Environmental Management Accounting (EMA) Guidelines
for Sri Lankan Enterprises
Institute of Certified Management Accountants of Sri Lanka
Environmental Management Accounting (EMA) Guidelines
for Sri Lankan Enterprises
Acknowledgement
The authors are thankful to the valuable comments received from
Professor K B M Fonseka, Director, Postgraduate Institute of
Management, Colombo, Sri Lanka.
Disclaimer
The opinions expressed in this book may not necessarily relect the views
of the Institute of Certiied Management Accountants of Sri Lanka. The
responsibility for all such opinions rest solely on the authors.
Copyright
A person or organization that acquires this product from the Institute
of Certiied Management Accountants of Sri Lanka may reproduce and
amend these documents for personal use or use within the business.
Apart from such use, copyright is strictly reserved, and no part of this
publication may be reproduced or copied in any form without the written
permission of the Institute of Certiied Management Accountants of Sri
Lanka.
ISBN 978-955-0926-01-5
Cover and text design by Chamara Jayakody, 3rd Year, Department of
Accounting, Faculty of Management Studies and Commerce, University
of Sri Jayewardenepura, Nugegoda, Sri Lanka.
Published 2014
Institute of Certiied Management Accountants of Sri Lanka
29 / 24, Visaka Road,
Colombo 04,
Sri Lanka.
i
Environmental Management Accounting (EMA) Guidelines
for Sri Lankan Enterprises
A D Nuwan Gunarathne
Lecturer, Department of Accounting, University of Sri Jayewardenepura,
Nugegoda, Sri Lanka.
Ajanee B Ranasinghe
Lecturer, Department of Accounting, University of Sri Jayewardenepura,
Nugegoda, Sri Lanka.
Assisted by
Sanka Peiris
Business Information Reporting Analyst, Standard Chartered Bank,
Colombo, Sri Lanaka.
ii
President’s Message
It gives me great pleasure in forwarding this message to “Environmental
Management Accounting (EMA) Guidelines for Sri Lankan Enterprises”
which is launched at the CMA National Management Accounting
Conference, 2014 on the theme “Sri Lanka 2.0 and Beyond- Fast Tracking
Economic Development - 2020”. This publication is another pioneering
initiative of CMA to provide guidance for the Sri Lankan industry
professionals to embrace sustainability in their core business operations.
CMA is the only local professional management accounting institute
that introduced sustainability management accounting into its
syllabus which was launched in 2012. CMA has also been organizing
many seminars and workshops on sustainability and sustainability
(environmental) management accounting for the last few years. As the
national professional management accounting body in Sri Lanka, CMA
makes these eforts to fulill its endeavor to meet the growing demand
for professional management accountants in both private and public
sectors. Through initiatives of this nature, we expect to guide competent
professionals in the ield of management accounting to contribute to
move the national economy for better sustainable development.
I specially would like to thank the authors of this book, Mr. A D Nuwan
Gunarathne and Ms. Ajanee B Ranasignhe, lecturers of the Department
of Accounting, University of Sri Jayewardenepura and their assistant
author Mr. Sanka Peiris who is also a product of the same Department,
on behalf of CMA for their volunteer efort.
Prof. Lakshman R Watawala
President- CMA Sri Lanka
18.06.2014
iii
Preface
Guidelines on EMA for organizations have been published by various
national and international institutes around the world. Yet, in Sri Lanka,
there has been little attempt at the national level to guide industries on
adopting and sustaining environmental strategies and its supporting
accounting tool, EMA. “Environmental Management Accounting (EMA)
- Guidelines for Sri Lankan Enterprises” is a publication that aims at illing
this long felt need for industries.
It is apparent that management accounting can play a crucial role in
driving organizations for better environmental performance, irrespective
of the organizational function that utilizes it. The growing body of EMA
practices which can support this is presented here with the primary aim
of improving the level of awareness of Sri Lankan managers on how EMA
could be adopted and made use of. It is expected that the improved
understanding will be a catalyst in leading industries across diverse
sectors for better adoption of EMA in Sri Lanka.
