Significance and challenges of Green Accounting

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GREEN ACCOUNTING –

A TOOL FOR PAINTING INDIA GREEN

Paper submitted for

International Conference

on Managing Change in Business & Economy on 6-7 April,2013


GREEN ACCOUNTING –

A TOOL FOR PAINTING INDIA GREEN

Abstract

Environmental issues have gained momentum in past few decades. The issue of environmental responsibility and sustainable industrial development has given birth to a new branch of accounting i.e. Environmental Accounting, more popularly known as “Green Accounting”.

Green accounting is an important tool for understanding the role played by the natural environment in the economy of a nation. Environmental accounts provide data which highlight both the contribution of natural resources to economic well-being and the costs imposed by pollution or resource degradation.

Greening the national accounts is necessary especially in the developing countries both for economic and environmental policy formulation. The traditional Systems of NationalAccounting(SNA) are considered inadequate today as they cannot accurately measure the contribution of environmentandthe impact of economic activities on it. They give a false impression of increase in income to the decision makersandresearchers, while natural wealth may actually be reducing.

A standard system of green accounting is still in infant stage in India. This article aims to throw light on the concept of “Green Accounting”. It also highlights the need, significance and challenges of this emerging field of accounting from Indian perspective.

Key words- Green Accounting, Environmental Management Accounting (EMA), Environmental Financial Accounting (EFA), Environmental National Accounting (ENA)

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Introduction

Environmental accounting is an important tool for understanding the role played by the natural environment in the economy. It provides data which highlight both the contribution of natural resources to economic well-being and the costs imposed by pollution or resource degradation.

"Environmental accounting"- also referred to as "green accounting", "resource accounting" or "integrated economic and environmental accounting" - refers to modification of the System of National Accounts (SNA) to incorporate the use or depletion of natural resources. The SNA is the set of accounts which government of any nation compiles routinely to track the activity of its economy. Environmental accounting is flexible tool to provide information not necessarily provided in traditional managerial systems.

Environmental accounting was first adopted by Norway in the 1970s. It has made great strides at global level since then. But a standard system of green accounting is still in infant stage in India. Presently, it is applied only in few industries like the cement, steel, engineering and textile industries etc. However, interest is growing in modifying national income accounting systems to promote understanding of the links between economy and environment.

Basically, a company has to fulfill the following environmental responsibilities-

  • Meeting regulatory requirements or exceeding that expectation.
  • Cleaning up pollution that already exists and properly disposing of the hazardous material.
  • Disclosing to the investors both potential & current, the amount and nature of the preventative Measures taken by the management.
  • Operating in a way that environmental damage does not occur.
  • Promoting a company having wide environmental attitude.
  • Control over operational & material efficiency gains driven by the competitive global market.
  • Control over increases in costs for raw materials, waste management and potential Liability

Environmental accounting helps to know whether corporation has been discharging its responsibilities towards environment or not. Generally following information are disclosed by the companies in its annual report about Environmental accounting and reporting-

  • Present and future costs for products as well as processes redesign.
  • Present and future capital expenditures for pollution and control.
  • Physical data related to the reduction of toxicity and waste.
  • Estimates of future environmental costs and benefits.
  • Accumulation of current environmental costs from current as well as past activities and products.

For developing countries like India, both ‘Environment Protection’ and Economic Development’ are matters of great importance. However, some amount of balance is needed between the two. For this purpose, Green Accounting is required to measure the environmental impact of economic activities by corporate. A rising demand by policymakers and regulators of businesses to address the potential threats posed by climate change and other environmental issues is the primary driver of Green Accounting. This trend is bound to continue as can be seen from the increasing financial attention firms are giving to these issues. Thus, accountants need to be responsive of environmental issues and should consider their influence upon both internal and external reporting.

Objectives of Environmental Accounting

The objectives of environmental accounting and Reporting are as follows-

  • Taking the total stock of assets related to environmental issues and changes, there in.
  • Minimizing environmental impacts through improved product & process design.
  • Estimation of the total expenditure on protection or enhancement of environment.
  • Assessing changes of environment in terms of costs and benefits.
  • Reducing costs through proper resource management.
  • Realizing organizational accountability and increasing environmental transparency.
  • Ensuring effective and efficient management of natural resources.
  • Aiding strategic decision process regarding continuing or abandoning a particular product or process.
  • Linking physical resource accounting with monetary accounting.

