A Circular Economy Must Drive Management Accounting in the 21st Century

Stathis Gould | October 29, 2014 |

It is now clear that the industrial economy, which has emerged and developed over the last 200 years, is inefficient and environmentally detrimental. Inefficient processes consume excessive natural resources and produce waste and environmental pollution. In running our organizations, we use natural capital in the form of oil, wood, minerals or natural gas, and return them in the form of waste, most of which does not naturally degrade and cannot be reused.

Waste is a serious issue for society and for management accounting. A critical purpose of management accounting is effective and efficient resource utilization. Improving resource productivity and allocation leads to direct financial benefit to organizations, as well as providing value for society. As outlined in their seminal book, Lean Thinking (1996), Womack and Jones describe waste as any human activity that absorbs resources but creates no value. Most forms of waste have associated environmental impacts, such as defects, overproduction, excess inventory, and unnecessary transport of goods. Professional accountants working in management accounting roles need to consider waste as part of their contribution to organizational success.

Lean production, most notably pioneered by Toyota, has been critical in enabling many organizations to deliver high quality at a low cost. A next step in providing greater value to customers, and to society, is to reorganize business models along biological rather than industrial lines. A biological closed (or circular) system approach is a natural extension of lean thinking and production that is governed by a philosophy of delivering customer value without waste. It involves thinking about resource inputs in the form of alternative fuels and raw materials, energy efficiency, and reduced waste for the benefit of all concerned.

In some jurisdictions, policies that extend manufacturer responsibility to the post-consumer stage of a product’s lifecycle are also influencing business models. An example of such a policy is the European Waste Electrical and Electronic Equipment (WEEE) Directive (2002/96/EC). The directive deals with the problem of scarcity of landfill space and the environmental risk of hazardous waste. It extends a manufacturer’s responsibility to include the collection and disposal of WEEE waste.

Waste occurs during the production process and at the end of a product’s life. The design of a product, and the materials used in its manufacture, determine how the product and its parts can be recycled, and therefore ultimately the extent of the environmental impact. “Eco” design involves materials that can be recycled and products that are relatively easily disassembled.

Lifecycle thinking is also leading to business model innovation based on producers providing a service rather than a product. Aligning the incentives of both customers and producers leads to benefits on both sides. As Philips CEO Frans van Houten described in Toward a Circular Economy, “for business customers, we now sell lighting as a service: customers only pay us for the light, and we take care of the technology risk and the investment. In many cases, we also take the equipment back when it’s the right moment to recycle the materials or upgrade them for reuse.” The benefits are substantial energy savings for customers and high profit margins for the company.

An increasing number of examples of this type of business model innovation exist in many sectors of our economies. An inspiring example is Interface, which previously produced carpet for commercial premises but now provides floor-covering services. Functionality to the customer remains relatively unchanged in the sense that they continue to walk on carpet. However, Interface transformed its business model for the benefit of customers, society, and the company using lifecycle analysis and innovative ways of working to drive relevant insights.

Traditional carpet manufacturing is energy intensive and relies on fossil fuel-based raw materials. Customers once bought and installed carpet, which was disposed of in landfills at the end of its useful life. Interface’s innovative business model replaces fossil fuel-based resource inputs with polymeric material that can be remanufactured back into new product. This approach leads to 99.7% less waste than traditional carpet. The remaining 0.3% is reused elsewhere.

Interface started its Mission Zero journey in 1996 and set a target for becoming carbon neutral by 2020. In May 2014, Rob Boogaard, CEO of Interface in Europe, spoke in a press release of “our goal to cut the umbilical cord to oil, with the result that 44% of our raw materials in Europe are already recycled or bio-based.” 

By 2013, Interface had reduced its greenhouse gas emissions by 80% and water use by 87% in Europe. The company has recently introduced several new innovations that are significantly reducing its impact on the environment further still, achieving 95% water reduction and 90% carbon reduction between May and January 2014. One example is the company’s switch to a water recirculation system through closed loop piping at its facility in Scherpenzeel, the Netherlands.

As a restorative enterprise supporting a circular economy, Interface is working toward a resilient business model that delivers societal benefit. To serve both organizational and societal outcomes, management accounting has to be applied in a way that integrates economic, quality, and environmental systems, with the ultimate goal of facilitating decisions that support circular economies. The future relevance of management accounting depends on it.

For more information on Interface Europe’s environmental performance, see Our Progress to Zero, and for the broader Interface mission zero story, see Interface: The Untold Story of Mission Zero in Europe.

Stathis Gould

Deputy Director, Professional Accountants in Business, IFAC

Stathis Gould heads up the development of international services for professional accountants working in business and industry at IFAC. A key element of his work is developing thought leadership and guidance in support of finance professionals and their roles facilitating sustainable organizational performance. Before moving to IFAC, he was at the Chartered Institute of Management Accountants (CIMA) responsible for planning and overseeing a program of policy and research. Prior to serving the accountancy profession, Mr. Gould worked in various roles in the private and public sectors in the UK. See more by Stathis Gould

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