This book on EMA Guidelines is launched at the CMA National
Management Accounting Conference-2014, “Sri Lanka 2.0 & Beyond”,
which is an ideal platform to deliberate future challenges in fast tracking
economic development. It is expected that this book will be a guiding
stepping stone for managers to explore an adventurous journey in EMA
for a greener world in the pursuit of fast tracked economic development.
A D Nuwan Gunarathne
Ajanee B Ranasinghe
Sanka Peiris
18.06.2014
iv
About the authors
A D Nuwan Gunarathne
MBA, B.Sc., ACMA (SL), CGMA, ACMA (UK), ACIM, Dip in Mkt
Nuwan Gunarathne after years of teaching, consulting, and
research currently serves as a lecturer at the Department of
Accounting, University of Sri Jayewardenepura, Sri Lanka. He
has co-authored and authored many publications in diferent
spheres of management and management accounting. He is
currently engaged in research in environmental/sustainability
management accounting. Nuwan has also presented papers
in Finland, Australia, Sri Lanka and Indonesia.
Ajanee B Ranasinghe
B.Sc. Accounting (Special), CIMA a passed inalist
Ajanee B Ranasinghe is a Lecturer at the Department of
Accounting, University of Sri Jayewardenepura. Prior to
lecturing, she served as a Financial Analyst in a renowned
conglomerate and has gained extensive experience in the
areas of equity and economic research, fund management,
inancial analysis, and investment advisory. Ajanee emerged
the highest scorer in her batch winning three gold medals at
her degree programme.
Sanka Peiris
B.Sc. Accounting (Special), CIMA a passed inalist
Sanka Peiris is a graduate of the Department of Accounting,
University of Sri Jayewardenapura. Sanka currently serves
as a Business Information Reporting Analyst at a foreign
commercial bank. Previously he served as an Investment
Analyst in a local investment bank and gained wide industry
analysis experience in various sectors. Sanka is interested
in academic research in the areas of Sustainability and
Management Accounting.
v
Contents
Chapter 1 Introduction
Chapter 2 Environmental Management Accounting(EMA)
Chapter 3 Environmental Cost Analysis
Chapter 4 EMA Tools & Techniques
Chapter 5 EMA Success Stories
Chapter 6 Framework for the Adoption of EMA
References
1
6
15
24
49
64
71
vi
vii
Chapter
1
Introduction
Consider the following conversation between an author of this booklet
and an accountant of a public listed company.
Author: Do you have any environmental management programs in your
organization?
Accountant: Yes. We have some CSR projects.
Author: Then, what sorts of projects do you have?
Accountant: I’m not sure. I need to check from the CSR division.
Author: What actions do you take to reduce your energy or water bill?
Accountant: We take a lot of actions. Our chief engineer is the best
person to answer that.
This conversation is not atypical of the thinking of many accountants.
Yet, it typiies few important things:
( Many organizations (or accountants) still think that environmental
management programs are CSR projects
( These projects are mostly handled by the CSR, engineering or the
sustainability division in an organization
( Managing energy, water or waste is the responsibility of the engineers
or health and safety oicers
However, the environment has become an important consideration for
businesses as well as for the accountants now more than ever before
in history. It is too important to let the engineers or health and safety
oicers handle it by themselves.
1
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
Demand for better environmental management
There are various reasons that have propelled the importance of the
environment for organizations or accountants. They include, but are not
limited to;
–
–
–
–
–
–
–
–
–
Increasing costs (such as energy, water, materials) that erode the
bottom line of organizations
Natural disasters associated with global warming such as frequent
loods, droughts and hurricanes
Other natural disasters such as tsunamis
Industrial disasters such as BP oil leak, Bhopal gas leak, Chernobyl
disaster and many others
Increasing media coverage and growth of social networking that
difuse news fast
Increasing environmental regulations and associated ines
Customers who are conscious on environmental impacts of businesses
Shareholders who prefer socially responsible investments
Growth of environmental lobbying groups
Owing to these reasons, business organizations have to be more prudent
and seriously consider environmental impact of their activities. This has
challenged the traditional ways in which businesses operated. Yet, if an
organization can manage this environmental challenge efectively it will
be a source for competitive advantage.
