A Circular Economy Standard for Everyone

On 31st July 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS) for use by all companies subject to the Corporate Sustainability Reporting Directive (CSRD). The ESRS standards are interconnected with the CSRD, which sets out reporting requirements and obligations and the ESRS provide the framework and methodology for reporting. This marks another step forward in the transition to a sustainable EU economy.

The development of the ESRS is based on two elements:

• To guarantee a high level of interoperability between the ESRS and other international standards, the ESRS reporting requirements are aligned with the standard of the Global Reporting Initiative (GRI) . EFRAG also works closely with the International Sustainability Standards Board (ISSB) to ensure interoperability with the IFRS Sustainability Disclosure Standards.
• To create a unified reporting landscape in the EU that supports the goals of the EU Green New Deal and Sustainable Finance Framework, the ESRS reporting areas are coherent with other EU frameworks and legislations such as the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR).

The Benefits of ESRS E5 for the Circular Economy

Caroline Kötter-Bendtsen, Associate Manager, Strategic Sustainability Consulting at Ramboll, states “ESRS E5 focuses specifically on resource use and circular economy and can essentially be grouped into three categories”:

1. To become more resilient: ESRS E5’s requirements can serve as guidance to understand, manage, and improve relevant circularity aspects of the business which may help increase resilience against critical risks, such as material shortages, and upcoming regulations, such as the next update of the EU Eco-Design Directive.
2. To boost competitiveness: By showcasing strong reporting and performance through ESRS E5, companies can demonstrate that they have gone one step further than competitors who might not yet have made use of circular initiatives to reduce their carbon footprint.
3. To meet changing customer and investor demands: Having strong data through ESRS E5 makes it more likely that companies are prepared to respond effectively to more demanding customer and investor inquiries about circularity, including those as part of new tender requirements that make circularity a necessary part of every bid.

https://www.ramboll.com/insights/resource-management-and-circular-economy/esrs-e5-from-the-materiality-assessment-to-driving-new-circularity-progress

A Circular Economy Standard for Everyone

The ESRS E5 Standard can be used by companies outside the EU to define how to integrate the circular economy in their company as it focuses on resource flows and covers the key following subtopics:

(a) resource inflows;

(b) resource outflows (including waste)

and can be summed up in three paragraphs:

1. Resource inflows cover the means (a) use of natural resources, (d) reduction of hazardous substances and (f) increase the use and quality of secondary materials.
2. Resource outflows cover the means (b) increase the durability, reparability, upgradability or reusability of products and © increase the recyclability of products.
3. Waste covers the means (g) prevents or reduces waste generation, (h) increases preparing for the re-use and recycling of waste, (i) increases the development of the waste management infrastructure, (j) minimises the incineration of waste and avoids the disposal of waste and (k) avoid and reduces litter.

ESRS E5 also aims to contribute to other international goals such as UN’s SDG Goal 12 Responsible Consumption and Production: Ensure sustainable consumption and production. It encompasses the following targets:

(a) Target 12.2 by 2030, achieve the sustainable management and efficient use of natural resources; and

(b) Target 12.5 by 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse.

And compatibility with other sector-agnostic international initiatives has also been considered including the Global Reporting Initiative (GRI) and in particular GRI 301 — Materials which considers the following: “The type and amount of materials the organization uses can indicate its dependence on natural resources, and the impacts it has on their availability. The organization’s contribution to resource conservation can be indicated by its approach to recycling, reusing and reclaiming materials, products, and packaging.”

In the JRC (EU Joint Research Centre) 2022 publication ‘Development of the EU Sustainable Finance Taxonomy — A Framework for Defining Substantial Contribution for Environmental Objectives 3–6’, Section E — The Transition to a Circular Economy — Article 13 of the Taxonomy Regulation defines when an economic activity has to be considered to contribute substantially to the Transition to a Circular Economy environmental objective:

The document continues by listing the four high-level category groups:

• SC 1 Circular Design & Production: design and produce products and materials with the aim of long-term value retention and waste reduction; promote dematerialisation by making products redundant or replacing them with radically different products or services.
• SC 2 Circular Use: life extension and optimized use of products and assets during the use phase with the aim of resource value retention and waste reduction support better usage and supporting service.
• SC 3 Circular Value Recovery: capture value from products and materials in the after-use phase.
• SC 4 Circular Support: develop enabling digital tools and applications, education and awareness raising programs, and advisory services to support circular economy strategies and business models.

While all this may look complicated, in fact, it is not but there is a lot to get through. The most important point to note is that the ESRS E5 and all the supporting documents put together during the last few years all point in the same direction — resource management.

ESRS take a “double materiality” perspective — companies are obliged to report both on their impacts on people and the environment, and on how social and environmental issues create financial risks and opportunities for the company.

Finally, there are the ESRS E5 — Disclosure Requirements to understand, which should be read and reported alongside the disclosures required by [draft] ESRS 2 — General Disclosures, Chapter 4 — Impact, Risk and Opportunity Management.

1. Disclosure Requirement E5–1 — Policies related to resource use and circular economy
2. Disclosure Requirement E5–2 — Actions and resources related to resource use and circular economy
3. Disclosure Requirement E5–3 — Targets related to resource use and circular economy
4. Disclosure Requirement E5–4 — Resource inflows
5. Disclosure Requirement E5–5 — Resource outflows
6. Disclosure Requirement E5–6 — Potential financial effects from resource use and circular economy-related impacts, risks and opportunities

Within these six Disclosure Requirements are 35 sub-topics which dig deep down into the mechanics of the circular economy. For the first time, we are beginning to get into the nuts and bolts of what resource management looks like. For example, Disclosure E5–4: Resource Inflows includes, “The disclosure shall include a description of its material inflows: products (including packaging) and materials, and property, plant and equipment used in the undertaking’s own operations and along the value chain.”

Once more companies begin to embrace ESRS E5 as a viable framework, the circular economy stops being a concept but an actual set of actions that can be measured and reported. Over time, there may be some amendments and adjustments to ESRS E5 or, more likely, technologies will emerge to make the calculations easier.

Conclusion

For companies serious about the circular economy, ESRS E5 is the only framework that will drag companies kicking and screaming away from believing the circular economy is primarily about waste management and recycling and towards a genuine measurement of circular design and production. Under Disclosure E5–5: Resource Outflows, it states, “The undertaking shall provide a description of the key products and materials that come out of the undertaking’s production process and that are designed along circular principles, including durability, reusability, repairability, disassembly, remanufacturing, refurbishment, recycling or other optimisation of the use of the resource.”

For several years I have nagged on about the necessity for the circular economy to be grounded around resource management and a common definition. ESRS E5 lays the foundation beautifully, even if it is still a bit clunky in parts.

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Ms Adrienna Zsakay is the Founder and CEO of Circular Economy Asia Inc, and this article represents her opinions on the circular economy. Circular Economy Pick of the Week is brought to you by Circular World™ Media — a brand owned by Circular Economy Asia Inc.

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References

‘ The Commission adopts the European Sustainability Reporting Standards ‘, News article, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, published 31st July 2023.

‘European Sustainability Reporting Standards (ESRS)’ published by Plan A, date unknown.

‘ESRS E5 — From the materiality assessment to driving new circularity progress’ by Patrick Malony, published by Ramboll, 16 November 2023.

‘What is the Difference Between CSRD and ESRS?’ published by Anthesis, date unknown.

‘European Sustainability Reporting Standards (ESRS)’ published by the UN Environment Program, Finance Initiative.

Originally published at https://www.linkedin.com.