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Environmental Management Accounting Notes

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Lecture 5: Environmental Management Accounting Topics

• Environmental management accounting

• Environmental cost accounting

• Life cycle costing

• "Green" investment appraisal

• Sustainable balanced scorecard

• Cost of full sustainability

• Challenges for ema Environmental Management Accounting Why EMA?
○ Important political debates:
 Bruntland 1987
 Rio 1992
 Copenhagen 2009
○ Social and environmental reporting initiatives (e.g. CSR, GRI etc.)
 The process of communicating the social and environmental effects of organizations' economic actions to particular interest groups (Gray et al. 1996)
 Extending the accountability of companies beyond provision of financial accounts to the owners of capital
 The "triple bottom line" (Epstein 2004)
□ "People, planet, profit" or "the three pillars"
□ An extended spectrum of values and criteria for measuring organizational success What is EMA?
○ The problem of externalities:
 Pollution, toxic waste, carbon emissions etc. didn't used to be taken into account
□ Seen as the side effects of economic activities
□ Remained external to decisions
□ Negative externalities
 Many natural resources were seen as unlimited
□ Positive externalities
○ EMA is about costing what was previously not accounted for
○ The depletion of non-renewable or slowly renewable natural resources is also a cause for concern Costs
 Private costs = The cost of sustainability to businesses
□ Sustainability used to be seen only as a cost
□ Now increasingly a source of competitive advantage
□ Quality is also defined on environmental grounds
 e.g. ISO14000 on environmental management
 From cost to opportunity
 From compliance to performance
 Societal costs =Cost of unsustainable business to the environment and society
□ Can it be calculated and monetized
□ What is the relevant time horizon
○ EMA = IFAC (2005): "The management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices"
○ EMA = UN Expert Working Group on EMA (2001): "The identification, collection, analysis and use of two types of information for internal decision making. (1) Physical information on the use, flows and destinies of energy, water and materials (including wastes) and (2) monetary information on environment-related costs, earnings and savings"
 More distinctively highlights both the physical and monetary sides of EMA
 Uses two types of information for internal decision making:
□ Physical information on the use, flows and destinies of energy, water and materials (inc. waste)
□ Monetary information on environmental-related costs, earnings and savings
 United Nations Division for Sustainable Development, Environmental Management Accounting, Procedures and Principles, 2001
○ Simple adjustments to existing accounting systems to more integrated EMA practices that link conventional physical and monetary information systems
○ MA and EMA share many common goals
○ "resource use is judged effective if it optimizes value generation over the long run, with due regards to the externalities associated with organization's activities" - IFAC, Management Accounting Concepts
○ Narrow definition:
 Tries to capture the impact of environmental concerns
□ On the part of consumers, government or firms
 Excludes externalities
 Private costs

○ Broad definition:
 Tries to capture the impact of economic activities on the environment
 Includes externalities
 Social costs Main EMA techniques and their focus

Course Notes Page 21

Key Points

• Why EMA

• What is EMA

• Private vs. societal costs

• Tracing environmental costs

• Environmental cost categories

• Life cycle costing

• Consumer product example (Apple)

• Services example (Xerox)

• Green investment appraisal

• Sustainable balanced scorecard

• Problems with SBSC

• Cost of full sustainability

• Landcare Research Ltd

• Challenges for EMA Definitions

• Balanced Scorecard = "A statement to translate an organisation's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy"

• Cost of full sustainability = Notional cost of restoring the environment, on a yearly basis ("stop the clock")

• EMA = IFAC (2005): "The management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices"

• EMA = UN Expert Working Group on EMA (2001): "The identification, collection, analysis and use of two types of information for internal decision making. (1) Physical information on the use, flows and destinies of energy, water and materials (including wastes) and (2) monetary information on environment-related costs, earnings and savings"

• Private costs = The cost of sustainability to businesses

• SBSC = Integration of environmental performance measures (KPIs) in the BSC

• Societal costs =Cost of unsustainable business to the environment and society

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