Accelerating the Transition to a Circular Economy through Disclosures

The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD)¹ represents a significant advancement for mandatory reporting of a company’s environmental, social, and governance (ESG) information and expands reporting requirements to a broader set of corporations, as well as listed small- and medium-size enterprises operating in the EU. Companies will be required to assess the impact their business practices and value chain have on the environment and communities, and the risks and opportunities sustainability matters create for their own business operations. The outcome of this double materiality assessment will determine the scope of reporting required. The CSRD also extends the reporting of non-financial environmental information beyond climate change to include disclosures on pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy.

Circular Economy and CSRD

The CSRD builds on several EU legislative frameworks and policies, such as the EU Circular Economy Action Plan², Directive 2008/98/EC of the European Parliament and of the Council³ (Waste Framework Directive) and the EU industrial strategy⁴, and represents the first set of mandatory disclosures for circular economy matters determined to be material to an organization. The objective is to create transparency of the impacts from resource use (in)efficiencies and of the actions taken by companies to enable a transition from the current modus operandi of a linear (make-take-waste) system to a circular economic approach. Reporting companies are tasked to decouple their business growth from an exponential depletion of finite resources and to align their business models with circular economy best practices. 

The importance of a circular economy has been extensively emphasized in the context of sustainable development as it: i) minimizes material depletion and consumption, ii) enables materials, products, and services to be used in a more resource-efficient way, and iii) reclaims waste as a valuable resource for the production of new materials and products. It also maximizes the value of products and materials, and extends their usable life through durable product design, maintenance, reuse, refurbishment, and recyclability, thereby protecting natural resources and addressing additional sustainability matters such as biodiversity loss, food and material waste, and air, soil, and water pollution. 

European Sustainability Reporting Standards – ESRS E5 Resource Use and Circular Economy

The European Sustainability Reporting Standards (ESRS) define the underlying reporting and disclosure requirements to give effect to the objectives of the CSRD. The ESRS consolidates disclosure requirements around two areas:

• Impact, risk, and opportunity (IRO) management, which includes assessment processes, policies, and actions 
• Metrics and targets

ESRS E5 Resource Use and Circular Economy captures all requirements for the disclosure of resource and circularity related sustainability matters. The primary aim of ESRS E5 Resource Use and Circular Economy is to empower companies with a holistic perspective of the product life cycle, spanning from resource extraction to waste disposal, within the context of a circular system—a concept not conventionally embraced in a linear economy. The reporting standard presents an avenue for companies to reassess their prevailing take-make-waste paradigms, explore reuse, recycling, and remanufacturing opportunities, and proactively mitigate material and environmental risks.

With resource use impacting various other areas of sustainable development, the ESRS E5 Resource Use and Circular Economy should be considered in close conjunction with the reporting standards of ESRS E1 Climate Change, ESRS E2 Pollution, ESRS E3 Water and Marine Resources, ESRS E4 Biodiversity and Ecosystems, and ESRS S3 Affected Communities. 

How to Report Under CSRD and ESRS E5 Resource Use and Circular Economy

To meet the requirements, companies will need to report on the following while taking into consideration their own operations, their upstream and downstream value chain, as well as any impacted stakeholders:

Under Impact, Risk, and Opportunity Management:

• Processes — Companies will need to specify the processes used to identify and assess resource use, resource efficiency, resource depletion, and other circular economy-related IROs regarding resource inflows, resource outflows, and waste. In addition to materiality and risk assessment best practices, companies can leverage methodologies around Life Cycle Assessment, Product Environmental Footprint, Material Flow Analysis, and corporate greenhouse gas emissions accounting principles (Scope 3 Category 1 (Purchased goods and services), Category 5 (Waste generated in operations), Category 12 (End-of-life treatment of sold products)) to support the data collection process in preparation of their disclosure reporting.
• Policies — Companies will need to describe the policies they have adopted to identify, assess, and remediate material IROs, including how those policies address sustainable sourcing and transitioning away from virgin resources. 
• Actions and Resources — Companies will need to disclose the actions and resources in place to execute their policies and to meet set targets, and whether companies engage in collective actions with other stakeholders across the value chain for the prevention or mitigation of negative impacts related to resource use. Supply chain engagement-focused programs such as Supplier Leadership on Climate Transition⁵ are examples of collective actions and resources to enable change in sustainability matters throughout the value chain. As part of the wider EU sustainability efforts under the European Green Deal, the EU’s Circular Economy Action Plan2 introduces a series of measures and strategies for industries to pave the way toward a circular economy. The action plan especially focuses on sectors with high resource utilization and raw material dependencies, and outlines potential opportunities for a circular economy business model.