Forms of environmental accounting

1. Environmental Management Accounting (EMA): This is Management accounting with a particular focus on material and energy flow information as well as environmental cost information. It can be further classified as:

  1. Segment Environmental Accounting: It is an internal environmental accounting tool to select an Investment activity or project related to environmental conservation from among various processes of operations and to evaluate environmental effects for a certain period.
  2. Eco Balance Environmental Accounting: It is an internal environmental accounting tool to support for sustainable environmental management activities.
  3. Corporate Environmental Accounting: It is a tool to inform the public of relevant information compiled in accordance with the Environmental Accounting.

2. Environmental Financial Accounting (EFA): This is financial accounting with a particular focus on reporting environmental liability costs and other significant environmental costs.

3. Environmental National Accounting (ENA): This is National Level accounting with a particular focus on natural resources stocks & flows, environmental costs & externality costs etc.

Need & Significance of environmental accounting at corporate level

Today, business enterprises are facing the challenges to determine their real profits, which are environmentally sustainable ones. For this, they need to account for the environment. Over the years, measures of National income accounting like Gross Domestic Product (GDP) and Net Domestic Product (NDP) have been used as indicators of the economic health in almost all countries. These measures are used by the policy makers for new policy initiatives and to analyze policy alternatives respectively. However, the traditional Systems of National Accounting (SNA) are now considered inadequate, as they cannot accurately measure the contribution of environment and the impact of economic activities on environment. This leads to a false impression of increase in income to the decision makers while natural wealth is actually reducing. Hence, green accounting can be helpful for sustainable national income accounting and in removing the current biases

Environmental costs are one of the many different types of costs businesses incur as they provide goods and services to their customers. They deserve management attention for the following reasons:

  • Several environmental costs can be significantly reduced or eliminated as a result of business decisions, ranging from operational and housekeeping changes, to investment in “greener” process.
  • Environmental costs may be masked in overhead accounts or otherwise overlooked.
  • Many companies believe that environmental costs can be offset by generating revenues through sale of waste by-products or transferable pollution allowances, or licensing of clean technologies.
  • Better management of environmental costs can result in improved environmental performance and significant benefits to human health as well as business success.
  • Understanding the environmental costs and performance of processes and products can promote more accurate costing and pricing of products and can aid companies in the design of more environmentally preferable processes, products, and services for the future.
  • Competitive advantage with customers can result from processes, products, and services that can be demonstrated to be environmentally preferable.
  • Accounting for environmental costs can support a company’s development and operation of an overall environmental management system.

Advantage of Environmental Accounting

The organization that chooses to disclose environmental issues in their statements get several benefits as mentioned below:

  • It improves image of the product or business which further leads to improvement in sales and ultimately profitability.
  • It gives competitive advantage as today customers prefer environmentally friendly products and services.
  • It gives better borrowing access from various lenders like shareholders, bankers and creditors.
  • It leads to improvement in the health safety of the workers which further helps in increasing productivity.
  • It builds positive image in the eyes of stake holders because the organization gets special status.
  • It builds up trust and confidence within the community.
  • Environmental accounting not only recognizes environmental related costs but also tries to reduce them.

Application of environmental accounting in Indian Companies

Environmental Accounting is in preliminary stage in India. Following are the practices of environmental accounting in India:

1. The environment Ministry has issued instruction to prepare environment statement. Mainly the following types of information are given:

  • The types of devices installed for pollution control.
  • Various steps taken for energy conservation.
  • Various steps taken for raw material production conservation.
  • Step taken for waste water and production process waste.
  • Step taken for improvement of quality of product and services, process of production, etc.

2. Very few corporations give adequate information regarding environmental issue. They do so only if it is mandatory as per requirement of law to prepare and submit any information relevant to environment.

