Environmental and social management accounting

Lecturer : yvonneJan 21st 2014

Corporate social responsibility and external reporting

• Involves taking into account the social and environmental impact of corporate activity when making decisions– May increase profitability– Determine long-term survival

• Communicated to stakeholders in annual reports, environment reports, stakeholder impact reports, social impact reports and social audit reports

Corporate social responsibility and external reporting

• Triple bottom line reporting– Focus on financial (economic), social and environmental

aspects of performance– Aimed at a broader range of stakeholders

• Social performance– Impact of an organisation's behaviour on society, including

the broader community, employees, customers and suppliers

• Environmental performance– Impact of an organisation's behaviour on the environment,

including natural systems of land, air and water, people and other living organisms

Environmental management accounting (EMA)

• Consists of environmentally-related management accounting systems and practices

• Life cycle costing, environmental cost accounting, environmental performance measures, assessment of environmental benefits, strategic planning for environmental management

• EMA techniques– Financially-oriented EMA– Physically-oriented EMA

The benefits of recognising environmental and social impacts

• There is an increasing awareness that recognising environmental and societal impacts can have broad implications for an organisation

• Attracting highly skilled employees who wish to work for an environmentally-responsible organisation

• Enhancement of the organisation’s reputation as a responsible and caring organisation

• Identification of potential cost savings

The benefits of recognising environmental and social impacts

• Reduction of risk of current and future activities

• More effective management of resources• Improvements in competitiveness– Greater attractiveness to customers– Positive reputation

Difficulties in recognising and measuring environmental and social impacts

• Costs of environmental impacts are often hidden or forgotten, even though they may be substantial

• They may be difficult to recognise• Future ecological and social issues are not yet known– Current work practices and operations may have future

environmental and social consequences which we cannot predict

• Many costs and benefits are external to the organisation– Difficult to detect and assess

Difficulties in recognising and measuring environmental and social impacts

• Many costs and benefits are difficult to measure in financial terms– They relate to the future, and the size of the

impact may be unknown• Defining environmental costs– The costs that an organisation incurs to prevent,

monitor and report environmental impacts– US EPA defines 5 tiers of environmental costs– Private costs (tiers 1 to 4) and societal costs

Analysing environmental costs

• Environmental costs can be analysed as relating to the following activities

• Prevention activities– Solve environmental problems before they occur, or turn

problems into opportunities– Costs of these activities are ‘investments’, as they reduce

the future outlays and provide long-term benefits• Appraisal activities– Monitor the levels of environmental impact– Measuring damage, inspecting processes and products,

auditing supplier performance

Analysing environmental costs

• Internal failure activities– Correct breakdowns discovered in appraisal activities– Cost of cleaning the plant after spillage, cost of

occupational health and safety claims by employees• External failure activities– Occur when resolution and remediation efforts fall

outside of the organisation’s management– Cost of cleaning up polluted sites, fines for

environmental damage, lost profits associated with damage to reputation

Can environmental failure costs be reduced?

Yes! Investing more in prevention & detection activities will reduce environmental failure

costs.

ENVIRONMENTAL PERSPECTIVE

• 5 objectives for environmental perspective– Minimize use of raw or virgin materials– Minimize use of hazardous materials– Minimize energy requirements for production, use

of product– Minimize release of solid, liquid, gaseous residues– Maximize opportunities to recycle

Are environmental activities non-value-added?

Because environmental pollution is equivalent to economic inefficiency, all failure activities are non-value-added.

HAZARDOUS WASTE PIE CHART