How accountants can help establish circular business models

A few notable brands have been built on the idea of circularity and sustainability. Outdoor gear retailer Patagonia is the standout. Having tested new ways to minimise the environmental impact of its goods over the course of decades, learning from each iteration and trying again, even Patagonia has not achieved true circularity – but it certainly is decreasing its impact.

Now, some of the Australia’s most recognisable brands are also using the language – Country Road billboards around Sydney towards the end of 2023 proclaimed a shift ‘towards circularity’, tied to the brand’s new practice of recycling offcuts and faulty garments. 

It’s not only the environment that benefits from circular or sustainable practices – many companies working to become more sustainable will be aware that, as a recent McKinsey study showed, there’s a clear link between consumer spending and a product or brand’s ESG claims.

This link emphasises the importance of accounting professionals’ role in helping businesses and clients to not only do what’s right by the environment and customers, but build a business case for doing so.

“Accountants sometimes see themselves as the back-office support function, without the power to make businesses better,” Paula Kensington, CFO and founder, PK Advisory, says.  

“But a mindset shift is needed. We can drive change – and should.”

In fact, accountants are in the ideal position to help achieve circularity. 

“They can see across the whole business, which you can’t really do in most other departments,” Kensington says.

Accountants should be part of the solution from the very beginning – Kensington warns against business leaders getting deep into a strategic plan before bringing in the CFO.

What is circularity?  

The best way to understand a circular economy is to compare it to its opposite: a linear economy. 

The basis of a linear economy is “take, make, dispose”, explains Caterina Sullivan, founder, Strategic Sustainability Consultants. Businesses take resources and make products, which are eventually thrown away. 

In contrast, the basis of a circular economy is a closed-loop system. 

“Resources are given value and, therefore, are reused, recycled, composted, or regenerated, going back into a new lifecycle or supply chain, without generating waste,” Simona Paganetto, Certified Circular Economy Specialist and founder, I’m Plastic Free, says.

Flooring manufacturer Interface, for example, achieves its ‘nothing to landfill’ promise by designing products that are wholly recyclable, and by committing resources to ensuring that its products can be and are reused or recycled.

Circularity usually refers to the use of resources but should extend to the social aspects of doing business, argues Sullivan. 

“How can we empower everyone throughout a supply chain, so that success isn’t built on others’ pain, suffering and disempowerment?”

Why is circularity important?

Circularity is essential to sustainability – because reusing resources means not having to take more from the Earth. 

“You cannot have infinite growth on a finite planet,” Paganetto says. 

Ultimately, the linear approach could threaten human survival. But even before that, it could threaten companies – in two ways. 

First, practical risks to doing business might arise – these are the climate risks that sustainability standards will soon require businesses to understand and report their exposure to. Paganetto lists resource scarcity, water availability and climate change. 

Second, consumers are becoming less willing to spend on linear businesses, as the McKinsey report above showed. 

“If companies don’t change their behaviour, they’re going to be left behind,” Kensington says. 

Alongside the risks, there’s an opportunity – circularity can help businesses save money. 

“Circularity fosters efficiency, enabling companies to do more with fewer resources, which enhances operational resilience,” Sullivan says. 

Current trends in circularity

Businesses moving towards circularity are discovering they’re less effective on their own. 

“Companies are forming collaborative ecosystems, looking outside their own environments,” Kensington says. 

“About 10 years ago, Levi [Strauss & Co] realised it takes a lot of water to make jeans, so it brought in nine competitors to work on the problem.” 

The solution included tracking water use, boosting production in factories that recycle water and improving access to clean water for communities where jeans are made. 

Other businesses are shifting to Product-as-a-Service (PaaS) business models.

“Offering products as services, rather than selling them, encourages durability, repairability and efficient use of resources,” Paganetto says. 

At a policy level, companies are turning to the United Nations Sustainable Development Goals for guidance, Sullivan says. 

Meanwhile, governments are adopting extended producer responsibility (EPR) policies, which make producers responsible for their products’ lifecycles, says Sullivan. 

For example, in the European Union, ‘right to repair’ laws help prevent products that only need minor repairs from going to landfill, with consumers able to repair a broken product rather than purchasing a new one.   

In Australia, a 2021 Productivity Commission report identified a competition upside to ‘right to repair’ laws as well – increasing access to information and parts by independent repairers.  The report found this would not stifle those manufacturers’ ability to innovate, nor decrease the likelihood of product and process innovation.

How accountants can contribute to circular practices

First, accountants can help determine if circularity is a viable model. 

“Accountants have all the numbers and know the business inside-out,” Sullivan says. 

“They should run a cost-benefit analysis to work out whether the plan will work, and is not just an ethical choice, but also a financially sound one.” 

This might include advising on potential financial strategies, adds Paganetto. These range from investing in new technologies to support circular practices, such as blockchain and AI, to identifying opportunities, such as grants, subsidies and partnerships. 

Right down in the weeds, accountants can help with the vital work of ensuring a plan will deliver true circularity by conducting a life cycle analysis. 

“This is a systematic analysis of the environmental impact throughout the entire life cycle of a product, material, process or other measurable activity,” Paganetto says. 

“Accountants can provide costs of raw material, profit margins, inventory data and so on.” 

Once the plan is in motion, accountants should track ongoing resource usage and suggest opportunities for optimisation, adds Sullivan.

Case study: How an accountant helped Whybuy switch to a circular model

Jeremy Piper spent 15 years running a business repairing and reselling second-hand appliances before he went circular.

For him, this meant shifting to a PaaS model. His company, Whybuy, loans refurbished fridges, washing machines, dryers, televisions and microwaves to subscribers. 

“We know how to repair our fleet and, when an appliance is retired, it’s stripped of its valuable parts,” Piper says. 

“Because of this, we lose very little capital. We don’t just see our appliances in whole, but as a collection of parts. Shelves, fans, doors, computers – all can be reused to bring several machines back to life.”

In establishing Whybuy, Piper worked closely with his accountant, Adam Espie of Shoreline Advisory.

“Early strategy meetings identified the limitation of the then-second hand appliance business as the cost and lack of availability of stock,” Espie says.

“A change to circular practices was identified as a key strategy to drive growth.”

Espie says that the team believed adopting circular practices would improve profit and efficiency, and that this belief has now been proven correct.

At tax time, Espie makes the most of depreciation laws to write off new assets.

Further, he and Piper are working on an integrated asset ledger to capture the additional ‘harvest value’ of each asset’s parts. 

“This will fully measure the benefit Whybuy achieves by operating as a circular business,” Espie says.

Getting in early

Even if a company isn’t working towards circularity now, it won’t be long before reporting on sustainability, at least, is mandatory for many.

“The International Sustainability Standards Board (ISSB) put out mandatory accounting standards in June 2023,” Kensington says. 

The Australian Government has announced its intention to roll these out incrementally from 1 July 2024.

“Even if your company isn’t big enough to have to report, you’ll probably get swept up in it, because it’s highly likely that you’re part of someone else’s supply chain,” Kensington says.

For those unsure of where to start, Sullivan has a word of advice. 

“We see a lot of businesses try to do everything at once, then throw their hands up in the air, and say it was too hard,” she says.

“Take just one policy and one procedure at a time.”

Sullivan notes that this can sound awfully slow for people who are passionate and want to get out there, but that a methodical approach allows the accountant to analyse whether processes are working, how change is impacting other parts of the business and any influence on productivity.

Read next: 4 ways to prepare for sustainability reporting changes