3. A study (Padhan, Bal) conducted among executives of different industries revealed that corporate world is fully aware of the requirements of environmental reporting. The corporate executives have also expressed their views in favor of environment reporting. Despite their awareness and consent over this issue, environmental reporting by industries is very poor.

4 Most of the companies disclose the environment information in descriptive manner rather than financial type i.e. no account is made for the degradation of natural capital when calculating corporate profits.

In its Environmental statement, the industries should provide information relating to-

  • Impact of pollution control measures on conservation of natural resources.
  • Pollution generated.
  • Nature of hazardous and solid wastes produced and disposal practices.
  • Impact of pollution control measures on conservation of natural resources.
  • Water and raw material consumption.
  • Resource, allocation for environmental protection.
  • Measures taken for environmental protection
  • A comprehensive audit and following program meant for environmental protection.
  • A general awareness evaluation about need and importance of environmental accounting and reporting.
  • A compulsory and comprehensive disclosure program in corporate environmental protection report.
  • Steps taken to popularize the benefits of Environmental reporting among the corporate sector.

Challenges of Environmental Accounting

The major Obstacles or challenges to the growth of environmental accounting are as follows:

  • There is lack of accounting standards for environmental accounting.
  • It cannot work independently and requires to be integrated with the financial accounting, which is not easy.
  • It has inapplicable assumptions.
  • There is lack of reliable industry data.
  • The method of estimating the social value of environmental goods and services are imperfect and often misleading.
  • Estimated values for environmental goods are quantified or qualified in terms which are difficult to convert in monetary terms.
  • Social value of environmental goods and services are changing so fast that the estimates become obsolete even before they are available for use.
  • It is a long-term process and so to draw a conclusion with its help is not easy.
  • Environmental accounting is not a legal obligation in most of the cases in India.

Suggestions

To make the environmental accounting an integral part of the overall accounting system, the following suggestions are made-

  • Create awareness-Study the various Acts applicable to the company, analyze the rules and regulations regarding environment applicable to the company.
  • Environmental policy- Prepare an environmental policy after analyzing the requirement of various laws regarding various environmental issues.
  • Budget-Prepare short term as well as long-term environmental budget for both revenue and capital nature.
  • Identify causes -Prepare list of various elements causing pollution of various types and show what types of action have been taken for controlling the same.
  • Responsibility centers -Environmental responsibility centers should be decided so that actions can be taken against defaulter if there are deviations from standard pollution limits
  • Proper disclosure-Environmental indicators should be calculated for evaluation of environmental aspects and the same should be disclosed properly in annual accounts.
  • Incentive and punishment-Incentive and punishment policy should be linked with environmental issue.
  • Compulsory Environmental audit-Government should make it compulsory for every polluter to submit environmental audit report being done by a certified environmental auditor. Government may prescribe qualifications and experience for issue such a certificate. Such a report will be a great help to exercise control over pollution.

Conclusion

Environmental accounting is an important tool for understanding the role played by the natural environment in the economy. However, it remains largely voluntary and unaudited among corporate of India. It is the demand of time that companies in India prepares a firm environmental policy, take steps for controlling pollution, comply with the related rules and regulations, and mention adequate details of environmental issues in their annual statements.

To conclude it can be said that Greening the national accounts is necessary especially in developing countries like India and Environmental accounting is slowly emerging as an innovative tool for greening India.

References-

  • Chauhan Mukesh, “Concept of Environmental Accounting and Practice in India”, The Chartered Accountant, November 2005
  • Datta Rajib, Deb S.K, “Green Accounting: what? Why? Where we are now and where we are heading - A Closer Look”, European Journal of Business and Management, Vol 4, No.4, 2012.
  • Himanshu Sekhar Rout Sr., “ Green Accounting: Issues and Challenges”, The IUP Journal of Managerial Economics, Vol. VIII, No. 3, pp. 46-60, August 2010
  • Qureshi, kulshrestha,Tiwari, “Environmental accounting and reporting: An essential component of business strategy”, Asian Journal of Research in Banking and Finance, Vol.2 Issue 4, April 2012
  • Roy A.R “Environmental Accounting & Environment Management Accounting”, The Management Accountant June, 2008.

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