COURSE

NMAC 307 STRATEGIC MANAGEMENT

TOPIC
Specialist management accounting techniques
Environmental Accounting
 Learning objectives
a) Definition and Scope a) Costs Associated with Environmental
Management Accounting
b) Importance of Environmental Accounting
b) Challenges in Environmental Management
c) Differences Between Environmental Accounting
Accounting and Environmental
Management Accounting c) Mitigating Factors
d) Applications of Environmental d) Measurement of Environmental
Management Accounting Accounting
e) Functions of Environmental Management e) Integration with Strategic Management
Accounting
f) Case Study: British Petroleum (BP)
g) Benefits of Environmental Accounting
Definition
▪Environmental Accounting is the process of identifying, measuring, and communicating the
costs of environmental impacts associated with business activities.
▪ It integrates environmental and financial data to provide insights into the sustainability of an
organization's operations.
▪This discipline helps organizations understand the financial implications of their environmental
actions and develop strategies for sustainable management.
Origins of Environmental Accounting
1. Rising Environmental Concerns :
In the late 20th century, growing awareness of environmental issues—such as pollution, climate change, and biodiversity
loss—prompted discussions about the impact of business activities on the environment. Major events, like the 1972 United Nations
Conference on the Human Environment in Stockholm , highlighted the need for sustainable development.
2. Regulatory Developments:
Governments began implementing stricter environmental regulations, requiring businesses to monitor and report their
environmental impacts. This led to a demand for systems that could accurately account for environmental costs and benefits.
3. Economic Valuation of Natural Resources:
Economists and environmentalists started advocating for the integration of natural capital into economic decision-making . This
movement emphasized the importance of recognizing the monetary value of ecosystems and natural resources .
4. Corporate Social Responsibility (CSR):1970s
The rise of CSR in the 1990s encouraged businesses to adopt more sustainable practices. Companies began looking for ways to
measure their environmental performance and communicate it to stakeholders, prompting the development of environmental
accounting.
Origins of Environmental Accounting
5. Standardization Efforts:1990s
Initiatives to standardize environmental reporting, such as the Global Reporting Initiative (GRI)
established in 1997, provided frameworks for businesses to disclose their environmental impacts. This
helped formalize the practice of environmental accounting.
6. Stakeholder Pressure:1990s
Investors, customers, and communities increasingly demanded transparency regarding corporate
environmental practices. This pressure encouraged organizations to adopt environmental accounting to
improve their public image and stakeholder relations.
7. Technological Advancements:2010s
Advances in data collection and analysis technologies made it easier for organizations to track and
quantify environmental impacts, further facilitating the adoption of environmental accounting practices.
 Environmental Accounting VS Environmental
Management Accounting-Differences
Environmental Accounting: Environmental Accounting:
a) Focuses on identifying and measuring a) Focuses on identifying and measuring
environmental costs and benefits. environmental costs and benefits.
b) Integrates environmental data into b) Integrates environmental data into
financial statements. financial statements.
c) Aims to provide stakeholders with c) Aims to provide stakeholders with
information on environmental information on environmental
performance. performance.
 Environmental Accounting VS Environmental
Management Accounting-Differences
Environmental Accounting Objectives: Environmental Management Accounting
Objectives:
a) Report on environmental impacts for
external stakeholders. a) Support management in making informed
decisions.
Ensure regulatory compliance and enhance
transparency. b) Identify cost-saving opportunities and
improve sustainability practices
Environmental Accounting Scope:
Environmental Management Accounting
a) Primarily concerned with financial Scope:
reporting and compliance.
a) Focuses on internal processes and
b) Looks at external impacts and stakeholder operational improvements.
communication.
b) Involves performance measurement and
resource management
 Environmental Accounting VS Environmental
Management Accounting
Environmental Accounting Methodologies: Environmental Management Accounting
Methodologies:
a) Utilizes standardized frameworks (e.g., GRI, SASB).
a) Employs tools like life cycle assessment (LCA) and
b) Emphasizes monetary valuation of environmental cost-benefit analysis.
impacts.
b) Focuses on data collection for internal use.
Environmental Accounting Reporting:
Environmental Management Accounting Reporting:
a) Targets external stakeholders (investors,
regulators, public). a) Targets internal management and
decision-makers.
b) Provides comprehensive environmental
performance reports. b) Offers insights for operational improvements and
cost control.
Environmental Accounting Example:
Environmental Management Accounting Example:
A company publishes an annual sustainability report
detailing its carbon footprint and waste management A manufacturing firm analyzes its energy consumption
practices. data to identify areas for cost reduction and process
optimization.
 How organizations can leverage EMA
Overview: Cost Reduction
a) Environmental Management Accounting a) Analyzes costs associated with
