Business Factors Affecting Adoption Of Er Accounting Essay

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The purpose of this work is to study social reporting and in particular environmental reporting. Greenhouse Gas Emissions reporting becomes compulsory for the LSE listed companies in 2013. However, despite the wealth of the academic research into the subject, the link between theory and practice is still not straightforward. The Department for Environment, Food and Rural Affairs (DEFRA) was due to issue guidelines to official reporting but failed to do so due to a disagreement between the developers of the guidelines. This highlights the complexity of reporting on such a complex and diverse area such as the environmental.

Research backs the argument that only consistent and solid environmental reporting can add value to a company's name, whilst poor reporting adversely affects the company's reputation.

I will consider the factors which make environmental reporting successful.

Companies need to adopt environmental thinking and to include it in every level of corporate identity, from mission statement to reward system. Importance of two-way communication with stakeholders.

Using internal reporting frameworks to monitor/measure/control environmental costs. Consistence with long-term company's objectives.

Environmental accounting from financial and management accounting point of view.

Whilst GHG reporting is classed as non-financial, it is based on the accounting data. There is a need for essential changes in accounting systems to accommodate environmental reporting.

External reporting - historical development, current dominating frameworks. Triple Bottom Reporting, the Global Reporting Initiative, AccountAbility's AA1000 principles.

Benefits and pitfalls.

My suggestions on what could be done to improve the quality of environmental reporting and facilitate the job of accountants preparing such reports.


1 Environmental reporting

Introduction to Environmental Reporting

Categories of Environmental Reporting - Triple Bottom Line/GRI Initiative/A1000

Development of Environmental Reporting and adoption of differenct reporting frameworks

Factors impacting Environmental Reporting

Pressure from Government/National/Industrial bodies

Business factors affecting adoption of Environmental Reporting

Frameworks for adopting sustainability in organisation

Academic views on approaches - stakeholder/...

Synchronisation with the corporate vision

Methods of implementing sustainability values

Internal reporting

External environmental reporting

Main frameworks

Issues with using them

How it could be improved


Introduction to ER

Majority of books on sustainability begin with the 1987 UN Definition from Brundtland Report:-

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

The topic of corporate social responsibility has been around for a long time and it has evolved greatly in the last fifty years. One of the first serious works on social responsibility was done by H. Bowen in 1953 in the book "Social Responsibilities of the Businessman".

More research has been done since then to understand the nature of the social responsibility and its consequences for business; this indicates the shift in attitudes in both academic and financial circles.

Sustainability reporting involves a number of professions. (13) Accountants are placed in the middle of any framework as a link between financial and non-financial performance.

Still, ER is its infancy comparing to financial reporting frameworks. This is due to the wide variety of both formal and informal reporting frameworks and additional complexities around measurement of carbon data.

1.2 Categories of ER

Until recently environmental reporting was done on a voluntary basis in the UK. However research (Freedman, 10) shows that European business including the UK has fallen behind Japan and Canada in reporting GHG emissions despite the EU's efforts to promote such reporting.

Environmental reporting guidelines exist both in the UK and internationally. However there is no universally accepted global framework up to this date. Whilst the governments of developed countries encourage environmental reporting as part of the UN Kyoto Protocol obligations, few countries made it compulsory.

2 Factors impacting ER

2.1 Government/National pressure

There is pressure from governments and other stakeholders for companies to become more environmentally aware.

Firstly countries-participants of Kyoto protocol committed to reduce greenhouse emissions by .... by 2020. It is impossible to achieve this goal without participation of businesses. It is estimated that big companies are responsible for around 10% of national greenhouse emissions.

Governments takes various steps to promote environmental awareness among businesses; the most popular tools are as follows.

Educating both businesses and stakeholders. The topic of sustainability is included in majority of professional degrees and end-consumers are increasingly more aware of environmental issues. Psychologically, it creates a peer pressure to comply with the main stream so such educational efforts create a snowball of positive response from general public.

By providing clear reporting guidance. In order to help businesses to help governments to meet their targets, the latter's task is to make it easier for the companies to comply with regulation. A robust reporting guidance gives assurance to both the state and the businesses that environmental targets are measured and controlled.

By shaping taxation so to favour greener businesses. The UK government has some environmental taxes it uses for this purpose. It includes Landfill tax which is £64/tonne until April 2013 and it is set to rise £8/tone every year until it reaches £80/tonne. The other one is Climate change levy (CCL) which target the business use of certain energy products (e.g. electricity, gas, solid fuel). PWC(14) comments that "Legislation surrounding CCL is becoming increasingly complex. An example of this is the introduction of a carbon price support mechanism (CPSM), effectively an additional rate of CCL from 2013. This will add to complexities and costs for electricity generators and their customers." Aggregates levy (AGL) is more specialised tax on the first commercial exploitation of rock, sand and gravel. Whilst it is mostly aimed at quarry operators, it could affect other businesses related to land exploitation so the government can use AGL to influence business strategies.

By helping businesses to reduce their carbon footprint. Some countries (Japan, Canada, Sweden) expect their local businesses to be almost or totally carbon neutral. Whilst zero carbon footprint is the ultimate target, in practice few business can achieve such level of environmental efficiency. The EU government took more flexible and realistic approach and introduced carbon credits, which are tradable certificates permitting to emit the equivalent of one tonne of CO2 of any greenhouse gas. Epstein (3, page 137) gives an estimate of the size of the credit market as $26 billion in 2005.

