Circular Asia News - Issue 15

The Circular Economy Meets ESG Reporting

For the circular economy, as a philosophy, tool and behaviour for resource management, to deliver on its ambitions, it must be formally integrated into the ESG reporting framework. In order to scale, it cannot remain a stand-alone concept. However, a growing number of circular economy advocates are asking for a wider scope of applications, particularly social impacts. Scholars state that there is "...risk that the benefits of a circular transition might be unevenly distributed and that a circular transition will negatively impact the equality of human welfare and development."

The Board of Innovation website argues the case for including social impacts a little more clearly, "But there is another side to the circular economy: the people. The main social concerns related to the circular economy are employment, health and safety. As an example of child labour, in India alone, over?40,000 children, between the ages 10 to 14, are employed in recycling facilities."

In Mexico, PetStar, which operates the world's largest Coca-Cola recycling facility, was asked about the use of child labour in procuring plastic PET bottles. The PetStar plant is owned by Coca-Cola of Mexico and the Mexican bottlers Arca Continental, Bepensa, Corporación del Fuerte, Corporación Rica, Embotelladora del Nayar and Embotelladora de Colima. For those interested in the response, please refer to the links below under References.

Children working to secure additional income is an age-old problem in all societies around the world. ?It is important for people to be able to distinguish between child labour and child work as not all work done by children should be classified as child labour; that is to be targeted for elimination.?However, I digress from the main topic of this conversation...

Scaling the Circular Economy

In August 2022, during a routine analysis to discover the search trends between 'sustainability', 'ESG' and the 'circular economy', it was not surprising to see the circular economy rank so low. There is little to no overt correlation between the circular economy to climate change, sustainability or environmental, social or governance impacts. Many circular economy professionals believe more effort must be made to raise awareness in order to solve this problem. Perhaps, expanding the circular economy's scope of reference to include social issues may also help.

Even the Boston Consulting Group (BCG) stated under Step Three, in their Ten Steps Toward the Circular Economy, "Management must clearly define what circular means for the company - both strategically and operationally. This will ground the concept and make it easier for managers to communicate with employees. The explanation of circular will be unique for every company and will help foster a common understanding across the organization. Management also needs to explain the strategy and rationale."

In essence, this promotion of an explanation unique to a company has been persistent for a number of years. It has enabled an extraordinary number of definitions, and the lack of a cohesive framework grounded around a common foundation has damaged the circular economy's ability to see past itself. Hence the growing call to include social impacts. It seems the circular economy lacks purpose!

The ESG Pillars

Except the circular economy does not lack purpose, nor does it require expanding to include social impacts. There are two resolutions:

1. Resource management - The foundation of the circular economy must be resource management (here is the purpose). This is non-negotiable. It immediately eliminates the 'unique explanation' that companies need to conjure up just to be part of the circular economy. The C-Suite becomes focused and is in a better position to approach this task according to their business and industry sector.

Currently, resource management is not an area covered specifically under any of the environmental pillars with ESG reporting. While raw material sourcing is included within ESG reporting mechanisms, it is not considered relevant in all sustainability reports. Adding in resource management is the first step toward a company recognising the products they use come from primary raw materials, a country's natural capital. Here are two examples from vastly different companies for comparison.

Example One: Intercontinental Exchange (ICE) - is an American company formed in 2000 that operates global financial exchanges, clearing houses and provides mortgage technology, data and listing services. In their 2021 Sustainability Report, the only reference to resources or raw materials is, as to be expected, energy and water. In terms of risk and opportunities, ICE lists waste, water and supply chains under a Tier Three category (the lowest).

Within Scope Three, Category 5 emissions reporting 'Waste Generated in Operations', the number stated for 2020 is 484 tCO2e, and for 2021, it is 795 tCO2e. There are no other details. Under an ESG reporting system that includes resource management, ICE would be asked to include the volume of materials recovered for reprocessing, which means reassessing what they call 'waste' and not just calculating the emissions and which Circular Rs they utilise.

Example Two: Bridgestone Integrated Report 2022 - Bridgestone Corporation?is a Japanese multinational auto and truck parts manufacturer founded in 1931. As of 2021, Bridgestone / Firestone?is the largest manufacturer of tyres in the world. As a tyre manufacturer, raw materials are crucial to Bridgestone's operations. In their report, they state, "As resource consumption increases due to societal economic growth, the supply-demand balance of resources is expected to become tighter. The Group recognizes that using resources more wisely and sustainably is an important issue and a business opportunity for the Group."

Under ESG Data, Bridgestone uses GRI Standards 306 - Waste, and thus, the metric is somewhat different to ICE. The image below is a snapshot of Bridgestone's raw material usage and Product Circularity, which they define as "A concept to show circularity of used products. Bridgestone Group uses the ratio of beneficial next use of used tires collected by its shops/stores (based on the number of shops/stores and contracts with processing companies) as the indicator for product circularity." (What does this actually mean?)