(EMA) integrates environmental environmental impacts to identify savings.
considerations into management practices.
b) Implements strategies that lead to reduced
b) Focuses on improving decision-making and operational costs, enhancing profitability.
operational efficiency.
Performance Monitoring
Resource Efficiency
a) Tracks environmental performance metrics
a) Identifies opportunities to reduce resource over time.
consumption (water, energy, materials).
b) Utilizes data to assess the effectiveness of
b) Supports initiatives for waste minimization sustainability initiatives.
and recycling.
 How organizations can leverage EMA
Lifecycle Assessment (LCA) Risk Management
a) Evaluates the environmental impacts of a) Identifies environmental risks and their
products throughout their lifecycle. potential financial impacts.
b) Informs design and production processes b) Develops strategies to mitigate risks,
to minimize negative impacts. ensuring long-term sustainability.
Strategic Decision-Making Compliance and Reporting
a) Provides data for informed a) Facilitates compliance with environmental
decision-making on investments in regulations and reporting requirements.
sustainable technologies.
b) Enhances transparency and accountability
b) Aligns environmental goals with overall in environmental performance.
business strategy
 How organizations can leverage EMA
Stakeholder Engagement Innovation and Product Development
a) Engages stakeholders by providing insights a) Encourages the development of
into environmental performance. eco-friendly products and processes.
b) Builds trust and enhances relationships b) Drives innovation by integrating
with customers, investors, and the sustainability into product design.
community.
 What are the costs associated with
EMA?
Overview:
Environmental Management Accounting (EMA) integrates environmental considerations into
management practices.
Understanding associated costs is vital for effective decision-making and sustainability.
Direct Costs : Costs directly linked to implementing EMA processes and initiatives.
Examples:
a) Software and tools for data collection and analysis
b) Environmental performance audits and assessments
c) Training programs for staff on EMA practices
 What are the costs associated with
EMA?
Indirect Costs : Costs that are not directly traceable to EMA but are influenced by it.
Examples:
a) Increased administrative workload for sustainability reporting
b) Costs associated with stakeholder engagement and communication
c) Changes in operational processes to accommodate EMA practices
Compliance Costs : Expenses incurred to meet environmental regulations and standards.
Examples:
a) Costs for obtaining environmental permits
b) Fees for external consultants for compliance assessments
c) Investments in systems to monitor compliance
 What are the costs associated with
EMA?
Capital Expenditure :Long-term investments aimed at enhancing environmental performance and
sustainability.
Examples:
a) Upgrading facilities for better environmental outcomes
b) Investments in cleaner technologies or renewable energy sources
c) Costs for implementing energy-efficient systems
Operational Costs : Ongoing costs associated with the management and implementation of EMA.
Examples:
a) Continuous monitoring and reporting of environmental performance metrics
b) Maintenance of systems used for data collection and reporting
c) Costs related to the recycling and waste management programs
Challenges in Implementing EMA
▪Environmental Management Accounting (EMA) integrates environmental considerations into
management processes.
▪While beneficial, several challenges hinder effective implementation.
1. Data Collection and Accuracy : Difficulty in obtaining accurate and comprehensive environmental
data.
▪Inconsistent data can lead to poor decision-making.
▪Resource-intensive processes for data gathering and validation.
2. Integration into Existing Systems : Integrating EMA into existing accounting and management systems
can be complex.
▪Potential disruptions to current operations.
▪Resistance from staff accustomed to traditional practices.
Challenges in Implementing EMA
3. Lack of Standardization: Absence of universally accepted standards for environmental
accounting.
▪Difficulty in comparing performance across organizations.
▪Variability in reporting practices can confuse stakeholders.
4.Resource Constraints : Limited financial and human resources to implement EMA effectively.
▪Organizations may struggle to invest in necessary tools and training.
▪Prioritization of short-term financial goals over long-term sustainability.
Challenges in Implementing EMA
5. Complexity of Environmental Issues : The multifaceted nature of environmental challenges
complicates accounting efforts.
▪Difficulty in quantifying environmental impacts and benefits.
▪Challenges in addressing indirect costs and benefits.
6. Stakeholder Engagement : Ensuring effective communication and engagement with
stakeholders regarding EMA initiatives.
▪Potential misunderstandings or lack of support from stakeholders.
▪Difficulty in aligning stakeholder expectations with organizational goals.
Challenges in Implementing EMA
Regulatory Changes : Evolving environmental regulations can create uncertainty for
organizations.
▪Constant adaptation required to remain compliant.
▪Increased complexity in accounting for regulatory impacts.
Measuring Success : Difficulty in assessing the effectiveness of EMA initiatives.
▪Challenges in establishing clear metrics and benchmarks.
▪Potential lack of recognition for sustainability efforts.
The Impact of Environmental Behavior
on Financial Performance
Slide 2: Introduction