Epstein (3, page 136) gives an outline of options available to companies when developing environmental strategies:-

Emission Offsets. Companies may increase the level of a pollutant if they also do something that is good for the environment, such as planting trees;

Bubble policy. Companies may increase pollution at one source as long as they reduce pollution at another source;

Banking. Companies store emissions allowances for later use or lease them to another firm.

Companies can offset their total GHG emissions with carbon credits and achieve a "zero carbon footprint" status. With this scheme, the government has a win-win situation - it facilitates the compliance of the business and at the same time it channels the financial support carbon reduction schemes removing the state as a middle man. However, there are some criticisms of such approach.

Some argue that it's a "license to sin" and it promotes the wrong attitude towards the matter.

2.2 Business factors affecting adoption of ER

Generally there are two main interlocking factors pressuring businesses to become greener.

First, it is growing awareness that the natural resources' supply is constraint. This leads to the scarcity of the existing resources and as a result, their growing costs. Water resources, global food prices, fossil fuel availability and prices - nearly all businesses are exposed to the volatility of their supply.

Second, companies are under pressure from a growing spectrum of stakeholders. Stakeholders might have different influence power over companies and different motives for being environmentally concerned. Nevertheless thanks to the internet their voices are more loud than before and it amplifies their impact on companies.

Esty et al (1) talks about "three basic reasons for adding the environmental lens to core strategy: the potential for upside benefits, the management of downside costs and risks, and a values-based concern for environmental stewardship" (p11).

The upside benefits and downside costs form two parts of sustainable competitive advantage concept.

Upside benefits of environmental strategy can contribute to competitive advantage part. A tight management of downside costs and risks will make this advantage sustainable.

Esty et al (1) refers to their research that "companies that bring an environmental lens to their business are generally more innovative and entrepreneurial than their competitors." They can spot the emerging trends earlier than the rest of the market and use them as opportunity to become the market leaders of the future. Thus, such companies as Toyota, BP and Shell rebranded themselves to be environmental businesses and re-directed their R&D investments to tackle the environmental projects.

This can result in more benefits of driving revenue growth and increase customer loyalty.

Management of costs and risks creates healthier income statement and has a number of benefits including better financial position in case of a market storm (to look up in S&P module), better working capital, better positioning in case of legislation tightening.

Reporting is generally driven by legal requirements and industry standards. Sustainability reporting frameworks rely on complex considerations of supply chains and whole-life cost models and focus on the direct impact on the environment, society or the wider economy.

Epstein (3) gives four main reasons why sustainability has become a hot topic on corporate agendas.

The first one is compliance with Regulations imposed by governments and industry bodies. The risk of non-compliance could be financial (penalties, fines, legal costs) as well as intangible (tarnished corporate reputation, loss of potential contracts).

The second one is community relations - with the development of internet and social media firstly via blogging, then via Facebook and Twitter the general public and activist Non Governmental Organisations (NGOs) have a variety of new platforms to voice their concerns with a wider audience. Reporting environmental agenda to stakeholders helps companies to have their say on some sensitive cases. Esty et al (1) illustrates such botched relations with 1995 Shell attempt to dump a defunct oil platform. Despite having its facts wrong, Greenpeace won a public relations war with Shell which resulted in huge lost profits for the latter.

The third factor is cost and revenue imperatives. Also described by Gray (12) as Win-Win scenarios where economic benefits are achieved by reducing in usage of a resource which leads to consequent reduction of costs, environmental impact, waste and energy.

Improved reputation will attract more business and revenues as a result.

A compliant company is more desirable as a business partner in any supply chain which gives a competitive advantage in bidding for new contracts.

The fourth reason is societal and moral obligations. There is a legitimacy theory of social responsibilities of business. Its definition is LEGITIMACY THEORY posits that businesses are bound by the social contract in which the firms agree to perform various socially desired actions in return for approval of its objectives and other rewards, and this ultimately guarantees its continued existence.(

Whilst the primary target of a company is to maximise shareholders' value, companies are led by people whose beliefs influence corporate decisions. A wise manager is able to see opportunities which could be turned to profit by fulfilling societal obligations.

3 Frameworks for adopting sustainability in organisations

Academic views on approaches - stakeholder/...

In the modern world, corporate social responsibility is a vital part of the company's stakeholders' management.

Social responsibility evolved together with the major frameworks describing the relationships between management and stakeholders.

Early agency theory pioneered by M. Friedman (1962, 1970) viewed social, political or environmental agendas as deviation from the main responsibility to maximise the value of a firm. Whilst agency theory is still very much valid in other aspects of management, it has lost its position in 1980s as the corporate social performance view started to emerge.

The term of Corporate Social Performance view was first coined by Preston (1978) and Carroll (1979). This framework included social issues as well as financial indicators in the list of general responsibilities of a company. Further research backed this model's assumptions and reported a positive correlation between financial performance and a company's activity in corporate social field.

Companies practising social responsibility values soon realised that in order to sustain the benefits of social activeness, they would need to pass social initiatives up and down the supply chain.

This led to a Resource-based View developed by Russo and Fouts (1997). They argued that engaging suppliers and customers in a company's environmental program lead to creating a competitive advantage and better customer retention.

The supply and demand view on social responsibility was developed by McWillams and Siegel (2001). They argue that a company's investment in social issues could increase profit maximisation and also satisfy stakeholders' expectations of the company.

Stakeholder view (Freeman, 1984) on corporate responsibility. It emphasizes the role of a broader range of stakeholders and not just shareholders. As a top executive from ABN AMRO Real put it "Companies cannot succeed in societies that fail."(1)

Research (6, 11) showed that only consistent, thorough and inclusive environmental reporting can add value to a corporate brand, whilst cherry-picking and poor reporting does more damage to the company image than good.

