Aerial view of a spiral staircase with a tree in the middle

How CSRD regulations embrace circular economy principles

Explore the CSRD’s circular economy framework and steps to prepare for meeting disclosure requirements.

In brief
  • If an entity’s double materiality assessment identifies circular economy and resource use as material, then disclosures on the topic will be required.
  • ESRS E5 will require entities to report on resource inflows, including resource use, resource outflows related to products and services, and waste.
  • To prepare, companies should understand data collection systems and processes and opportunities to incorporate circular strategy into business operations.

Circularity is a critical tool to enable the transition to a sustainable economy. A circular economy is a systems-based approach in which products and materials have multiple lifecycles. By applying circular principles, companies can reduce waste, limit their dependence on resource extraction, shorten their supply chains, lower the carbon intensity of their products and enhance consumer engagement. Circularity is a fundamental departure from the “take-make-consume and throw-away” linear economic model that characterizes most economic activity.¹

Circular thinking has become both a strategic consideration and an emerging feature of global regulation. Many leading companies have adopted circularity principles into their corporate strategy, with more considering its adoption. This shift has resulted in take-back programs, eco-design and targets for recycled content. Sustainability and consumer product regulations are accelerating these trends, both in the US (through Extended Producer Responsibility programs adopted in several states) and the European Union (EU).2,3 The EU has had some form of sustainability-oriented regulation since the 1970s. The passage of the EU’s Green Deal and Circular Economy Action Plan in 2020 signaled a much more ambitious approach to sustainability, with economy-wide objectives for greenhouse gas reduction, nature restoration and resource use, among many others. This policy package also included regulations on Ecodesign for Sustainable Products (ESPR), battery recycling and single-use plastics, among others.4


The EU Corporate Sustainability Reporting Directive (CSRD): application and timing


The CSRD is a signature element in achieving the policy objectives of the EU Green Deal. Prior to the CSRD, the EU required select companies to disclose sustainability-related risks, opportunities and impacts under the Non-Financial Reporting Directive (NFRD).¹ The CSRD expands the scope of required disclosures significantly — while the NFRD currently applies to 11,700 organizations5, the CSRD will require approximately 50,000 entities to disclose an extensive set of environmental, social and governance (ESG)-related information. These requirements are detailed in the European Sustainability Reporting Standards (ESRS) that have been developed by the European Financial Reporting Advisory Group (EFRAG) in accordance with the requirements set out in the CSRD. The directive’s reporting requirements will be rolled out in a phased approach, with companies first in line to report on the 2024 financial year in 2025 published reports5. Many EU incorporated companies of US groups will be scoped in for financial years beginning 2025 and will include reporting against the EU Taxonomy, in addition to the ESRS standards.6 For further information on the scope and EU sustainability reporting standards broadly, refer to EY publications here.7

How the ESRS contemplates circular economy principles

The ESRS standards explicitly address circular economy, namely through ESRS E5 Resource use and circular economy (E5).8 While multiple ESRS standards touch on circularity, this article will primarily focus on the impact of E5, and how it has the potential to revolutionize adoption of circular economy practices.

As a first step to CSRD compliance, entities must conduct a double materiality assessment to assess sustainability matters that are “material” across two dimensions: impact materiality (positive and negative impacts on people and the environment) and financial materiality.9 If an entity’s double materiality assessment identifies circular economy and resource use as material, then disclosures on the topic will be required.

The General Disclosures in the ESRS standards address circularity, requiring companies to disclose the processes, methods and tools used to identify and assess circular economy-related risks, opportunities and impacts across their value chain.10 The CSRD furthers its circular economy consideration requirements in the E5, specifically:11

  • The positive or negative impacts entities have on resource use
  • How entities prevent or mitigate negative impacts on resource use
  • Potential for entities to adapt and align with circular economy principles
  • An entity’s resource use risks and opportunities
  • The short-, medium- and long-term financial impacts of circular economy-related risks and opportunities

E5 will require entities to report on resource inflows, including resource use, resource outflows related to products and services, and waste. Specific reporting requirements include:

  • Description of the policies an entity is using to manage circular economy related risks, opportunities, and impacts across upstream and downstream operations12 (E5-1).
  • Description of an entity’s circular economy related actions, current or planned, and the resources allocated for implementation (E5-2).
  • Targets relating to the circular economy and resource use. For example, circular design, circular material use rate, reduction of virgin nonrenewable materials, and sustainable sourcing and use of renewable resources and waste management (E5-3).
  • Resource inflows related to material risks, opportunities and impacts identified along the company’s operations and upstream value chain. Disclosures could include total weight of technical and biological materials in products, percentage of biological materials (and any accompanying certification scheme, including for packaging), and weight of recycled material. (E5-4).
  • Material resource outflows, including an entity’s waste management strategy, the extent of recirculation, reparability, recycling of products and other materials (e.g., packaging), and waste generated from operations (E5-5).

Finally, entities will need to disclose the anticipated financial effects of material circular impacts, risks and opportunities over time. Required disclosures that will gradually be phased into scope for some organizations include a description of quantified monetary effects (cash flows, financial performance and financial position) and qualitative financial opportunities.

