, while aiming to tie such disclosure to business priorities. But the method in which they do differs. Considering Scope 3 disclosures, for instance, companies’ emissions calculations approaches vary from conducting life-cycle assessments, multiplying product weight by emissions factors or citing estimations based on scientific literature or independent calculations.

Managing and recapturing waste is a critical component of circularity strategies. But “waste” within CDP Scope 3 disclosure, even among similar companies, could imply anything from discarded paper to hazardous materials, and rarely do companies clarify these classifications.

How do you hold companies accountable for tackling those 45 percent of emissions related to making and disposing products, if there is no comprehensive guidance on what is expected of them?

As the space of ESG disclosure evolves, circularity should move away from being an aspiration listed on the company’s website to being a core framework for measuring its comprehensive climate progress.

The focus of reporting organizations such as CDP has been to encourage companies to provide transparency around a set of key environmental metrics, while allowing them the flexibility to also report on environmental topics relevant to them. But most reporting organizations do not yet encourage companies to consider the relevance or materiality of a circular economy to their business model. Nor do they require clarity about how companies’ circularity initiatives tie to their emissions reduction targets, overarching environmental goals or business priorities.

CDP acknowledges the role of “circular thinking” in addressing the climate crisis within its 2021-25 strategy, but given the spikes in interest around circularity, that strategy seems out of sync.

Beyond reporting organizations, measuring corporate performance on circularity has drawn interest from several circularity-related nonprofits and those within academia. Yet, research has shown that there are currently no uniform or scalable approaches from nonprofits in the circularity space that support or encourage the inclusion of circularity information within ESG disclosure.

The Ellen MacArthur Foundation’s (EMF) tools — Circulytics and Material Circularity Indicator (MCI) — are among the leading options available to companies that offer a company-level assessment on circularity progress. However, there is no guidance or incentive for companies to publicly disclose on the assessment they receive from EMF or on the corresponding measures the company is taking to improve its performance.

The World Business Council for Sustainable Development’s Circular Transition Indicators (CTI) provides companies with a framework for decision-making around circularity as well as identifying strategies in communicating with stakeholders and value chain partners. While WBCSD’s work is the most far-reaching effort so far, the framework and the self-assessment tool largely target companies receiving inquiries from value chain partners. Therefore, a limited number of companies see an incentive to incorporate the framework within their external reporting strategies.

Yes, a lot of companies use their independent sustainability reports to outline their approach and progress towards circularity, and many might do so consistently each year. So, credit where credit’s due. However, a closer look at these reports shows that there is minimal commentary about the decision-making that went into picking a company’s circularity initiatives. How was it decided which products should be kept “in the loop” vs. phased out? Is landfilling being completely avoided or simply delayed?

[Continue the dialogue on how to build a circular economy with forward-thinking leaders at Circularity 22, taking place in Atlanta, GA, May 17-19.]

Questions such as these are important because researchers have observed that increasing material circularity doesn’t necessarily lead to decreasing environmental impact, as it could shift emissions and create new hotspots that could lead to large shifts of the environmental burden instead of mitigating it. Rarely do companies’ sustainability reports touch on addressing such rebound effects of circularity initiatives.

Additionally, creating a circular economy means more than ensuring products are recyclable. Creating a circular economy also means redesigning products to eliminate waste, transitioning to innovative business models focused on reuse, creating better jobs and preventing biodiversity loss. Reporting only on how recyclable a company’s products are is a missed opportunity for showcasing the widespread benefits of circular initiatives to a business.

Each player in the reporting landscape has work to do, but it might be helpful to do this work together. Initiatives for collecting circularity data by nonprofits such as EMF and WBCSD have been promising. ESG reporting organizations can benefit from partnering with such circularity experts, to ensure their current questionnaires and standards accurately capture how circularity is helping companies combat climate change.

As for the companies implementing circularity initiatives, data collection about the comprehensive impacts that circularity can have on a business should be at the top of the sustainability manager’s to-do list. But such disclosure cannot exist as a standalone report. If companies are looking to improve their circularity disclosure, the goal should be to leverage existing reporting mechanisms to include data on how robust the company’s circularity strategy is and how closely it integrates with sustainability and business priorities.

As the space of ESG disclosure evolves, circularity should move away from being an aspiration listed on the company’s website to being a core framework for measuring its comprehensive climate progress.

March 18, 2022 at 03:09PM

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