Nowadays, climate change is a popular topic which is discussed together with the issue of sustainability. Indonesia with its geography and nature condition face a lot of dangers caused by climate change. To name a few, flood, thunderstorm and temperature change. Climate change is not only changing the nature but also decrease Gross Domestic Income. Bappenas study showed that Indonesia GDI has decrease potentially almost Rp544 trillions during the 2020-2024.
As targeted by Government, Indonesia in 2045 will turn into a developing country as the top 5 in economic growth. Climate change and its consequences is one of the challenges that we should be aware of to be able to reach the target.
Indonesia Government has fully aware of the climate change’s dangers and these few years has more focus on reducing carbon emission and promoting the use of circular economy. The discussion arises mostly on how to reduce carbon emission and many activities and regulation that has been made by government to reduce carbon emission, however circular economy is a term that is still new for many businesses in Indonesia.
Management Accountant who is responsible for the business survival and sustainability in the long run should also understand and include these thinking into his companies’ business strategy.
Understanding Linear Economy and Circular Economy
Nature from centuries and even from the start of the earth teaches us that life is a circle, from newborn, grow, old, weak, die and reborn. Man made a new finding on power-driven machines that replaces hand tools uses natural resources (fuel, coal) started from Industrial Age in 1760. This period taught us the term of linear economy in which the process is to take, to make/ to use and to waste. This industrial age is a new beginning of linear economy. Nowadays, people are starting to think about the replenishment of the energy from natural resources because it is limited and has affected the earth, in form of climate changes and the change of natural resources.
The circular economy changes the men behavior to a more sustainability caring. Using this type of economy, business will sustain more. The business in the future will strategically change to renewable energy usage with least waste. Focus of the circular economy type is on the five-business model, i.e circular inputs, sharing, product use/life extension and resource recovery. With these 5 models, the company will develop renewable energy growth and optimize the usefulness age by using repair, reprocessing, upgrading and reselling systems. At the end, the industrial waste will become a secondary raw material. By using circular economy, it is expected that Indonesia’s GDP, and household savings will increase and will create more jobs.
Government Regulations on Circular Economy
With the focus to achieve “Indonesia Emas 2045” the Indonesia Government has issued several regulations to support the implementation of circular economy, such as Government Regulation No. 46 Year 2017 on Environmental Economic Instruments, which provides incentives for circular economy implementation, such as natural resource accounting, environmental taxes, subsidies, and fees. Another regulation is Presidential Regulation No. 97 Year 2017 on National Policy and Strategy for Household Waste and Similar Waste Management, which aims to reduce waste generation and improve waste management, such as sorting and processing garbage at its source, empowering garbage banks, and
implementing the expanded responsibility of producers through the roadmap for the reduction of waste by producers.
Another initiative is that Ministry of National Development Planning Agency/Bappenas together with UNDP (United Nations Development Program) published a report “The Future is Circular – Uncovering Circular Economy Initiatives in Indonesia” in 2022, a study on economic, social and environmental benefits of a circular economy in Indonesia. This study showed the potential and benefits of implementing a circular economy in five industrial sectors, food and beverage, construction, electronics, textiles, and plastics. These industries have impacts on the excess on waste and the effect to environment and society.
Accounting role in Circular Economy, how it differs?
Accounting plays a vital role in enabling the circular economy, as it provides the information and incentives for businesses to adopt circular business models and practices. Circular business models are different from linear business models, which follow the make-use-dispose logic. Circular business models aim to keep products and materials in use, regenerate natural systems, and design out waste and pollution. Some examples of circular business models are product-as-a-service, sharing platforms, remanufacturing, and bio-cycling.
Accounting for circular business models requires new approaches and frameworks that can capture the value and impact of circular activities, as well as the risks and opportunities associated with them. Some of the challenges and differences that circular accounting faces are:
1. Measuring and reporting the environmental and social impacts of circular activities, such as the reduction of greenhouse gas emissions, the preservation of natural resources, and the creation of jobs and social benefits
2. Valuing and depreciating assets that are used multiple times, repaired, or refurbished, rather than disposed of after one use
3. Recognizing and allocating revenues and costs for circular services, such as leasing, renting, or sharing products, rather than selling them
4. Assessing and managing the risks and uncertainties associated with circular activities, such as the availability and quality of inputs, the demand and preferences of customers, and the regulatory and market changes.
Circular accounting is still an emerging and evolving field, and there is a need for more research, guidance, and standardization to support its development and adoption. However, circular accounting also offers many opportunities and benefits for businesses, such as enhancing their competitiveness, innovation, and resilience, as well as contributing to the global goals of sustainable development.
According to a report by the Coalition Circular Accounting (CCA), financial accounting in the circular economy can be used to redefine values, impact and risk face by the business and show the goal achievement to accelerate the circular transition. The unstoppable movement of circular economy has to be supported by accounting and finance, otherwise it will be difficult to change the business behavior.
On 26 June 2023, ISSB (International Sustainability Standard Board) published IFRS (International Financial Reporting Standards) S1 on General Requirements for Disclosure of Sustainability-Related Financial Information and S2 on Climate-Related Disclosures. IFRS S1 objective is to ask for disclosure of information about sustainability-related risks and opportunities to meet investor information needs, while IFRS S2 objective is to require an entity to disclose information about its climate-related risks and opportunities
that is useful to primary users of general-purpose financial reports in making decisions relating to providing resources to the entity. Both IFRS should be effectively implemented by 1 January 2024. Although it is not official yet, Ikatan Akuntan Indonesia as an accounting standard setter in Indonesia has promote the adoption of both standards and ultimately, management accountants will use the standards as basis for their professional judgments and works to support the numbers and disclosures in the financial reporting.
References:
1. Ministry of National Development Planning Agency/Bappenas together with UNDP (United Nations Development Program), 2022, “The Future is Circular – Uncovering Circular Economy Initiatives in Indonesia.”
2. Government Regulation no 46, 2017, Environmental Economic Instruments 3. Presidential Regulation No. 97, 2017, National Policy and Strategy for Household Waste and Similar Waste Management
4. Coalition Circular Accounting, 2022, Financial Accounting in The Circular Economy: Redefining Value, Impact and Risk to Accelerate the Circular Transition
5. ISSB, 2023, IFRS 1 General Requirements for Disclosure of Sustainability-Related Financial Information and S2 on Climate-Related Disclosures
6. ISSB, 2023, IFRS 2 Climate-Related Disclosures