Responses of the policy makers
Having realized the importance of preserving the environment in
economic development, many countries around the globe have created
environmental agencies. Given below are few examples.
h
h
h
h
2
Environmental Protection Agency (EPA) in the USA
European Environment Agency (EEA) in European Union
State Environmental Protection Agency in China
Central Environmental Authority (CEA) in Sri Lanka
Chapter 1
Introduction
In addition to these national environmental agencies, there are other
global environmental institutions such as United Nations Environment
Programme (UNEP).
With these initiatives too, the environmental concerns have started to
shape the agenda of business organizations around the globe.
Emergence of EMA
Encouraged and sometimes compelled by the aforementioned reasons
organizations pursue various environmental management practices.
These practices are aimed at;
–
–
–
–
–
Conserving energy, water and other resources
Minimizing solid waste, air and other types of pollutions
Maximizing waste management practices such as reducing, recycling
and reusing
Maximizing the use of environment-friendly materials
Conserving biodiversity and supporting local livelihoods
In order to support these actions, managers have sought the support
of accounting. In this context, a body of practices referred to as
Environmental Management Accounting (EMA) has emerged.
Status quo of EMA
Various researches conducted around the world have revealed that EMA
is fast difusing, particularly in developed countries. Despite the growing
importance of EMA globally, it is still limited in application in developing
or emerging countries including Sri Lanka. There are various reasons
for this low level of difusion of EMA in Sri Lanka and other developing
countries (refer Chapter 2 for more details). Among them, the lack of
managers’ awareness, especially among accountants is signiicant.
3
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
CMA leadership
A long time ago, CMA envisioned the important role it has to play in
shaping the sustainability (accounting) agenda in the local management
accounting profession. It introduced sustainability management
accounting into its syllabus which was launched in 2012, for the irst time
in a curriculum of a local professional accounting body. It was under the
Strategic Level course - Strategic Management Accounting (SMA). In
SMA, CMA introduced a novel section on “accounting for sustainability”
which includes the following areas;
h
h
h
h
h
h
h
h
h
h
Sustainable business and triple bottom line movement
EMA & social accounting (SA)
Accounting for Ecological and Carbon Foot-Printing
ISO 14000 and 26000 standards
Global Reporting Initiative (GRI)
AA1000 Stakeholder Engagement standard
SA 8000 standard
EMA (scope, techniques, applications, drivers and roadblocks)
Sustainability Management Accounting
Sustainability Balanced Scorecard (SBSC )
Moreover, from 2010 CMA has been organizing various seminars,
workshops and conferences on sustainability management/accounting.
These have been highly efective in creating awareness on sustainability
among the local managers.
This booklet “Environmental Management Accounting (EMA) Guidelines
for Sri Lankan Enterprises” is another pioneering efort of CMA to lead the
Sri Lankan industries into greater heights in sustainability management
and accounting.
4
Chapter 1
Introduction
Need for education reforms
The role that can be played by institutions such as CMA, will not be
suicient to drive the entire country into a sustainability agenda in its
development pursuit. The education system of a country can play a
vital role in reaching great heights in sustainability or environmental
management. Thus, the professional and academic education system
should arm future managers with a wider set of skills in the areas of
environment, engineering, science and accounting. This requires a
holistic and trans-disciplinary approach for sustainability education. It
is necessary that accountants learn natural sciences and engineering
while engineers are familiar with accounting and other social sciences. It
should also be noted that education reforms alone will not be a panacea
for all the environmental or sustainability issues we face today or in the
future. But, it will be a catalyst in creating the much needed awareness in
the minds of corporate decision makers and national policy makers.
In this context, management accountants can play a crucial role in
sustainability now and in the future. When performing their key functions,
i.e. planning, decision making, leading, controlling and performance
evaluation, management accountants can embrace (environmental)
sustainability in pursuit of a greener planet and a fairer society.
5
Chapter
2 Environmental Management
Accounting (EMA)
Introduction
EMA is an evolving discipline. It is therefore diicult to ind a universal
boundary or deinition for EMA. However, there are deinitions that are
widely used. Given below is one such deinition of EMA.
EMA is
The identiication, collection, analysis and use of physical information,
on the use, lows and destinies of energy, water and materials
(including wastes) and monetary information on environment-related
costs, earnings and savings for internal decision making.