Epstein (3, page 32)) suggested that the following factors are crucial for the successful implementation of a sustainability practice:-

Sustainability must be an integral component of corporate strategy;

Leadership must be committed to sustainability and build additional organizational capacity;

Sustainability strategies should be supported with management control, performance measurement, and reward systems as appropriate;

Sustainability strategies should be supported with mission, culture, and people as appropriate;

Managers must integrate sustainability into all strategic and operational decisions. Then, additional systems and rewards can be introduced to formalize and support;

Managing sustainability performance should be viewed not only as risk avoidance and compliance but also as an opportunity for innovation and competitive advantage.

Obviously traditional accounting can't capture the complex issue of monitoring, measuring and controlling environmental objectives without changing the perception of the subject.

Economic performance is no longer the sole indicator of total welfare (Bedford, 1965; Pigou, 1938).

The lack of unified reporting format and guidance doesn't contribute to the comparability and transparency of reports.

The external reporting should be in line with the company's strategic vision. The objectives should be measured and managed in the balanced scorecard.

The company's accounting software should be adapted to record the emissions to make reporting easier.

Synchronisation with the corporate vision

It is not enough for companies to just implement some of environmental schemes; it is vital that this is communicated to the stakeholders. Corporate social responsibility area is heavily dependent on public relations and here companies are placed against such powerful players as NGOs (Greenpeace, etc), influential bloggers, governments and customers.

That is why staring environmental reporting deem to be a huge commitment for companies.

The research shows that only reports which are in line with the company's strategic vision and are consistent over a period of time will add value to the company's brand.

Successful environmental reports are based on robust environmental strategy and cannot exist without it.

Majority of book on sustainability agree that in order for sustainability agenda to be successful, it should be linked to general company strategy and to every stage of business process.

These are the steps to integrate sustainability program into the organization.

Many different plans and programs can be used to implement sustainability in the company.

It is crucial that the top management commits to the environmental agenda and the development of a mission and strategy that will be implemented.

These are sustainability actions leading to financial and sustainability success (Epstein, 3, page 52)


Show commitment from the top

Scan business environment for potential risks and opportunities

Lead a cultural transformation


Develop a mission statement

Consider global and local regulations, as well as voluntary standards

Consider the impact of social investors


Integrated throughout organisation

Effective use of human resources

Manager access to top leadership

Aligned with strategy


Costing and capital investment systems

Risk management systems

Performance evaluation and reward systems

Measurement systems

Feedback systems

Reporting and verification systems

However, every organisation will have individual challenges in integrating sustainability strategy in its structure, systems, performance measures, rewards and culture.

Implementation of sustainability strategy varies depending on the size of company. International companies will have to decide on whether environmental management will be centralized or decentralized.

Formulate the short and long term goals.

This is the first step to determine where the company wants to be, what is the position management is seeking to achieve. It might be that the market company operates is saturated and it needs shaking in order to keep the profits at a sustainable level.

The bibliography literature describes this stage as seeing the forest from the trees, making good decisions which remain to be seen as good decisions generations later and looking at the big picture first.

As it is a tectonic change in the company, management shouldn't rely only on their own vision. All possible indicators from important participants should be gathered - customers questionnaires, consultations with major shareholders, discussions with government, etc.

From this exercise the company would understand the expectations of the stakeholders and outline the opportunities to exploit to maximise shareholders value.

After the goals are established, management can do a why-why analysis to see how these goals can be achieved and how environmental policy can help to do it.

It is crucial that CEO, top management and shareholders make a wholehearted commitment to change. This commitment should be financial as well as cultural.


Incorporate environmental policy into corporate vision statement.

This is when the company goes public with its commitments to environmental development.

After this stage, the company's movements are scrutinised by a wider audience and the consequences of non-compliance with its own promises could be dire.

The example of such botched public statement is BP's change of slogan to "Beyond Petroleum" in 2000. Given that 99% of BP profits were coming from fossil fuels, such positioning didn't do any good to the company's image even before Gulf of Mexico disaster in 2010. In 2001, Greenpeace gave then-CEO Lord Browne an "award" for "Best Impression of an Environmentalist" and in an NGO report "Don't Be Fooled 2005" which listed top 10 "greenwashing" ad campaigns, BP taking the second place after Ford. (1, page 136).

The examples of BP, Marks and Spencer and some other companies illustrate an aggressive approach to environmental public relations.

One of the obvious reasons for BP to proactively proclaim their environmental policy is a desire to win customers and their loyalty. BP's fuel is no different from one from Shell so BP felt it needed to differentiate itself from the competitors by appearing more environmentally friendly.

BP has since scaled back their advertising as "Beyond Petroleum" and softened their position to be more conservative but didn't retract from its environmental commitments. It gave positive results; Esty et al (1, page 137) writes that "BP's brand value, as measured by experts in measuring intangibles, jumped significantly in the first half of the decade. A recent study of brand strength highlighted 10 products with the greatest increases in brand value from 2001-2005.(...)BP was second only to Google. (...) BP, the study said, gained over $3 billion in brand value."

However, Gulf of Mexico accident brought the company a massive negative publicity largely not because of the nature of accident but because of the company's management handling of the situation.

When environment agenda is incorporated into company's vision statement, it should be kept short and simple.

Strategy Mapping.

This is the stage when the company starts implementing the environmental vision into the existing business model.

There are several frameworks designed to assist this process.

Esty et al (1) suggests AUDIO analysis. The mnemonic AUDIO stands for Aspects, Upstream, Downstream, Issues and Opportunities.

