Why integrated reporting contributes to the creation of a circular economy
Developments around the circular economy are increasing rapidly. Following the developments, Deloitte will publish a series of articles about this theme. In this column we will discuss how your organization relates to the circular economy and how you can take concrete steps using Integrated Reporting (<IR>) principles.
In many reports about the circular economy, recommendations often relate to the creation of more transparency. A word easily used for a complex problem. In the report of the Planbureau voor de Leefomgeving (PBL), it is argued that transparency and knowledge sharing can lead to more effective policy about, and more innovation in, the field of the circular economy. True in its concept, but creating transparency covers several layers within and outside an organization. Today we focus on transparency in the annual report, more precisely the Integrated Report.
Non-financial reporting and specifically <IR> can create this recommended transparency. For example, in disclosing opportunities that could accelerate transition to a circular economy. In this article, we will discuss two of those opportunities.
1. <IR> can lead to more financial support for circular initiatives
With its focus on value creation, <IR> is a useful tool for organizations to show how they create (non-financial) value. One of the barriers that is often mentioned in literature is that not enough financial support is available to develop new circular initiatives , especially because the financial benefits of the circular economy are not always directly evident. Short term thinking still prevails in many business decisions. This is the reason businesses and financial institutions are often not keen on high investment costs which are sometimes needed to start circular initiatives1. There is also too much emphasis on the financial aspects, whereby one argues that there is too much focus on GDP per capita instead of on broader growth2. This financial focus can lead to unbalanced judgement of new initiatives and businesses, where for instance the minimal risks related to a linear business model (e.g. negative impact or dependency on the natural environment) are not acknowledged enough, nor made quantifiable.3
<IR> clearly shows, by discussing the six capitals: financial, human, social, natural, intellectual and manufacturing capital, that value creation relates to more than only financial value. When companies are able to show, explain and substantiate this value better, financial institutions can recognize and take this into account much more easily. This could help them respond to the frequently heard recommendation that financial institutions should start focusing on multiple value creation, and should take responsibility in their role in creating a circular and sustainable economy.4
2. <IR> can lead to more understanding about business processes and intensifies knowledge sharing and cooperation
Another obstacle mentioned in the transition to a circular economy is the fragmented knowledge-management and the lack of knowledge sharing within and between organizations5. The lack of knowledge sharing is particularly needed since circular business processes are complex. <IR> can help businesses to identify and understand the dependency on others in their own processes better by mapping out the whole value chain. This enables them to gain insight in the value of the different capitals. This knowledge can then be used to facilitate cooperation.
Cooperation between organizations will need to change in a circular society. When linearity will reduce, business processes and relationships between businesses will become more complex. There will be increasing (supply chain) interdependence and connectivity between organizations and between organizations and customers. The leasing of unconventional products like light is a striking example on how ownership of goods can change. There is no longer a product delivered (such as a lightbulb) but a service (light). That these changes (in business models) have consequences are obvious as they also change and increase certain risks. This increasing complexity makes <IR> a helpful business tool as mapping out risks and relationships are more important than ever.
<IR> for a more sustainable society
Having discussed two opportunities that can contribute to the development of the circular economy, it has become clear that <IR> can help accelerate the circular economy contributing to a more sustainable society in general. In this perspective, we are fortunate to see that an increasing amount of companies have started with (integrated) non-financial reporting. This can be found in our recently published report ‘Integrated Reporting moving towards maturity’, where we have investigated the maturity level of <IR> in 25 AEX companies. We are therefore confident in believing that a transition towards a more sustainable and circular economy will continue to occur.
Would you like more information on Integrated Reporting? Please contact Annemieke Huibrechtse-Truijens at +31 (0)88 288 8731.
1. European Commission (2014), Scoping study to identify potential circular economy actions, priority sectors, material flows and value chains, p. 11-14
2. IMSA (2013), Unleashing the power of the Circular Economy, p.43-44
3. Circular Economy (2016, Empower financial decision making in a circular economy, p. 22
4. Sustainable Finance Lab (2014), Een schuldbewust land, p. 5-6
5. TNO (2013), Opportunities for a circular economy in the Netherlands, p.63-65