In GRI Standards 306, Circularity Measure is defined as "...measures taken to retain the value of products, materials, and resources and redirect them back to use for as long as possible with the lowest carbon and resource footprint possible, such that fewer raw materials and resources are extracted, and waste generation is prevented." (Now, this is better).

It is obvious from Bridgestone's Integrated Report that they are acutely aware their survival depends on their ability to extend the life of current tyres in circulation and procure raw materials, whether from new sources of natural rubber or the reprocessing of end-of-use-cycle tyres. While the recognition that primary raw materials are a finite resource is well understood, the ratio of recyclable and renewable materials is still exceptionally low. However, a company such as Bridgestone, with approximately 130 manufacturing plants, and operations in 150 countries, employing 135,636 staff, is well placed to engage more Circular R functions.

Bridgestone acknowledges, "The Group is working to build an ecosystem with a high degree of recycling and utilizing used tires, which are currently used mainly as fuel, by developing technology to return them to raw materials...Used tires are mainly utilized as fuel in Japan, but to reduce CO2 emissions generated in this method, it becomes increasingly important to circulate tires in a process that emits less CO2, rather than burning them."??

ICE, on the other hand, does not appear to have this same level of perception. Yet, ICE's business and the services they provide across the globe are equally dependent on the primary raw materials that make up all the products they use that guarantee their survival.

2 Social Impact - The social aspects circular economy advocates are looking for are already included within the ESG framework and annual reporting processes.

There is no issue with circular economy advocates wanting to include social impacts into the narrative. The problem arises as to how it shall be measured. It is highly unlikely companies will engage in a separate reporting system and will include any circular initiatives within their current ESG reports. Based on this scenario, what would be the purpose of adding social elements to the circular economy? Why should the circular economy double up on the social elements already included within the ESG reporting framework? Then, there are companies, mostly SMEs, who do not report. Yet there is no reason why SMEs could not engage the ESG social pillars, which are much more defined, mature and targeted. Furthermore, circular economy advocates can expand their skills through existing social programs, some of which have been operating for many years, rather than trying to reinvent the wheel or compete.

By placing resource management at the heart and soul of the circular economy, there are, of course, massive social impacts that must be addressed. But not as part of the criteria that go with the Circular Rs (product use-cycle-extension) and reprocessing for a secondary raw materials industry. For the circular economy to truly reach its potential, it must be measured. In turn, these measurements should be included in ESG reporting, either as mandatory requirements or voluntarily by companies, under the existing pillars.

In Conclusion

Stick to your Knitting

Stay with the business you know well and focus on it. Do not compromise and do not suffer fools

The circular economy lacks a cohesive narrative that gives it value and meaning. Over the last couple of years, a growing number of circular economy aficionados have been calling for more purpose to be built into its execution.

The circular economy's purpose is to manage planetary resources, a country's natural capital, significantly reducing primary raw material use, which will, ultimately, promote our biodiversity goals. To achieve this purpose at scale, the circular economy will best serve the individuals, companies and institutions if it is integrated, with a more concise definition, into ESG reporting.

Some companies are already writing the circular economy into their reports. Some sustainability standards are also attempting to find clarity around the circular economy concept. But doubling up on social issues will confuse many companies and weaken the circular economy's overall agenda. The circular economy needs to stick to its knitting - managing the natural capital of our planet.

***************************

Ms Adrienna Zsakay is CEO of?Circular Economy Asia Inc,?and this article represents her opinions on the circular economy.

References

'The lack of social impact considerations in transitioning towards urban circular economies: a scoping review' by Fedra Vanhuyse, Emir Fejzic, Daniel Ddiba, Maryna Henrysson published in Sustainable Cities and Society, Volume 75, December 2021.

'Recycling misery: How Coca-Cola profits from garbage collected by Mexican children' by Peniley Ramirez, 13 March 2017 on Univision.com. To read the response from Coca-Cola, dated 21 March 2017, visit the Business and Human Rights Resource Centre.

'Distinguishing Child Work and Child Labour' published by RNCYPT, 04 March 2020.

'Ten Steps Toward the Circular Economy' By?Holger Rubel,?Marc Schmidt, and?Alexander Meyer zum Felde, 06 February 2018.

Image: ESG framework image from PwC 'ESG reporting and preparation of a Sustainability Report'

Intercontinental Exchange website: https://www.theice.com/index and Intercontinental Exchange 2021 Sustainability Report

Bridgestone Integrated Report 2022 and ESG Data 2021

The full selection of GRI Standards, including GRI Standard 306 Waste, can be downloaded from the Global Reporting Initiative website.

Image: Knitting - 'BrilliantBusinessThings.com - Stick to your knitting'

Stick to your knitting quote: A mix from EditorialWords.com and IdleHearts.com