Management needs to identify what aspects of environmental issues the company is most exposed to. Esty (1) suggests bringing together professionals from a range of business functions from both inside and outside of the company to brainstorm on what aspects of environmental issues can potentially affect the organisation. Hopefully, the result of this exercise will bring the list of issues without giving them positive or negative sign at this stage.

Supply chain evaluation - Upstream and Downstream to ask similar questions.

The nature of environmental issues is that it really depends or affects a single unit, be it a single nation or a single company. That's why it is important for the company to expand their environmental mapping beyond the company's operations to the supply chain. The examples of Sony Corporation's 2001 recall of PlayStation game systems because their supplier of cables used the toxic element Cadmium which resulted in $130 million loss (1, page 1).

Companies have to use the purchasing power to influence better compliance with environmental regulations in the supply chain.

The next step is to sort the identified Aspects between Issues and Opportunities.

Issues deal with risks arising from environmental aspects both for the company and its value chain, such as reliance on limited resources, tightening of legislation, etc.

Opportunities to profit can also be drawn from Aspects identified by AUDIO analysis. Because both the company's profile and the market profile are examined in the analysis, the opportunities could be both internal and external.

The internal opportunities can include adding value by redesigning the product, re-engineer the processes so the company can create more but use less.

The external opportunities arise from rethinking the market and potentially finding new niches to explore by differentiation or cost leadership. Thus, Epstein (3) talks about exploring the bottom of the pyramid (page 211). "The people at the bottom of the economic pyramid, the world's poorest, represent two-thirds of the world's population. More than four billion people worldwide live on less than $2 a day. This market is currently being underserved by large firms and multinational corporations. Not only can effective innovation strategies aid in alleviating global poverty, they also five corporations markets for future growth since the bottom of the pyramid is currently an untapped market.

Epstein (3) talks about Corporate Sustainability Model which is outlined below (page 165)

There are three major sets of impacts:

Corporate financial costs/benefits of actions

Social Impact

Financial impact through sustainability performance

The model above helps to draw a business case for sustainability initiatives. It shows how actions of every functional department affect the overall environmental performance giving a clear link between sustainability actions and financial performance.

It is important to identify and communicate such links throughout the company. The strategy mapping serves as a link between the company strategy and operations.

Epstein (3) writes about the importance of involving the whole organisation in integrating sustainability. Every functional area will be affected by these changes although at a different attitude.

The value chain and sustainability model below can be used to promote sustainability in each department.

Setting up internal performance indicators.

Epstein (3, page 167) emphasizes the role of performance indicators: "Specific and appropriate measures that reflect the sustainability strategy and essential to monitor the key performance drivers (inputs and processes) and assess whether the implementation of the sustainability strategy is achieving its stated objectives (outputs) and thus contributing to the long-term success of the corporation (outcomes). Without appropriate metrics, companies often waste resources on projects or do not invest when they should because they cannot effectively evaluate the potential payoffs of sustainability initiatives."

Using the Corporate Sustainability Model above, indicators should be set for each inputs, processes, performance (outputs) and stakeholders' reactions (outcomes).

Sample metrics of such indicators are adapted from Epstein (3, page 169) and shown below.


Performance measures

External context

Average temperature

Regulatory regimes

Hazardous waste disposal regulations

Pollution standards

Non-discrimination laws

Local versus global standards

Internal context

Number of strategic business units

Life-cycle assessment (of products, process, activities)

Social audit

Environmental/social benchmarking of competitors

Existence of corporate code of conduct and management system

Business context

Competitive position within industry

Number of competitors

Relative size of competitors

Breadth of competitors by geographic region, product diversity, or other

Number of customer channels

Market size

Geographic diversity of production

Geographic diversity of sales

Human and financial resources

Funds available for employee training

Cost per employee

Median or average years of schooling

Median of average salary

Number of hours of training needed per employee

Cost of training per employee

Funds committed for research and development on more effective pollution control and energy conservation efforts

Number of employees with environmental training


Performance measures


Management attention to environmental issues

Average years of experience - senior executive

Turnover rate

CEO evaluation

Board evaluation

Clearly articulated vision

Sustainability strategy

Percentage or number of suppliers certified for sustainability standards

Percentage of "green" office space

Percentage of products undergoing life-cycle analysis

Diversity of workforce

Diversity of management

Reduce emissions (percentage reduction)

Percentage of overall budget set aside for cooperatives/nonprofits

Sustainability structure

Senior managers with social and environmental responsibilities (number of senior managers)

Number of levels of management with specific environmental responsibilities

Number of functions with environmental responsibilities

Compliance with industry standards of corporate governance

Existence of indices of independent and active board of directors such as lead director and external director

Sustainability systems, programs, and actions

Percentage of employees with health insurance

Percentage of health insurance paid by organization

Educational opportunities

Cost of employee benefits

Number of hours of ethics training per employee

Investment in cleaner technologies (£)

Investment in community projects (£)

Safety training programs (hours)

Support programs for minority-owned businesses (percentage of volume of business)

Social performance evaluation systems in place (number of facilities)

Environmental accounting systems in place (number of facilities)

ISO14001 certification (number of facilities)

Number of employees with financial incentives linked to environmental goals.