UNDSD (2001), Burritt et al. (2002)
From the above deinition it is clear that EMA provides information
regarding
−
−
−
−
−
6
Energy
Water
Materials
Waste
Other environmental related costs, savings and revenues
Chapter 2
Environmental Management Accounting (EMA)
Further the deinition indicates that EMA provides two types of
information for internal decision making, i.e.
h
h
Physical information
Monetary information
Accordingly, we can identify two types of EMA systems, physical EMA
(PEMA) and monetary EMA (MEMA) as depicted below.
EMA systems
Physical EMA system
Provides information on
the company’s impact on the
natural environment
[expressed in physical units]
Monetary EMA system
Provides information on the impact
of corporate activities
on economic systems
[expressed in monetary units]
PEMA information entails consumption of resource and will be expressed
in kilograms, liters, cubic meters, joules, etc. MEMA takes place when a
inancial value is assigned to PEMA. MEMA can also arise without any
relation to physical measures such as license fees and environmental
ines.
Just assume that you are going to buy a solar panel system for your
organization as a part of using alternative sources of energy. Before you
purchase the solar panel system, the inancial viability is usually assessed.
It is a good example to understand how EMA takes place both in physical
and monetary terms. Based on the capacity of the panel and various
other factors you can calculate the electricity cost saved due to the
installation of these solar panels. These electricity cost savings in units is
the PEMA. When you want to identify the amount of money saved due
to the panels you will value the units at the existing electricity tarif. The
total cost savings you calculate can be identiied and it is the MEMA.
7
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
Dimensions of EMA information
EMA information provided by these two types of systems may encompass
three dimensions:
Time frame
period being addressed by diferent EMA tools (past,
current or future)
Length of time
frame
duration of the period being addressed by EMA tools
(short term vs. Long term)
Routineness
frequency of information gathering (ad hoc vs.
routine)
Based on these dimensions of EMA information, a comprehensive
framework for EMA has been suggested as follows.
8
Chapter 2
Environmental Management Accounting (EMA)
Comprehensive EMA framework
Environmental management accounting (EMA)
Monetary environmental
management accounting
Routinely generated
information
Long term
focus
Material and
energy low
accounting
Environmental
capital impact
accounting
Ad hoc
information
Environmental Environmentally
cost
induced capital
accounting
expenditure
and revenues
Short term
focus
Routinely generated
information
Future oriented
Long term
focus
Ex post
Environmental
Ex post
Life cycle
assessment
life cycle costing
assessment
inventories
of relevant
Post investment of short term
Post physical
environmental
assessment
environmental environmental
costing
impacts
investment
decisions
appraisal
Monetary
environmental
operational
budgeting
Monetary
environmental
capital
budgeting
Environmental
long term
inancial
planning
Physical
Long term
environmental
physical
budgeting
environmental
planning
Relevant
environmental
costing
Monetary
environmental
investment
appraisal
Environmental
life cycle
budgeting
Relevant
Physical
environmental environmental
impacts
investment
appraisal
Life cycle
analysis
Ad hoc
information
Past oriented
Short term
focus
Physical environmental
management accounting
Source: Burritt et al. (2002)
9
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
When you evaluate the inancial feasibility of the solar panel system
you will calculate the payback period for the system. It is ad hoc future
oriented long term MEMA information. After the installation, on a
daily basis the kilowatts of electricity saved is calculated to identify the
actual savings made from the panels. It is routine, past oriented physical
information for short term decision making.
Practical use of EMA
As you can see from the above framework, EMA encompasses a wide
array of accounting techniques used for internal decision making. Hence,
it is not merely an environmental management tool among others, but
a broad set of principles and approaches that provide information for
the successful implementation of environmental strategies. It acts as
an interface between inward focused management accounting and
environmental management strategies. In essence, it is a support tool
that facilitates environmental management strategies of an organization.
Hence, it includes a wide array of accounting practices such as accounting
for energy, Material Flow Cost Accounting, environmental capital
budgeting, life cycle analysis, etc (refer Chapter 4 for more details).
Day-by-day, new EMA practices are being introduced or existing practices
are being adopted.
