Companies facing the European Sustainability Reporting Standards (ESRS) will not clear disclosure requirements E5-4 and E5-5 unless they can quantify the economic effects of substituting, reusing or recycling materials — and that quantification, argues Agustín Moreno Ruz, depends entirely on internal cost accounting systems robust enough to support it.

Moreno Ruz, professor at the Faculty of Economics and Business of the University of Barcelona and a regular collaborator of the Royal European Academy of Doctors (READ), makes the case in the article "Sustainability in Internally Generated Goodwill. Costs in the Circular Economy," published in issue 91 of the journal Técnica Contable y Financiera, dated December 2025.

His central claim is straightforward: the circular economy model can only be managed effectively if companies accurately measure what material substitution, reuse and recycling actually cost and return. Under ESRS E5-4 and E5-5 — the disclosure requirements covering resource inflows and outflows and circular economy performance — firms must report flows they have often never tracked at the level of individual production processes. Cost accounting, in his framing, stops being a secondary instrument and becomes a strategic tool for anticipating deviations, improving decision-making and rigorously assessing both environmental and economic impacts of production.

The informational payoff outweighs implementation costs, he writes, especially for small and medium-sized enterprises. That is a notable claim for the SME segment, where CSRD scope discussions have centered on whether lighter reporting burdens can preserve the directive's substance. Moreno Ruz argues the substance is commercial, not clerical: firms that measure material flows properly gain decision-useful data that feeds directly into pricing, inventory and product decisions.

He illustrates the point with a worked joint-production case. A manufacturer facing choices over by-products — sell them, recycle them internally, or dispose of them — sees each option produce direct, measurable effects on unit cost, inventory valuation and the income statement. The example reframes sustainability from an environmental reporting exercise into a factor with tangible influence on competitiveness and the company's economic structure.

The goodwill angle

Moreno Ruz extends the analysis to internally generated goodwill — the intangible value that never appears on the balance sheet under current standards but manifests in innovative capacity and the potential to generate future profits. He links this hidden asset to innovation driven by the proper application of circular-economy practice and European regulation, arguing that improved operational performance and corporate reputation strengthen the company's position with shareholders, customers and suppliers.

He has studied the accounting value of internally generated goodwill specifically, taking into account the demands of markets and investors as well as company performance. His position: accounting practice should adapt to market requirements, and research in the field should expand.

Regulation as opportunity, not burden

The article's argument runs against the framing — common in industry pushback against the CSRD's omnibus simplification — that sustainability reporting is an administrative cost with no operational return. Moreno Ruz contends sustainability can become a driver of innovation and growth if companies integrate it into internal management using quantifiable, results-oriented criteria rather than treating it as a compliance overlay.

For him, the real challenge is not compliance itself. It is deciding with what level of ambition, and at what pace, companies wish to move along what he calls the "innovation highway" — the route connecting profitability, environmental responsibility and long-term value creation. Implementation should not be understood as an administrative burden, he writes, but as an opportunity to improve efficiency, profitability and the internal value of companies.

What to watch

The stakes for the argument are set by the reporting calendar. ESRS E5-4 and E5-5 fall under the CSRD framework, and the depth of their application — including which SMEs fall in scope as wave-based reporting phases proceed and as the omnibus package reshapes thresholds — will determine how many firms are actually forced to build the cost-accounting capability Moreno Ruz describes. Firms that build it early, his analysis suggests, capture the informational edge before the disclosure deadline makes it mandatory.

The milestone to track: the next adjustments to CSRD scope and ESRS sector-specific standards, which will set both the compliance population and the stringency of the circular-economy disclosures that make material-flow accounting a regulatory requirement rather than a managerial choice.