Performance measures

Sustainability performance

Number of plant closures

Business opportunities generated locally

Volume of hazardous waste

Percentage of volume with fair-trading partners

Percentage of materials recycled

Volume of cost of energy use

Costs of fines and penalties for pollution

Volume of emissions to air and water

Vehicle fuel use

Packaging volume

Fresh water consumption

Response time to environmental accidents

Number of trees planted

Percentage of suppliers audited for sustainability compliance

Percentage of suppliers with sustainability lawsuits or legal actions

Frequency of audits

Percentage of products/process materials recyclable

Volume of landfill use

Product recycling

Philanthropic funds donated

Number of volunteer hours

Product life

Costs of minority business purchases

Costs contributed through cause-related marketing

Number of customer returns

Eco-efficiency of product use

Donations of products of services

Percentage of supplying companies owned by minority groups

Percentage of women (senior position)

Working hours/wages

Cases of bribery (number)

Number of supplier violations

Number of safety violations

Number of safety improvement projects

Number of accidental spills/discharges from plant

Remediation costs

Prosecution of criminal, antitrust, or trade violations

Rate of defective products

Duration of product use

Percentage of a product's content that can be reused or recycled

Number of products with instructions for environmentally safe use and disposal

Number of products that can be reused or recycled

Stakeholder reactions

Perceptions of corporate ethical performance

Percentage of sales from "green" products

Customer returns

Number of consumer complaints

Number of product recalls

Lawsuits and violations for inadequate disclosure related to such items as financial disclosures, product labelling, and environmental performance

Results of surveys of stakeholders regarding satisfaction with disclosures and meeting of their informational needs

Evaluation of external disclosures by external stakeholders

Customer satisfaction survey scores

Percentage of return customers

Funds invested in cause-related marketing

Employee satisfaction scores

Community awards and accolades received

By-products revenues (£)

Number of protests

Number of employees participating in environmental programs

Number and frequency of environmental reports.


Performance measures

Long-term corporate financial performance

Income and percentage of sales from "green" products

Income from sales of cause-related marketing affiliations

Income from recycled products

Income from recycled waste materials

Increased sales from improved reputation

Cost savings from reduction in energy costs

Cost savings from pollution reduction

Cost savings from reduction in cost of debt

Cost avoidance from environmental actions

Cost savings from reduction in natural resource use

EVA (economic value added)

ROI (return on investment)

ROCE (return on capital employed)

Percentage of environmental costs direct-traced

Disposal costs

Cost of fines/penalties

Legal costs

Risk management and environmental issues

For a business, the balance between risk and reward is an intrinsic element in creating shareholder value and contributing to economic growth, although the risk of long-term damage to business reputation can be particularly severe in the case of environmental risks. The costs of managing environmental risks must be viewed against the benefits of reducing risk. Efficient risk reduction therefore requires a compromise whereby the risk is reduced to a point that is as low as reasonable practicable or achievable. Trade-offs may exist in that, for example, reducing pollutants to a lower level could result in increased energy usage and contribution to global warming.

Most environmental risks are associated with hazards in areas such as:

Flood, fire and storm

Resource use and abstraction

Emissions to air, groundwater and soil

Land pollution

Waste and hazardous waste disposal

Some of these result from the failure of engineered systems. Hazards such as flood, storm and water stress are generally associated with the impact of climate change. Such risks might be beyond the scope of management techniques. There are also financial risks associated with the use of tradable permits such as emission allowances, waste disposal allowances and renewable obligation certificates.

Environmental risks are one subset of the portfolio of risks facing most organisations and the issues involved should therefore be included with other uncertainties in identifying, measuring and managing risk. Environmental issues therefore need to be integrated with other issues in the risk management and reporting structure. A process of stakeholder engagement helps with the identification and prioritisation of environmental risks.

The management of environmental risk has to take account of factors such as trust, confidence and reputation as well as the technical assessment of a particular risk. External communication is critical in securing credibility, given the possibility of external publicity or representation in the press.

Environmental risk assessment may be particularly difficult due to the absence of a system to capture relevant information. An environmental management system (EMS) can be used as a business tool to assist an organisation in managing risk, particularly as regards:

Comparing and prioritising risks of widely varying characteristics

Managing risk reduction without compromising competitiveness

Installing mechanisms for risk identification and management, such as management of water treatment process or the isolation of receptors by measuring efficiency of gas scrubbers for control of emissions.

It is important to distinguish between the process of obtaining regulatory authorisation and environmental risk management. In the case of businesses that are regulated, risk assessments take place within a regulatory framework such as the IPPC regime, the environmental Protection Act, or the regulations governing groundwater and waste management.

Environmental risk assessment involves a tiered approach:

Risk screening, in which the hazards are identified and exposure assessed in order to determine the key risks

Prioritisation - based on a combination of probability and magnitude of consequences

Qualitative and quantative techniques - involving the assessment of source and receptor.

The analysis of risk is not an end in itself but an aid to decision making.

Under the EU Emissions Trading Scheme, emission rights are governed by EU allowances (EUA). For companies participating in an emission trading scheme, carbon risk management is an important factor in decision making, the most important categories of risk being:

Cash flow risk, such as increased expenditure on measures to reduce emissions or the purchase of allowances

Pricing risk, due to market price volatility, particularly around reporting or trading period ends

Reputation risk, which can influence financial ratings and market capitalisation

Capital cost risks, such as more stringent credit conditions as a result of increased credit risk.

To identify, measure and control potential risks, companies need a robust greenhouse gas inventory of past, current and projected future emissions.

Setting up a reward system

Epstein (3, page 132) comments on the difficulties of setting a reward system: "The traditional accounting system often provides a disincentive to report potential hazards or violations of environmental laws, corporate goals, and corporate practices. Employees sometimes believe they will be penalized if they notify a manager of a potential hazard because eliminating the hazard might cause the business unit to suffer a short-term loss. This expenditure typically viewed as an expense rather than an asset, investment, or value creator and often has a negative impact on a manager's overall rewards."