10
Chapter 2
Environmental Management Accounting (EMA)
Beneits of EMA
As managers and decision-makers, the irst question that comes to your
mind would be ‘why should I adopt EMA?’ Following are some reasons:
To realize/discover cost savings (at present and in future)
To minimize waste
To generate additional revenue
To comply with regulator requirements
To create a goodwill through improved environmental
performance
To price products accurately
To generate a competitive advantage by being ‘Environmentally
Friendly’
To have access to international markets easily in which environmental
management standards are a prerequisite
EMA will provide information to realize costs savings and minimize waste
in numerous ways such as,
h Housekeeping changes – e.g. continuous accounting on water will
reveal leakages/spills which prompts managerial attention and
actions
h Redesign of processes/products – e.g. Suppose that accounting for
waste reveals that bio waste (e.g. vegetable oil) is simply disposed in
your organization. Probably you can redesign the boilers to use this
oil as an alternative to externally purchased fuel.
h Design of processes/products – e.g. when designing buildings to
make maximum use of natural daylight and wind, EMA will provide
necessary analysis to evaluate diferent options
11
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
Additional revenues can be generated through:
h Attracting green conscious customers to your business
h Sale of waste/by-products – e.g. Some sludge of the sewerage
treatment plant can be sold as fertilizer.
h Transfer of pollution allowances (carbon credit) – Although “pollution
allowances” are not available in Sri Lanka yet, this option is available
internationally, and even Sri Lankan companies can participate.
h Licensing of clean technologies – Companies can devise their own
clean-technologies and have them patented. These can be later
licensed to others to earn revenue.
It is obvious that EMA adds inancial as well as non-inancial beneits.
These beneits can vary depending on the organization, the industry, the
country, legal frame work and many other aspects. Considering this wider
range of beneits the International Federation of Accountants (IFAC) has
developed three categories of beneits as follows.
•
Compliance
Cost-eicient
compliance with:
– environmental
regulation
– self-imposed
environmental
policies
Eco-eiceincy
Simultaneous
reduction of costs
and environmental
impacts:
– eicient use of
energy
– eicient use of
water
– eicient use of
materials
Strategic Position
Strategic value
creation through
EMA:
– Embedding EMA
information in the
organization’s
strategy
(unique to each
organization)
Source: IFAC (2005)
12
Chapter 2
Environmental Management Accounting (EMA)
Challenges posed by EMA
A main reason why most managers shy away from implementing EMA
practices is the unwillingness to meet the challenges in EMA adoption.
As a result, many types of environment-related cost information are not
found in the accounting records and investment decisions are often made
on the basis of incomplete information.
While the challenges of EMA adoption can be numerous and contextspeciic, some of the common ones are:
Lack of proper understanding of EMA
Poor communication between accounting and other divisions (these
are the divisions that collect environmental information)
Diiculties in uncovering environment-related costs “hidden” in
overheads
Diiculties in tracking materials use, low and cost information using
existing systems
Diiculties in accurately estimating environment-related costs and
beneits
These challenges can be overcome by
h Creating awareness on the prospects and importance of EMA
h Establishing proper communication throughout the organization,
especially between accountants, engineers and production managers
h Treating signiicant environmental costs such as energy, water,
waste, etc separately
h Establishing tracking mechanisms that capture environmental costs
adequately
13
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
Hence, by overcoming these challenges the managers will not only pave
way for EMA, but also considerably improve the existing systems of a
company and drive it towards greater proitability.
The inal challenge, the diiculty in accurately estimating environmentalrelated costs is an inherent limitation of EMA. However, as done for most
other inancial estimations, a combination of educated assumptions,
foresight and justiiable forecasts can be used to arrive at a reliable
estimate. The importance lies more on giving attention to environmental
costs and being consistent and sensible in your approach than seeking
for absolutely accurate estimates.
14
Chapter
Environmental
Cost Analysis
3
Introduction
“Cost analysis” is central to management accounting and so is it to EMA.
Environmental cost analysis lays the foundation for the application of EMA
techniques. However, understanding what constitutes environmental
costs can be confusing as it can vary from one entity to another depending
on how an entity intends to use the information and the scale and scope
in which it is used. The ultimate goal of environmental cost analysis is not
to develop a universal cost classiication criterion, but to ensure suicient
attention paid to all signiicant environmental costs.
