OPINION: Accounting needs to adapt to the circular economy

Photo: Maj-Lis Koivisto

We often hear about how hard it is to change the course of large ships, and as an analogy our current economic system seems to be hard to turn away from its course of counter-sustainability. However, large tankers DO make it into port. I would like to offer the idea that our economy can change course too. As with large ships, we need to understand and master the controls. Very few talk about accounting and sustainability. That is a shame, as several built-in features (and some easy to build in) could offer a way to turn the economy around. It’s not rocket science and it would be a big leap forward!
Continue reading “OPINION: Accounting needs to adapt to the circular economy”

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Putting sustainability into financial reporting

We can envisage a balance sheet from which it is possible to glean the current state of the firm’s investment in circularity. A worked example is given below. Note that by  circular infrastructure we mean infrastructure that:

  • runs (or can run) on renewable energy
  • uses recycled materials and recycles materials
THE TRANSITIONAL COMPANY
PERIOD ENDED 31/12/2016
CURRENT ASSETS CURRENT LIABILITIES
Cash 200 000 € Accounts payable 0 €
Accounts receivable 0 € Accrued Expenses 0 €
Inventory 0 € Taxes owed 0 €
TOTAL CURRENT ASSETS 200 000 € Long term debt 0 €
TOTAL CURRENT ASSETS 0 €
PROPERTY AND EQUIPMENT
*Circular Infrastructure 100 000 € LONG TERM DEBT
*Non-circular Infrastructure 50 000 € *Loans for Circular investment 100 000 €
Less depreciation -4 000 € *Loans for other infrastructure investment 30 000 €
NET FIXED ASSETS 146 000 € Other loans
TOTAL LIABILITIES 130 000 €
OTHER ASSETS STOCKHOLDERS EQUITY
Licence 0 € Paid in Capital 0 €
Goodwill 0 € Retained Earnings 0 €
TOTAL OTHER ASSETS 0 € TOTAL NET WORTH 0 €
TOTAL ASSETS 346 000 € TOTAL LIABILITIES AND NET WORTH
*Percentage circular infrastructure value 67% *Percentage investment loans for circular infrastructure 77%

As the example above shows, the infrastructure is 67% circular. In terms of loans the 77% invested in circularity gives a degree of transparency for investors. For example, if investors think that regulations will become stricter in future, then the investment is sound.

Extended Profit and Loss Statement

An extended profit and loss statement can also be created as shown below.

From this you can derive measures like % of sales of circular products, cost of circular technology, circular vs non-circular expenses and trends over time. This again creates transparency for the capability of the firm to operate in an environmental way.

INCOME STATEMENT
PERIOD ENDED 31/12/2016
CURRENT
OPERATING INCOME
*Circular product sales 50 000 €
*Non-circular sales 100 000 €
Net sales 150 000 €
*Renewable energy 2 000 €
*Non-renewable energy 2 000 €
*Non-circular materials purchase 2 500 €
*Circular materials purchase 2 500 €
Other costs of good sold 100 €
GROSS INCOME 140 900 €
OPERATING EXPENSES
*Renewable energy 2 000 €
*Non-renewable energy 4 000 €
*Non-circular materials purchase 3 000 €
*Circular materials purchase 10 000 €
*Repairs and maintenance on linear infrastructure 20 000 €
*Repairs and maintenance on circular infrastructure 30 000 €
*Costs for waste elimination, non-recycled 2 000 €
Other expenses
TOTAL OPERATING EXPENSES 71 000 €
Other income 0 €
Other expenses 0 €
NET INCOME BEFORE TAXES 69 900 €
TAXES 25 000 €
NET INCOME 44 900 €
Circular products 50/150    75%

Renewable energy 2/6        50%

Circular materials 10/13     77%

Circularity lost to waste    15%

Circular infrastructure

costs 30/50                           60%

The Baltic: a dying sea on the doorstep of industrial giants

At a Stockholm seminar on the 18th January held by the Baltic Works Commission, scientists, government officials and NGOs came together to discuss the dying briny depths on their doorstep: the Baltic Sea. The general consensus is one of emergency where technology provides an as yet unproven ray of hope. Without bold investments, policy changes and some bold pilot studies – worst case – the whole sea could turn in to a dead and decaying algal soup. I presented a solution with economic incentives based on Environmental Fiscal Reform.

At a Stockholm seminar on the 18th January held by the Baltic Works Commission,  scientists, government officials and NGOs came together to discuss the dying briny depths on their doorstep: the Baltic Sea. The general consensus is one of emergency where technology provides an as yet unproven ray of hope. This is only if the countries surrounding the Baltic are ready for bold investments, policy changes  and some bold pilot studies. If nothing is done, the nutrients contained in the dead sea floor could flow into the water body and – worst case – cause the whole sea to turn in to a dead algal soup. Continue reading “The Baltic: a dying sea on the doorstep of industrial giants”

A circular economy needs a framework of rules and financial incentives to work

The idea seems logical: when a product or material enters the economy it should stay there – if it comes from below the ground. If it comes from nature it can return at a rate the eco-system can absorb it. The problem is, we are living in a society that has been weaving a complicated web of laws, rules and, taxes and fees since money was created. At the moment it just doesn’t pay. Ushering in the circular economy means making sure it pays by dismantling a few parts of this framework and replacing others. But where to start? Are there existing points of control that can be adapted to stimulate circularity? This article identifies a few essentials. Continue reading “A circular economy needs a framework of rules and financial incentives to work”

The economics of the circular economy

Economic Fiscal Reform calls for the economic system to align with the twin purposes of preserving and  indeed restoring the environment whilst providing a standard of living for citizens. Up to now, these purposes have not been central to the way economics has been practiced. We are, however, facing a pressing situation: soil degradation, atmospheric warming and mineral depletion are forcing us to rethink. The idea of the circular economy – where biological and mineral material circulate in the economy without being deposited – is gaining ground. Continue reading “The economics of the circular economy”