To overcome this common concept, organizations need to set up programs to promote environmental awareness and reward employees' environmental activity.

However, a reward system should be linked to the levels of influence employees have on environmental performance.

There are two dimensions of influence - control and ownership. It is difficult to attribute a particular environmental indicator to an individual, so some companies give environmental incentives to teams rather than individuals.

The most common reward scheme is when the amount of bonus is calculated based on employee's individual performance and the performance of the company as a whole.

So if a company performance matrix has a heavy element of environmental indicators, "it signals the importance of their impact to the employee and to the organisation" (3,page 133).

Epstein (3, page 133) suggests "another way to involve individual employees in improving social and environmental performance is to give them a stake in the performance of the company." This includes stock- and profit-sharing plans but it is important to communicate the link between the positive environmental performance and the financial results to employees.

The other approach to encouraging environmental behaviour is introduction of internal waste taxes. Epstein(3, page 135) gives an example of Dow Chemical's own landfill. The company started to charge each of its plant a fee for using it. As a result, it made more economical sense to re-engineer the processes to produce less waste than paying for its disposal. Full cost accounting in the example of Dow Chemical helped to improve environmental performance.

Communication with internal stakeholders

Like any other type of strategy, environmental strategy can't be achieved without the employees' efforts.

After the strategy is mapped and the performance indicators are chosen, the next logical stage is to communicate it down to the employees.

Educating, Incentivising, facilitating, two-way communication, appointment of environmental champions.

There are two types of learning process - single-loop and double-loop. Single-loop learning corrects the strategy which is already in place, whilst in double-loop learning the strategy itself can be challenged as a result on such corrections.

Environmental strategy is relatively new field of strategic development; by encouraging double-loop learning, organizations ensure that their environmental strategy constantly improves itself.

Epstein (3, page 202) suggests the PDCA cycle as a valuable tool for learning and promoting change. The PDCA cycle stands for Plan, Do, Check and Act with each involving key activities :-

Plan. At this stage, all actions required to achieve environmental goals are planned. Management analyse current issues and their impact on present and future business performance.

Conduct initial social and environmental reviews

Define sustainability strategy

Design sustainability programs

Set objectives and targets

Do. At this stage, the programs are communicated to the staff.

Develop structure

Provide training

Introduce programs

Check. Constant synchronisation between the original plan and action is needed to make sure the implementation has not drifted from what was planned. Two way communication and feedback system need to be encouraged to keep the progress under control.

Conduct internal audit

Monitor and measure performance

Act. "It addresses the effectiveness of the sustainability systems and possible need for changes to policies, objectives, and targets, and other elements. This review is made in light of information such as audit results, and any organizational or external changes." (3, page 203)

Management review

Internal reporting

Mechanisms for promoting sustainability - internal processes, procurement practice, product development.

Internal environmental reporting is an essential tool in managers' decision making. Even if an organization decides against making public environmental commitments by starting external reporting, internal environmental reporting still can be used to evaluate and improve current business processes.

The internal reporting system should be capable of providing sufficient information to enable the financial impact of environmental issues to be estimated with a reasonable level of reliability. Parameters should be set and impacts exceeding those parameters should be reported promptly to senior management. There needs to be regular communication between those responsible for environmental issues and the accounting staff, so that the financial implications of environmental issues are understood and any necessary action is taken promptly. Where a company is involved in carbon trading, an effective system for measuring actual emissions and recording the trading of emission allowances is essential to enable period-end balances to be reliably recorded as assets or liabilities.

Management could well require advice from specialists, such as environmental advisers, engineers or surveyors in developing estimates and obtaining information for disclose in the financial statements. For example, advisers may assist management in relation to the recognition of environmental liabilities, the impact of impairment and the assessment of greenhouse gas emission levels and the impact on related liabilities.

The reporting system needs to accommodate systematic and non-systematic issues in a way that their financial impacts are measured and recorded at an early stage. In the case of end-of-life liabilities, for example, this will require the supplier keeping records of sales by product type, date of sale and year of manufacture, with an appropriate way of estimating the cost of disposal when the product reaches the end of its useful life. In the case of the purchaser, asset registers will need to be maintained on a detailed basis so that the supplier can be identified when the items are due for disposal.

Non-systematic liabilities would normally need to be measured on an individual basis, with the assistance of in-house or external expertise, depending on the nature of the expected liability. Where this arises, a record should be kept of the basis on which the estimate is made, the person who provided the estimate and the nature of any assumptions made, for example the remediation costs of cleaning up a similar site.

Internal reporting provides important qualitative feedback for strategic planning and can be used for benchmarking and to track the progress made over a period of time.

An effective internal reporting serves two purposes - it supports managerial decision making and also provides a base for subsequent external reporting.

External environmental reporting

The Environmental Working Party of the European Federation of Accountants (FEE) defines the objective of external environmental reporting as being:

"the provision of information about the environmental impact and operational performance of an entity that is useful to relevant stakeholders in assessing their relationship with the reporting entity".

ACCA's(13) view "The key roles for accountants in sustainability reporting, in which it identifies, are as follows.

Reporting: to understand the regulatory and voluntary reporting environment in which businesses (regardless of size) and governments operate, and respond to new demands resulting from changes in the level and nature of business activity and new legal requirements.

Risk: to advice on risk management and the implications of entering into voluntary reporting mechanisms.

Frameworks: to develop frameworks which allow for the efficient measurement of financial and non-financial information and either maintain or assure the collection of information; potentially in an environment where there is a lack of specific reporting guidance from government, or where there are difficulties in capturing and collating social and environmental data and integrating them into mainstream information functions.