Frameworks for environmental cost analysis
Due to the ambiguous nature of environmental costs, certain institutes
have proposed models that support entities to understand their
environmental costs by analysing them. This book will focus on two
environmental cost analysis frameworks:
h Framework of the Environmental Protection Agency (EPA)
h Framework of the International Federation of Accountants (IFAC)
15
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
1. Framework by the Environmental Protection Agency (EPA)
Largely adopted by many, the EPA framework for analyzing environmental
costs, initially categorizes costs into two:
h Usual or direct costs, which receive management attention when
making decisions
h Other costs that may be obscured from the management eye
Since there is no ambiguity about costs that are already taken into account
by decision makers the following, the framework by EPA concentrates
on analyzing the second category i.e. the costs that are obscured from
management attention.
Environmental cost classiication by the EPA
Potentially hidden costs
Upfront
Regulatory
Conventional costs
Voluntary
(Beyond compliance)
Back-end
Contingent costs
Image and relationship costs
Source: EPA (1995)
According to this framework, environmental costs are categorized into
three:
h Potentially hidden costs
h Contingent costs
h Image and relationship costs
16
Chapter 3
Environmental Cost Analysis
Potentially hidden costs
Potentially hidden costs
Costs that are hidden from management attention due to being
classiied as overheads/R&D or simply overlooked
There are several types of potentially hidden costs:
h Upfront
h Operational
h Back-end
h Conventional
Cost type
Upfront
Description
Incurred prior to
operation of a
process
Operational
Incurred while
operating a process:
can be mandatory or
voluntary
Back-end
Incurred after the
operation of a
process
Incurred while
operating a process
Conventional*
Examples
Site preparation,
design of eco-friendly
products, costs of
obtaining permits
Mandatory:
Environmental taxes/
fees, mandatory
pollution control and
waste management,
record keeping and
reporting
Voluntary:
Recycling, training
employees on ecofriendly measures,
funds to protect
natural systems
Decommissioning,
disposing inventory,
post-closure care
Material costs, labour
costs, utility costs
* Although conventional costs usually draw management attention in decision making,
even they may be sometimes overlooked in decision making situations. Hence it is given
inside a dotted line in the above environmental cost classiication igure of the EPA.
17
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
These costs can be simply understood by relating to the process’
life-cycle as given below.
Manufacturing phase
Post-manufacturing
phase
Pre-manufacturing
phase
Environmental costs over product/process life-cycle
Operational costs
Upfront costs
Back-end costs
Contingent costs
Contingent costs
Costs that are uncertain, and may or may not incur depending on one
or more future events
Few examples for these costs are costs to comply with possible legal
requirements in the future, costs of possible penalties and remediation
measures and possible legal expenses. Since recognizing such costs
requires futuristic view on environmental considerations, managers may
easily overlook them in the decision making process.
18
Chapter 3
Environmental Cost Analysis
Image and relationship costs
Image and relationship costs
Costs that result in mostly intangible outcomes such as good
corporate image, strong relationships with business partners and
good public perception
Examples for image and relationship costs are costs for community
building activities and applying for award programs. Since the outcomes
are intangible, the underlying costs are often overlooked by managers.
Let’s take a mining company as an example. Under costs that can be
potentially hidden, costs of obtaining licenses and planning for energyeicient mining equipments are upfront costs; periodic environmental
taxes are regulatory costs; landscaping costs, if any, would be voluntary
costs; and costs of restoring the land after the mining is complete are backend costs. Contingent costs of the operation could include compliance
with stringent mining regulations in the future and possible legal and
compensation costs for pollution-related complaints by inhabitants of
the area. Image and relationship costs may include community service
activities and public relations carried out.
Issues in recording environmental costs
There are two practical issues when trying to record environmental costs
in an organization as depicted below.
