The increasing importance of environmental management accounting

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Environmental Accounting

Environmental or green management accounting is referred as "the identification, allocation and analysis of material streams and their related money flows by using environmental accounting systems to provide insight in environmental impacts and associated financial effects"(Steele & Powell, 2002). So environmental management accounting covers a vast majority of subjects such as the development of new accounting techniques which will measure assets, liabilities and costs in both non-financial (ecological) and financial streams, identification of environmental costs and their aspects, investment appraisal of projects to include environmental factors, and the maintenance of the sustainability of both the enterprise and the resources used.

As we can see in figure 1 below environmental management accounting (EMA) tries to combine two types of data in order to succeed in achieving reduced costs and better corporate efficiency.Figure 1. E.M.A combines monetary and physical data

Main elements for EMA

The eco-balance account

One of the key tools for EMA is the eco-balance account. In figure 1 above, we can see that the account combines the two different accounting systems. A company in order to increase its efficiency needs information of both physical units as well as monetary units. This is the reason why a firm needs secure quantitative information that focuses on those two aspects. Those data are needed not only for the identification and measurement of impact of environmental problems but also to control and measure the firm's environmental performance and its compliance with environmental legislations.

The following equation in figure 2 shows how quantitative data can be alter to an eco-balance account.

The meaning of this equation is that Material Inputs = Product Outputs (good units produced) + Non-product Outputs (waste + emissions). This simple equation can help the companies not only to compare their input and output data but also identify what has been consumed and what wastes have been generated. Moreover this enables the enterprise to track down the possible environmental costs, although not in a very reliable way since the wastes and emissions might not reflect the real environmental costs. A simple example is such: If we imagine a company with raw materials of 30000£ with a product output of 25000£ then the waste and emissions are of 5000£ value. But as was said before the 5000£ may not actually represent the actual "harm" on the environment.

Environmental Costs

One of the main components to consider for EMA is that of environmental costs. A definition of environmental costs is given by the Environmental Protection Agency (1996) as those that affect the financial statements of the organisation (internal costs), as well as those that have a direct impact on society, individuals and the environment (external costs). This is better shown bellow in figure 3.

Internal costs are summarized in four major categories that include conventional costs such as the cost of capital equipment for a company, price for raw materials and supplies. Hidden costs that are obscured in overhead accounts or overlooked in business decision making to comply with environmental laws (ICF Inc., 1995).  Contingent costs that refer to environmental costs that may or not occur due to their correlation with uncertain future events e.x. penalties and legal expenses. Finally image and relationship costs can include the costs of environmental reports, environmental activities such as tree planting and goodwill actions concerning the community.

External costs are costs that do not have an impact on the company itself, as was referred above, and include environmental degradation costs and human impact costs. For both categories a company is not legally liable e.x. damage caused to ecosystems from air pollution or to communities by noise pollution cannot always be legally compensated. As a result it is very difficult for firms to determine the value of these costs.

Differences between corporate environmental strategies

Since 1979 several models were created to describe the firm's level of approach towards social responsibility. The latest classifications were derived by the works of Azzone & Bertel (1994), Hunt & Auster (1990) and Roome (1992). According to those there were four classifications towards a company's social responsibility reactive, defensive, accommodative and proactive. In 1995 Hart reformed these classifications, leading to four types of resource based environmental approaches. So according to Hart there are four types of environmental approaches: "the end of the pipe approach", "pollution prevention or Total Quality Environmental Management", "product stewardship" and "sustainable development".

The first approach concerns companies that react simply with environmental protections to abide by the latest imposed legislation. Firms that adopt the pollution prevention approach are trying to have production lines and products below the legal limits and try to reduce their pollution levels. According to the product stewardship approach the firm focuses on differentiation of the product processes to mitigate the environmental impacts of the products life circle. Last but not least sustainable development approach targets to minimize the environmental impacts of the company's growth by developing clean technologies and by maximizing the efficiency of the materials used.

The increasing growth of EMA and ES

For the past 25 years the environmental problems have steadily risen in the political and economical agenda. The realization that resources that are provided from earth can reach a depletion level has caused a major alert among governments as well as organisations. Several acts and protocols where created and signed for the protection of the physical environment. In a global scale at 1992 and the "Earth Summit" in Rio de Janeiro the term "sustainable development" has become more important than ever. In the Kyoto protocol at 2009 a major effort to reduce in wastes and CO2 emissions was put in to action. In the U.K. the Water Act of 1989 has provided legislation for companies treating their waste.

It has become apparent to the enterprises that the world opinion and the amount of pressure that is being put on them has steadily increased over the years. As a result the firms have allocated their attention to one key term "sustainable development". Although a broad definition of this term is currently unavailable, we can understand the principle values behind it. Those basic pillars are "sustainability", as for in economy to keep a firm's capital intact, and "development", the increase of the profit margin for the company, have to be regulated. "Globalization" as in the new world order the boundaries of social, economical and environmental problems simply cease to exist. "Uncertainty" because future environmental damages due to environmental degradation cannot be accurately measured, it can only be predicted up to a certain point.

The consequences of this turnabout have leaded the corporations towards EMA and Environmental Strategies. Industries are becoming constantly more aware of their environmental and social liabilities associated with their products and their production lines. As such they have been trying to find a formula that correlates all those financial accounts of an enterprise with its physical obligations. It is clear that EMA is still in an infant stage but it is certain that a further development is still underway.