How the circular economy is becoming key to corporate longevity

This story first appeared on CPA Canada’s online news site.

As customers become more aware of their personal carbon footprint, they’re causing organizations to take a cold, hard look at their operations—and make some changes

Climate change has become a driving force in the way companies operate, and consumers and stakeholders are largely behind the push, experts say. As they become more aware of their carbon footprint, people are adjusting their behaviour accordingly—and organizations are catching up.

Customers and consumers have no patience anymore for the larger organizations that they loyally supported, but that don’t adopt lower carbon outputs, – says Henry Stoch, partner, risk advisory, Deloitte Canada and lead of their sustainability and climate change practice. – It’s taken many of these companies a while, but I think they’ve realized that things have changed.

Recent high-profile announcements from companies such as Nike committing to upcycling more of its product waste, and EY, which plans to become carbon negative in 2021, provide concrete evidence of this shift. “Large organizations are recognizing that they need to have real strategies in place,” says Stoch.

The circular economy, which is an economic system aimed at reducing waste, is behind such initiatives. It is created with a triple bottom line approach: to benefit business, society and the environment.

Adapting to the circular economy means acclimatizing to a risk-reward approach, Stoch says, which can initially mean more investment on the company’s operations but with a better return in the long-run. As Stoch explains, ultimately the key to a company’s survival will be meeting consumer, investor and board demands via environmental, social and governance (ESG) policies.

Here is how a growing number of companies are weaving circular economy into their climate strategies to drive corporate strategy and create value:

1) VERIFORM

Canadian steel fabrication company VeriForm has introduced more than 100 green initiatives since 2006. Not only have these programs reduced the company’s carbon footprint by 77 per cent, but VeriForm has also increased staff by 30 per cent and tripled its sales per kWh of energy consumed. A CPA Canada case study on the company demonstrates the success of reducing GHG emissions while achieving growth.

2) EY

After launching and achieving its goal of becoming carbon neutral in 2020 under its NextWave strategy, EY raised its commitment to sustainability by announcing plans to become carbon negative in 2021. The firm reduced its emissions during COVID-19 and has pledged to keep emissions below the Paris Agreement trajectory during pandemic recovery. By removing and offsetting more carbon than it emits, EY will achieve this year’s goal and meet its next target of becoming net zero in 2025.

3) SCOTIABANK

Scotiabank recently launched a $1-million fund to advance research in global decarbonization efforts by 2050. The Net Zero Research Fund, which is part of the institution’s commitment to achieving net zero, will create partnerships with academic institutions and think tanks that support sectors in efforts to decarbonize. This news comes on the heels of the bank’s 2020 announcement about its $1.25 million commitment to the Institute of Sustainable Finance—a collaboration hub aimed at aligning mainstream financial markets with Canada’s transition to a lower carbon economy.

4) NIKE

Nike released a targeted 2025 fiscal plan that includes an incentive for executive pay to be tied to goals based on diversity building and environmental activism. The corporation also set a list of 29 targets, which include reducing its carbon footprint and increasing the amount of product waste that is upcycled by 10 times the current amount. In 2020, the company also launched its Supplier Climate Action Plan to reduce carbon emissions and waste along its supply chain. Nike is now using fully renewable energy in in its Canadian and American facilities. It has also reduced freshwater use by 30 per cent through its textile dyeing and finishing suppliers, among other initiatives.

TIMES ARE CHANGING

Climate change has also influenced how stakeholders view business production and operation, says CPA Davinder Valeri, director, strategy risk and performance at CPA Canada and executive director of the A4S Canadian chapter. “Pension funds, asset owners, they’re all signalling very strongly the demand and the desire to move toward a greener economy,” she says.

Part of this shift includes the demand for more transparency and accountability, which is achieved by measuring impact qualitatively and quantitatively. These calculations can be done using accounting for sustainability methods such as natural, social and human capital accounting and, more recently, the A4S-CPA Canada guide on business valuations. “The boards of directors have a fiduciary responsibility now to make sure that climate change impacts are adequately addressed in their organization,” says Valeri.

These new accounting techniques will heavily influence how companies operate and also inform disclosure around their strategy, says Stoch. “Companies are learning to make use of Big Data in very different and new ways when it comes to ESG and sustainability, which is not an area that has traditionally focused as heavily on things like Big Data and analytics,” says Stoch. “This will obviously improve the overall state of how companies manage these issues.”

STAY IN THE GAME

CPAs are taking the lead to help organizations understand climate change impacts and navigate sustainable finance. ESG is now critical to business resilience and directors need to be asking tough questions about the environmental and social risks and opportunities.