Embracing circular economy practices can significantly reduce a company’s risk of default, particularly when paired with digital innovation and strong environmental governance, according to new research from the University of Modena and Reggio Emilia.
The study, published in Current Opinion in Environmental Sustainability, found that companies with high circularity scores — a measure of adherence to CE principles — experience improved financial stability, increased investor confidence, and enhanced access to capital.
“Circular practices are not just good for the environment; they are financially strategic,” said Beatrice Bertelli, lead author of the study. “They help companies cut costs, reduce risk exposure, and improve operational efficiency — all of which contribute to a lower probability of default.”
Financial Gains from Circular Practices
The report highlights a strong link between CE implementation and improved credit profiles. Practices such as waste minimization, resource reuse, and emissions reduction were shown to reduce operational costs and mitigate environmental liabilities.
“For example, reducing emissions directly lowers regulatory risk and enhances corporate reputation,” Bertelli said. “These benefits translate into better financial performance and a more stable credit outlook.”
Regression analyses referenced in the study indicate that a 1 percent increase in carbon emissions results in a measurable decline in a company’s distance to default — a widely used credit risk indicator.
3R Framework Core to Stability
The CE model is anchored in the “3R” principles: Reduce, Reuse, and Recycle. The study confirms that firms committed to emission reductions and resource efficiency consistently exhibit lower default probabilities. However, Bertelli notes that more empirical work is needed on the role of recycling.
“While we expect recycling to improve brand loyalty and reduce costs, its direct impact on default risk is still under-researched,” she said.
Digitalization as a Key Enabler
Digital technology is reshaping how firms implement CE strategies. Innovations such as artificial intelligence, big data, and the Internet of Things are helping businesses track resource flows, optimize supply chains, and extend product lifecycles.
“Digitalization acts as a powerful accelerator for circular adoption,” said Bertelli. “It improves resilience, enables predictive maintenance, and fosters collaboration across the value chain — all of which are critical for managing financial risk.”
Sectors like manufacturing and e-commerce have already shown marked improvements in default risk metrics when digital tools are used to support CE operations.
SME Barriers and the Role of Governance
The study notes that small and medium-sized enterprises face financial and knowledge barriers to CE adoption. However, effective governance frameworks can help mitigate these challenges.
“Family-owned firms and SMEs often operate under short-term constraints,” Bertelli explained. “Strong governance — including independent oversight and stakeholder engagement — can make the difference in overcoming these limitations and realizing the full financial benefits of circularity.”
ESG Integration Bolsters Stability
Bertelli emphasized that integrating CE into ESG frameworks strengthens firms’ reputations and lowers capital costs. Firms operating under mandatory ESG disclosure regimes show a greater improvement in default risk than those without such obligations.
“When CE strategies align with ESG goals, companies gain a dual advantage: they build stakeholder trust and reduce reputational and financial risk,” Bertelli said.
Roadmap for Future Research
Looking ahead, the study recommends exploring broader measures of circularity that incorporate all 3R dimensions, not just emissions.
It also calls for forward-looking models that use real-time and scenario-based forecasting to assess CE’s financial impacts over time.
Finally, the authors emphasize the importance of sector-specific analysis to comprehend industry-level challenges and encourage policymakers to develop targeted incentives that promote widespread CE adoption.
“To fully harness the benefits of CE, we need stronger regulatory support and targeted financial tools — especially for SMEs,” Bertelli said. “Only then can we achieve both economic resilience and environmental sustainability.”
