The leather industry is one of Bangladesh’s most resource-intensive manufacturing sectors which contributes to severe environmental pollution through chemical wastewater discharge and a very inefficient recycling system. The principle of circular economy (CE) with the system dynamics (SD) approach has been taken in this study to evaluate the environmental sustainability of Bangladesh’s leather industry and compare it with the European Union (EU), a relatively much better industry. A stock-flow simulation model was developed in VENSIM simulation to analyze the dynamic relationships among the multiple parameters such as production efficiency, pollution control, recycling capacity, and investment in sustainability. The parameters that are used are derived from secondary datasets and validated through comparative industrial reports. The result of the simulation reveals a scenario where almost every value of the EU maintains a higher value than Bangladesh, such as Good Management Practices, Environmental Sustainability Index (ESI) due to effective and strong regulation, better cost saving factor, larger investment in sustainability & advanced waste treatment, whereas Bangladesh’s ESI improves whenever the primary factors are done more efficiently and cost effectively. The study concludes that enhancing management practices, policy enforcement, and technological reinvestment can significantly accelerate the transition toward a sustainable circular leather industry.