Overview:

Environmental behavior significantly affects a company’s financial performance.

Poor environmental practices can lead to direct and indirect financial consequences.

Slide 3: Direct Costs

Key Point:

Increased costs from wasteful resource utilization and environmental clean-up.

Example:

A manufacturing company that fails to implement recycling programs may incur higher disposal costs and expenses related to hazardous waste management.

Slide 4: Reputational Damage

Key Point:

Revenue can decline due to negative public perception and customer boycotts.

Example:

A fashion brand facing backlash for unsustainable sourcing practices may see a drop in sales as environmentally-conscious consumers shift to competitors.
The Impact of Environmental Behavior
on Financial Performance
Slide 5: Financial Stability Threats
Key Point:
Deterioration of brand value can impact lending and insurance coverage.
Example:
A company known for environmental negligence may face higher interest rates from lenders or difficulty securing
loans due to perceived risk.
Slide 6: Failure Costs
Key Point:
Potential fines and legal costs due to non-compliance with environmental regulations.
Example:
A business that improperly disposes of waste could face hefty fines from regulatory bodies, along with legal fees
from lawsuits initiated by affected parties.
 Categorisation of Environmental Costs
These are:
a) Environmental Prevention Costs
b) Environmental Appraisal Costs
c) Internal Failure Costs
d) External Failure Costs
Categorisation of Environmental Costs
1. Environmental Prevention Costs: Expenditures incurred to prevent or limit adverse environmental
impacts before they occur.
▪Investing in prevention can reduce long-term environmental liabilities and enhance sustainability.
Example : Solar Panel Installation: A company invests in solar panels to reduce reliance on fossil fuels.
This upfront cost is aimed at preventing greenhouse gas emissions and promoting renewable energy
use.
2. Environmental Appraisal Costs : Costs associated with evaluating whether an environmental policy is
achieving its intended objectives.
▪Regular assessments ensure that environmental strategies are effective and compliant with regulations.
Example: A corporation conducts annual environmental audits to assess compliance with sustainability
goals. The costs involved in hiring external consultants and conducting assessments are categorized as
appraisal costs.
Categorisation of Environmental Costs
3. Internal Failure Costs: Costs incurred by the business to manage and limit the impact of hazardous
waste that has been produced.
▪Minimizing these costs is essential for operational efficiency and environmental responsibility.
Example : A manufacturing plant builds an internal waste treatment facility to handle hazardous waste.
The costs associated with operating and maintaining this facility are considered internal failure costs.
4. External Failure Costs : Costs resulting from the company’s actions (e.g., hazardous waste
production) that are not managed or contained, impacting society at large.
▪These costs can damage a company's reputation and lead to legal liabilities.
Example: If a company improperly disposes of toxic waste, leading to environmental contamination, it
may face costs related to community cleanup efforts and compensation for affected residents. These
costs are borne by society but are a direct result of the company's negligence.
 Methods of Accounting for Environmental Costs
Effective accounting for environmental costs is essential for sustainable business practices.
Four primary methods are used:
a) Input / Output Analysis
b) Flow Cost Accounting
c) Lifecycle Costing
d) Environmental Activity Based Costing
Methods of Accounting for Environmental Costs
Input / Output Analysis : Balances quantity of resources input versus output in production and
waste.
Objective : Forces businesses to account for wastage and environmental impact.
Example:A company uses 10,000 kg of raw materials to produce 8,000 kg of product and
generates 2,000 kg of waste.
Calculation:
Input Efficiency = (Output / Input) × 100
Input Efficiency = (8,000 kg / 10,000 kg) × 100 = 80%
The company identifies areas to reduce waste by 20%.
Methods
Flow cost accounting
Analyzes inflows and outflows of resources within the organizational structure.
▪• Material: the resources used in production and storing of raw materials.
▪• System: the resources used in (for example) in systems such as production and quality control
▪• Delivery and disposal: resources used in delivering to the customer and in disposing of any
waste.
As with input/output the ultimate aim in recording these movements is to reduce the
amount of materials consumed by each flow. This will reduce the environmenal impact
of the product in addition to decreasing total costs overall
 Methods of Accounting for Environmental Costs
Example : A company has the following costs:
a) Material: $50,000
b) System: $20,000
c) Delivery and Disposal: $15,000
d) Total Costs Calculation : Total Costs = Material + System + Delivery and Disposal
e) Total Costs = $50,000 + $20,000 + $15,000 = $85,000
The company aims to reduce total costs by 10% through efficiency improvements.
Methods of Accounting for Environmental Costs
▪Lifecycle costing accounts for the total cost of a product throughout its entire lifespan.
▪Includes costs from research and development to disposal, emphasizing environmental impacts.
Importance of EMA:
▪Some lifecycle costs are environmentally related, particularly at the end of a product’s life.
▪Understanding these costs helps organizations manage sustainability and compliance.
Total Lifecycle Cost Calculation
▪Total Lifecycle Cost = R&D + Production + Marketing + Usage + End-of-Life
▪Total Lifecycle Cost = $150,000 + $200,000 + $50,000 + $30,000 + $20,000
▪Total Lifecycle Cost = $450,000
Learning Outcomes
▪What is environmental accounting?
▪Why it has become important
▪How is it used
▪What is does
▪British petroleum example
▪What are the benefits
▪What are the costs
▪What are the challenges
▪What are the mitigating factors
▪How is it measured
▪How is Environmental accounting different from Environmental Management Accounting