Social Circularity Index: integrating circular economy practices into the social pillar of ESG for EU and Asian SMEs

Purpose This study aims to develop and validate the Social Circularity Index (SCI), a composite metric quantifying the social value generated by circular economy (CE) practices within environmental, social and governance (ESG) frameworks. It addresses a critical measurement gap for small- and medium-sized enterprises (SMEs) navigating corporate sustainability reporting directive (CSRD) and international sustainability standards board (ISSB) reporting requirements. Design/methodology/approach This study uses a balanced panel of 280 SMEs from the EU and Asia over 2020–2025, covering 1,680 firm-year observations. SCI is constructed using confirmatory factor analysis and principal component analysis with a regulatory-proximity adjustment and equal-weight sensitivity checks. Fixed-effects panel models, IV-2SLS, dynamic GMM, quantile regressions, placebo tests and scenario simulations are used to assess robustness and heterogeneous effects. Findings A one-standard-deviation increase in SCI is associated with a 4.2-point increase in social pillar or ESG (S-ESG) scores on the original 0–100 scale, a 9% increase in employment intensity and a 3.1-point increase in community impact scores. Effects are stronger among laggard SMEs and Asian firms, particularly through employment formalisation and skills-related mechanisms. Results remain stable across multiple robustness checks. Research limitations/implications Self-reported Global Reporting Initiative (GRI) and Circulytics data may introduce measurement error despite multiple imputation by chained equations (MICE) imputation. Some World Bank Enterprise Survey–derived indicators are used as country-sector-year contextual proxies rather than direct firm-level observations. The six-country SME sample limits generalisability to micro-enterprises, additional regions and sectors beyond manufacturing and services. Future research should validate SCI using independent social-outcome data and quasi-experimental policy variation. Practical implications SCI offers SME managers a practical tool for identifying social-circularity levers in training, inclusion, labour formalisation and community engagement. The index can support CSRD/ISSB-aligned reporting by translating CE activities into measurable S-ESG outcomes. Policymakers can use SCI to identify capability gaps across regions and design targeted capacity-building programmes for SMEs, especially where circular transitions require workforce upskilling and formalisation. Social implications SCI makes the social dimension of CE transitions more measurable and actionable for SMEs. By quantifying employment creation, workforce diversity, training, community engagement and labour formalisation, it supports fairer and more transparent sustainability transitions. The index can help firms and policymakers track whether CE practices contribute to decent work, inclusion and community benefits alongside environmental improvements. Originality/value To the best of the author’s knowledge, SCI is the first confirmatory factor analysis–validated composite index explicitly linking CE practices to S-ESG outcomes at the SME firm-year level across EU and Asian contexts. It combines construct validation, regional calibration and panel robustness checks to translate CE practices into measurable social outcomes. The study advances CE–ESG research by operationalising the social value of circular transitions for SME reporting and policy use.