Environmental Management in Accounting Perspective

Source of article




Environmental Accounting
Financial Management, Apr 2007 by Martin, Bob

If a company's accounts fail to pay full consideration to the green issues affecting its business, can they actually show a true and fair view? Bob Martin investigates.

While green issues are hot news and public awareness of them is at an all-time high, the media tend to concentrate on climate change and carbon trading, which are often seen as beyond the scope of businesses to affect over and above the legal obligations imposed on them. Other press coverage focuses on the promises made by directors in corporate social responsibility reports to adopt more ecologically sustainable production methods and so forth pledges for which they can only be held accountable in future, perhaps on someone else's watch.. read more

Comment by SS

Environmental accounting has received increased attentions in the 1980s as an effort in promoting environmentally sound and sustainable socio-economic development. The publication of Handbook of National Accounting - Integrated Environment and Economic Accounting is a milestone for environmental accounting; published in responds to the request in Agenda 21 of the Earth Summit of Rio de Janeiro in 1992.

Environmental accounting practice, according to the handbook, incorporates environmental concerns including natural resource depletion, environmental quality degradation and environmental protection into national accounts by means of a system of integrated environmental and economic accounting (SEEA).

United Nations Commission on Sustainable Development (CSD) identifies the application of Environmental Management Accounting (EMA) in its publication Environmental Management Accounting Procedures and Principles. Application fields for the use of EMA data are

• Assessment of annual environmental costs/expenditure;
• Product pricing;
• Budgeting;
• Investment appraisal, calculating investment options;
• Calculating costs, savings and benefits of environmental projects;
• Design and implementation of environmental management systems;
• Environmental performance evaluation, indicators and benchmarking;
• Setting quantified performance targets;
• Cleaner production, pollution prevention, supply chain management and design for environment projects;
• External disclosure of environmental expenditures, investments and liabilities;
• External environmental or sustainability reporting;
• Other reporting of environmental data to statistical agencies and local authorities.

Environmental accounting is also applied as a tool by corporate bodies on the cost structure and environmental performance. Environmental accounting is most commonly undertaken as voluntary self-reporting by companies, third-party reports by government agencies, NGOs and other bodies. This would portrait the envisagement of such organizations on their environmental accountability.

Impacts on the environment may be accounted and reflected within a company’s financial statements, relating to liabilities, commitments and contingencies for the remediation of contaminated lands or other financial concerns arising from pollution. Environmental reports may also account for pollution emissions, resources used, or wildlife habitat damaged or re-established. These reports can be useful when dealing with environmental legislation, or not, as in the Bartoline v Royal & SunAlliance Insurance pic and Heath Lambert Limited judgment.

Engineering or technical principles is an essential component in EMA. Using the First and Second Laws of thermodynamics, an energy balance can be used to track energy through a system. This is a very useful tool for determining resource use and environmental impacts to determine how much energy is needed at each point in a system, and in what form that energy is a cost in various environmental issues. The energy accounting system keeps track of energy in, energy out, and non-useful energy versus work done, and transformations within the system.

The mitigation of climate change and global warming emphasizes on the economic incentives on the reduction for achieving reductions in the emissions of pollutants. Flexible Mechanisms includes Emissions Trading, Clean Development Mechanism and Joint Implementation defined under the Kyoto Protocol intended to lower the overall costs of achieving its emissions targets. EMA knowledge and expertise is key to such mechanisms. Some of the issues involving environmental accounting are related to credits cap, emission reduction, carbon trading, carbon taxes, Marginal Abatement Cost (MAP) and project validation.