A clear example I can remember is Nick from ‘The Great Gatsby’. He is essentially a voyeur, and a sounding board for Jay Gatz. He never affects the plot directly. Though, what Nick notices and perceives ends up crystallizing a pretty clear portrait of his character for the reader. There is also something to be said about how Nick is essentially a bridge to connect a lot of characters who are otherwise isolated in different places. It is only through his POV that the book is able to realistically present scenes of Jay Gatz followed by ones involving Tom Buchanan. In these ways, Fitzgerald is able to describe Nick’s character, while also using him as a critical story device.
There is also another example in Frank Herbert’s ‘Children of Dune’. Herbert takes a momentary break from anxiety fueled political theater and psychedelic drug trips to zoom in on a single soldier on an opposing house’s planet. We see him at work, practicing an assassination drill where his only purpose is to press a single button, then oversee the operation. Through the course of menacing prose involving children murdered by tigers, we hear about the guard’s inner machinations. We hear the narrator whispering the truisms that dominate the soldier’s psyche - coupled with an assurance that he would be rewarded for being part of the practice for such a critical operation. Two chapters later the soldier is cut down by the very animals he controlled by order of his superior. Again we see a character who does very little to forward the plot through action. But, the soldier serves as important lesson to the reader. He illustrates the tyrannical and devious nature of his superior. He also is a window into the logic and pathos that occupies the minds of the soldiers of this outfit. Lastly, in the meta-context, it is Herbert communicating to the reader the disposability of newly introduced characters in his book.
In the case of your Elf, you can make them important by providing something for the reader through their eyes, ears, etc...
They never actually need to do something important in the story, but they can do something important for the reader.
As an exercise, it might be fortuitous to pretend they are the reader, or a type of reader who you want to communicate to more directly, by making something ‘happen to them’ in the story.