Regardless of a company’s maturity across circular economy design and activation, the CSRD will require transformational thinking about a company’s value chain and mandate consideration of how resource flows impact society across social, environmental and economic factors.

How organizations can prepare to meet CSRD circular economy reporting requirements

CSRD scoping and applicability

Understanding if and when your organization is required to report is an essential first step in preparing for CSRD disclosure. Companies can convene cross-functional stakeholders now — including finance, legal, ESG, procurement and data teams — to assess reporting timelines and determine to what extent and where they are scoped into CSRD reporting.

Data systems and collection

Once applicability has been determined, companies should consider what reporting systems and data collection they do or do not have in place to help meet their unique disclosure requirements.13 Under the ESRS standards, several sectors will have circular economy-related quantitative disclosure requirements that may not have previously been gathered and/or disclosed publicly, to include value chain inputs, financial effects (impacts on cash flow, performance, positive, development, cost of capital or access to finance), social and environmental impacts,14 and recycled material volume. Comprehensive reporting systems will help entities collect and analyze the appropriate data across the value chain and, as reported data will require third-party independent assurance, establish audit-ready processes and controls.²


The implementation of circular economy principles will require businesses to fundamentally adapt to new ways of thinking and, in some cases, enact systems changes across the value chain. Many companies do not currently have a circularity strategy that is applied to business operations.15 Organizations will need to determine how circularity can be integrated to go beyond compliance and create behavior change.

As a first step, entities can benefit from performing a readiness assessment to identify reporting gaps, as well as review and update waste and circular economy targets, actions and policies, and relevant process and control documentation15. A reporting strategy roadmap can then be developed to address identified gaps, risks and opportunities. As part of this exercise, entities should consider the implications of reporting on current business-as-usual activities, and determine what additional activities are needed. Opportunities to incorporate circular principles may include the use of recycled or bio-based materials; using renewable energy used in the creation, use or access of goods and services;16 products as a service;16 resource recovery;16 and increasing product life or use through design, upgrade, resale or repair.16

Supply chain visibility

The transition from a linear to a circular supply chain is key to achieving ESG targets, complying with CSRD requirements, and moving toward a zero-waste operating model. Companies should recognize who along their value chain has an impact on resource use, what resource changes are inside or outside of their direct control, and how to collaborate with supply chain partners to help meet circular goals. Furthermore, increased supply chain visibility can provide mutual benefits of knowledge sharing, increased transparency and efficiency, competitive advantage through improved technical processes, and cost reduction. With increased supply chain visibility, inventory can be better managed to improve customer demand forecasting and avoid significant disruptions, obsolete inventory and storage costs. Increased supply chain visibility can also help spurn innovation to create new operating models, such as closed- and open-loop systems, both of which support a more circular economy.16 With clear sustainable supply chain strategies, companies should be well-positioned to respond to CSRD requirements and strategically position themselves to differentiate their business, meet ESG targets, and drive social and environmental impact.

The bottom line

The CSRD is one of the most significant legislative efforts to drive the adoption of ESG strategies and targets. While it is an EU-based directive, it will have a global impact and reach. Given the volume of entities in scope, and the layers of information required to disclose, the CSRD is expected to not only mandate corporate movement on ESG goals but also drive a new way of working and behavioral changes to align economic and social needs more equally. Of the CSRD’s many requirements, the circular economy plays a central role, helping companies better understand — and strategically manage — their resource use. With focused attention on applicability, data systems, strategic design and supply chain insights, companies can act now to prepare for CSRD disclosures and establish a foundation for greater adoption of circular business models, a key enabler to fighting climate change.

Key points on how companies can prepare

  • Organizations should understand if and when they will be required to report on circular economy and resource use.
  • Organizations should determine if they have adequate reporting systems to collect and analyze appropriate data across the value chain. This data will require third-party independent assurance and accordingly processes and controls should also be considered.17
  • Organizations should integrate a circularity strategy into their business operations.
  • Organizations should shift from a linear supply chain to a circular, zero-waste operating model. They should also gain supply chain visibility to highlight opportunities for closed-loop systems (products or materials are returned to original manufacturers) and open-loop systems (materials are recovered by other parties), both of which support a more circular economy.18

Sarah Schamschula, Vivian Dao and Elizabeth Tual of EY’s Climate Change and Sustainability Services practices also contributed to this article.


The CSRD will transform how global entities consider and apply circular economy principles. To prepare, if companies believe circular economy and resource use will likely be deemed material, they can take action now to prepare for future disclosure requirements, to include a review of reporting systems and building a circular strategy.

Related articles

How companies can leverage the circular economy to address global e-waste

Electronic waste creates a $57 billion loss annually. Adopting circular models can help firms access untapped opportunities and lower environmental impact.

20 Feb 2023 Mark Weick + 1

Circular economy: Navigating the evolving global policy landscape

Historically, geographical limitations and scarcity of natural resources have been key drivers for implementing circular economy policies.

16 Dec 2022 Mark Weick + 2

If it’s broken, fix it: how chemical recycling can fix the broken plastics cycle

Leaders in the chemical industry are urged to consider the benefits of chemical recycling, which can scale with the proper technology investments.

26 Oct 2022 Mark Weick + 2