Under Metrics and Targets:

• Targets — Companies will be required to set targets, preferably in absolute values, and disclose how these targets align with any ecological thresholds, as well as the various layers of the waste hierarchy, a ranking system for waste and resource management options, ranging from prevention to disposal. Possible targets could center around the following concepts:
  • Enabling sustainable resource use through sustainable sourcing practices and use of renewable resources
  • Increased leverage of secondary raw materials over virgin raw materials
  • Reducing use and dependencies on critical raw materials, rare earths, and water
  • Establishing end-of-life treatment and material recovery schemes to turn old products into secondary raw materials
  • Implementing eco-design concepts in product development to minimize use of materials, prioritize recycled content and recyclability
  • Design products for circularity to enable reuse, repair, refurbishment, remanufacture, and repurposing, and extend the usable life and value of products
  • Avoiding and minimizing waste generation as a priority over waste treatment and recovery

• Resource Inflows of Renewable and Non-Renewable Resources — Companies will need to disclose:
  • The total weight of products and materials (including packaging materials, critical and rare earth materials, water, and equipment) used in their own operations and along their upstream value chain
  • The percentage of biological materials and biofuels, accompanied by the respective sustainable sourcing certification
  • The quantities of secondary materials used 

• Resource Outflows — Companies will need to report:
  • The products and materials that have been designed based on circular economy principles such as durability, reusability, repairability, and recyclability, together with information on expected durability and repairability of a company’s sold products, and the percentage of recyclable content in both products and packaging.
  • How they are generating and managing both hazardous and non-hazardous waste, including: (i) The total amount of waste generated; (ii) The quantities of waste being recovered through reuse and recycling; (iii) The quantities of waste disposed of by incineration, landfill, or other disposal methods, and finally; (iv) The total quantity of non-recycled waste.
• In addition, and in due course, companies will be required to assess and disclose short-, medium-, and long-term anticipated financial effects from material risks and opportunities related to impacts from and dependencies on resource use and the circular economy, and how in turn they aim to protect their financial value.

How to Get Started

Early preparation will be critical to be ready for this mandatory disclosure of material circular economy matters under CSRD. Reporting companies most likely will face data gaps, complex stakeholder relations, and the necessity for in-depth supply chain and market assessments not commonly captured in ESG reporting. 

As a first step, companies should focus on their double materiality assessment, which will identify if circular economy and resource use are material sustainability matters and therefore form part of the mandatory reporting scope for the undertaking under the ESRS. This step will require collection and analysis of relevant data, such as material consumption, quantities of secondary raw materials vs. virgin materials, product design practices, and current waste management strategies. These data points will form a baseline assessment that can be leveraged to define a circular economy and resource use strategy, targets, and stakeholder engagement across the value chain. A designated team or working group can help identify opportunities where circularity principles can unlock value and build the sustainability profile of the business. 

While CSRD and ESRS E5 Resource Use and Circular Economy might seem an added burden in ESG reporting, they also provide an opportunity for companies to transform today’s business practices into resource-efficient, circular economy-based operations. In the long term and beyond mandatory reporting requirements, this will help ensure organizations are more resilient against future material resourcing constraints, virgin raw material dependencies, and waste management implications.


This article is authored by Melanie Kuhn, Ph.D., and Kylie Chun, with contributions by Leo van der Westhuijzen.