Policy: to advise on the development of policies for determining "necessity to report" decision (where they exist) and to contribute to the materiality process to help identify what to include in the report.

Information provision: to provide clear, reliable information and where required, assurance of it, build the evidence base for a business case, and establish the necessary supporting processes and procedures. Furthermore, through the assurance process there is a requirement to report directly to the Board of Directors or top management, requiring the auditor to know the business as well as responding on the scope of the audit."

The reason for such an approach is to enhance the quality and utility of sustainability reporting making it more transparent and comparable.(??)

Both TBL and GRI are based on the highlights of the Brundtland Report (WCED, 1987).

Over the time, different management accounting techniques were developed to help companies to include environmental objectives into management decision making process. Such tools include capital budgeting, balanced scorecard, performance measurement and reward systems.

In some cases companies identify environmental issues as their moral obligation and in some cases they will be financially obliged to deal with negative environmental impacts.

Capital budgeting is one of the most common tools of monitoring costs and by including environmental costs, management adds a new dimension to evaluating capital investment projects.

It is not a straightforward exercise however; changing technologies, government guidelines and lack of universally adopted measurements techniques make such an inclusion a difficult task.

Achieving corporate goals is a team task. A comprehensive reward system encourages employees to align their behaviour with the company's goals. By weaving in the environmental objectives into a reward system, company can channel its employees' efforts in the right direction.

Finch (5) cites the following potential pitfalls of using rewards system to encourage environmental behaviour: -(to follow)

"Massoud et all. (2008) identify three reasons for the lack of environmental rewards in organisations: (1) environmental management is relatively new and organisations have neglected to define rewards for environmental management efforts, (2) the scope for defining new environmental performance standards may be very broad and may cost the organisation an inordinate amount of time to do so, and (3) the cross-boundary nature of environmental problems makes it difficult to reward on an individual basis (Massoud et all., 2008, p.17) Based on these factors Massoud et al. (2008) highlight the importance of the introduction of a group-based collective reward system to reward employees for environmental performance in order to overcome difficulties associated with individual reward systems."

Environmental reporting is used by wide range of stakeholders. There is also a new category of interested party - social investors. These could be individuals, investment funds, business, NGOs whose intention is to invest in an environmentally sustainable business. They make the decision to invest based on company's corporate social responsibility reports. There are two types of screening, negative and positive that they use to identify a potential business to invest. Epstein (3) estimates that the assets in socially screened mutual funds are almost $200 billion.

Some investment indices are created to rank companies by their social and environmental activities. These include the Dow Jones Sustainability Group Indexes, the FTSE4Good Index Series, KLD Research and Analytics Index and AccountAbility Rating.

The ratings and indices provide re-assurance and comparison of how businesses perform in this field.

The importance and sensitivity of different environmental issues and their reliability will vary according to the nature of the business. In some cases, the information reported is qualitative rather than quantitative. The issues most commonly reported are likely to be those concerned with waste management, pollution, energy, climate change and sustainability/corporate social responsibility. The calculation of liabilities for decommissioning or remediation of pollution and assessment of emissions are likely to be subject to the closest scrutiny as they are required to be included in figures reported in the financial statement and therefore subject to audit.

Credibility may be enhanced by an effective system of internal controls. If reported information relating to environmental issues is derived from an environmental management system that is integrated with the company's management information system. The company is more likely to have confidence regarding the reliability of the information than if environmental information is assembled on an ad hoc basis. Furthermore, if the environmental management system has been certified to ISO14001, the process of certification can provide some additional support for the credibility of information reported.

A variety of assurance approaches has been developed to satisfy the needs of internal and external users of information. A standard relating to sustainability reporting, the AA1000 Assurance Standard, has been issued by the Institute of Social and Ethical Accountability (AccountAbility). This standard is primarily directed towards enhancing the credibility of information that is not part of the annual financial statements.

Main frameworks

Jones (13) notes that "An important element of sustainability practice and reporting is the importance of the social good or well-being of future generations as well as that of present populations. This presents challenges for accountants not least because reporting can be seen as inherently retrospective rather than future-focused and because reporting the projected future effects of current action necessarily involves estimation and uncertainty. There are also implications for audit assurance processes."

"Most environmental reporting frameworks focus on the company's impact on the environment, society or the wider economy. This may involve complex considerations of supply chains and whole-life costs of products. The GRI and the Prince's Accounting for Sustainability Project (A4S), DEFRA guidelines, IS14000 frameworks apply a similar model to reporting." (13)

Accounting for sustainability is the subject of a report issued in 2007, following an initiative by the Prince of Wales. As well as seeking to embed sustainability in an organisation's decision making, the project includes the development of a "connected reporting framework", intended to give a more complete picture of overall performance. The framework comprises five key elements:

An explanation of how sustainability is connected to strategy;

Five key environmental indicators;

Other information about material impacts on sustainability;

Development of industry benchmarks for KPIs

Supply chain/value chain sustainability impacts.

The environmental indicators proposed relate to polluting emissions, waste, water usage, energy usage and significant use of other limited resources. The connected reporting model is seen as a voluntary element of corporate reporting, intended to remedy some of the defects of audited financial statements.

DEFRA issued series of voluntary guidelines on the measurement and calculation of GHG emissions in 2009 based on the Climate Change Act. The Secretary of State is also required, through the Companies Act 2006, to make regulations fro those companies publishing a directors' report to include mandatory information on their greenhouse gases by April 2012 or explain to the Parliament why no such regulations have come into force. As of February 2013 no such guidelines for compulsory reporting were issued and in the letter to the Parliament, DEFRA cited the failure to reach an agreement as the reason for this failure.


Companies that currently adopt ISO14000 or are working towards it in the future, should be aware that consideration is being given to including material flow cost accounting (MFCA) within the ISO14000 family. This would mean that organisations seeking certification under ISO14001 would need to demonstrate that they are using this instrument within their environmental management systems.

MFCA is a tool for using cost data in relation to the environment. It is oriented more towards internal use than external disclosure, with its focus on physical units, although it does have some overlap with environmental management accounting and these implications should be considered. Although the currently proposed standard is there only as guidance, it will be synchronised with the International Federation of Accountants (IFAC) EMA guidance. MFCA is designed to complement existing standards within the ISO14000 family, including life-cycle assessment and environmental performance evaluation.

Mechanism for sustainability reporting and planning - annual reports or stand-alone sustainability reports.

ACCA(17) gives seven approaches to environmental reporting based on reporting methodology.

Compliance based reporting. Companies in heavy regulated utility industries such as water and electricity have to report in compliance with external regulation and consent limits (Anglian Water, TXU-Europe)

Toxic release inventory (TRI) based reporting. This applies mostly to the US companies as some of them are required to publish the lists of specific toxic substances (IBM, Texaco).

Eco-balance reporting. This type of reporting concentrates on the carbon impact of resource inputs and outputs (Kunert, NSK-RHP).

Performance based reporting. This is the most common type of reporting wi=hich is structured about the areas with the most significant environmental impact (British Airways, BT, Novo Nordisk).

Product focused reporting. This type of report extends environmental responsibility for a product to outside of the plant gates. The issues covered here include: operation, recycling, manufacturing and environmental management (Volvo, Marks & Spencer).

Environmental and social reporting. This type of reporting covers a wide area of corporate social responsibility and not just environmental commitments (Co-operative Bank, BP Amoco, United Utilities)

Sustainability reporting. This is sustainability reporting which goes beyond environmental and social reporting and involves integrating environmental, social and economic performance data and measures to produce one report (Procter & Gamble, BAA, Shell)

Reporting on environmental impacts is complicated and is often frustrated by difficulties in measurement. Environmental reporting is the production of narrative and numerical information on an organisation's environmental impact for the accounting period under review. In most cases, narrative information can be used to convey objectives, explanations, aspirations, reasons for failure against previous years' targets, management discussion, addressing specific stakeholder concerns, etc. Numerical disclosure can be used to report on those measures that can usefully and meaningfully be conveyed in that way, such as emission or pollution amounts (in tonnes or cubic metres), resources consumed ( kWh, tonnes, litres), land use (in hectares, square metres, etc) and similar.

At the moment, there is no one universal reporting framework, but the most popular ones are the Balanced Scorecard, the Jenkins Report, the 21st Century Annual Report, Value Dynamics, Value Reporting, the Hermes Principles and the Global Reporting Initiative (ICAEW, 2004, p.9).

The general approach to environmental reporting is to combine the traditional reporting with one of the frameworks mentioned above.

Triple bottom line reporting (TBL) is one example of such an approach, where financial and non-financial reports are combined to give an overall picture of company's performance. The concept was first proposed by Elkington (1997).

The other approach to reporting is pursued by the Global Reporting Initiative (GRI) where the guidelines are codified and more heavily based on rules rather than common sense approach. This format of reporting is getting more popular as it was used as a base for DEFRA's guideline to environmental reporting for both large businesses and SMEs.

The other standards of environmental reporting include:

ISO 14064 series

WBCSD/WRI GHG protocol and supplements

CDSB reporting framework

Carbon Disclosure Project (CDP)

What is disclosed

ACCA (17) suggests the following list of an ideal environmental report:

Organisation profile. A general overview of the company with key financial figures. This section can include company size and activities, number and location of production sites, general description of production processes and description of the main environmental issues related to production and distribution.

Environmental policy statement. A declaration of public commitment to the environmental objectives.

Targets and achievements. A quantitative and qualitative description of targets with clearly defined base year figures and the timeline of the targets.

Performance and compliance. The main part of the report describing the latest company's performance against the set targets. This section can include financial as well as non-financial data, such as lawsuits and complaints.

Management systems and procedures. This section should back up the statements made in the previous part of the report and serve as an assurance of continuous operational control over environmental performance. This section could include the following:

Organisation structure (environmental department and relationships with other business units)

Programmes for environmental policy implementation

Training activity

Implementation level of environmental management system and certifications

Risk Management. This section includes:

Audits, measures taken and achievements regarding risk management

Description of Clean-up operations carried out

Description of major accidents

Product Policy. This section includes the disclosures of how the product life cycle is redesigned under the influence of adopted environmental strategy. This section include:

Description of products life cycle and of the related impacts and description of the related impacts and description of the most relevant measures to mitigate them

Product innovation

Products energy efficiency (when relevant)

Company responsibility at the end of product use

Co-operation programmes with consumers and clients

Eco-label (where applicable)

Conservation of natural resources. This section may include energy, water saving programmes as well as other programmes for the protection of natural heritage.

Stakeholders' relations. This section includes:

Participation in voluntary agreement schemes

Relations with stakeholders (governments, NGOs, academic bodies, etc)

Certification. Any external certificates such as ISO14000, etc.

Emission and consumption of raw materials. Traditionally this expenditure is included in either cost of sales or overheads. Such costs need to be extracted and reported. The list will depend on the company but the examples include:

Site by site quantitative information (for main sites)

Raw materials

Energy as input

Wastes, air emissions, water discharges and soil pollution and other pollutants relevant for company's activity