Issues in recording environmental costs
Scope issue
Environmental costs
Scale issue
19
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
The irst issue in recording environmental costs is the scale issue which is
the level at which the environmental costs are applied/recognized in an
organization. It can be applied to a,
–
–
–
–
–
–
Process
System
Product
Facility
Region
Group
The second issue is the scope issue which is the number of cost categories
included in the analysis and considered for decision making. As per the
EPA, conventional costs are the easiest to measure and consider in
decision making. However, measurement diiculties and ambiguities
gradually increase for hidden costs, followed by contingent costs
and image/relationship costs in that order. An organization can enter
environmental cost analysis at an easy level, and gradually move onto
much diicult areas depending on its capabilities. Ultimately it can even
include the much broader and far vague concept of societal costs (i.e.
environmental externalities) into the decision making process.
2. Classiication by the International Federation of Accountants
(IFAC)
The IFAC has attempted to develop an overview of environmental cost
classiication by indicating bases for cost categorizations. Accordingly,
most environmental cost analysis models, including the EPA framework
discussed above, fall into one of the bases given below.
20
Chapter 3
Environmental Cost Analysis
Environmental cost categorization bases by the IFAC
Type of
environmental
activity
Traditional
accounting
Cost
categorization
bases
e.g. visible vs
hidden
e.g. proactive vs
reactive measures
Data visibility in
accounting
e.g. material costs
vs labor costs
Environmental
domain
e.g. land, water or
air
The IFAC also provides its own classiication of environmental costs by
intigrating some of the above bases. It focucess on the balancing inputs
and outputs of a process to ultimately identify six environmental cost
catagories as shown in the following diagrams.
Balancing inputs and outputs of a process (Mass balance)
Inputs
Outputs
Materials
XX
Finished goods
XX
Merchandise
XX
By-products
XX
Energy
XX
Product output
XX
Water
XX
Total inputs
XX
Waste
XX
Process
Emissions
XX
Non-product output
XX
21
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
Environmental cost categories by the IFAC
Materials costs of
product outputs
Materials costs
of non-product
outputs
Less tangible
costs
Environmental
costs
Waste and
emission control
costs
Research and
development costs
Prevention
and other
environmental
management
costs
( Materials costs of product outputs – Purchase costs of materials that
are converted to inished goods, by-products and packaging
( Materials costs of non-product outputs – Purchase and processing
costs of materials, including energy and water, that become waste
and emissions
( Waste and emission control costs – Costs for controlling, handling,
treating and disposing waste and emissions and costs for remedies
and compensations for damages
( Prevention and other environmental management costs – Costs
for preventing environmental damages such as planning, training,
reporting systems and cleaner production methods
( Research and development costs – R&D related to environmental
issues and improvement
( Less tangible costs – Image and relationship related costs, contingent
costs and externalities
It is obvious that the signiicance of this classiication is that waste and
emissions and preventive and creative actions are separately highlighted,
attracting special management attention to each component.
22
Chapter 3
Environmental Cost Analysis
Practical use of environmental cost analysis
When looking at the variety of models for environmental cost analysis,
particularly the two discussed above, one might wonder which one is
the most appropriate. The truth is, there is no such superior model. The
management of an organization can decide what to use after considering
factors such as the nature of the business, the nature of decisions made,
the availability of information etc. In fact, the same organization may
sometimes prefer to use diferent models for diferent situations. In
addition, as mentioned previously, the management can decide the scale
and scope in which environmental cost analysis is done.
A common issue that may arise when applying a model in practice is
the ambiguity in classiications. Most environment related costs are
complex, and it’s natural to feel doubtful as to whether they are actually
‘environmental’. Health and safety costs and risk management costs are
some examples. These costs are considered “gray zone costs” and are
quite normal to EMA.
Gray zone costs
Costs that are not completely or clearly “environmental” but may be
viewed to have an environmental orientation in part
There’s no need to be disheartened by them. Managers can make a
decision to classify such costs as environmental or not by agreement,
until such time it becomes clear what it actually is. This management
decision may be,
–
–
a case-by-case analysis
a uniform method
(such as “all costs that are above 50% environmental related will be
classiied as environmental costs”)
The decision depends on the management’s intended use of the costs.
Ultimately what matters is whether all signiicant environmental costs
are brought to management attention, and not whether they are
appropriately classiied.
23
Chapter
4 EMA Tools and
Techniques
There are various EMA tools and techniques which are developing dayby-day. Some of them are extensions to or adaptations of conventional
management accounting tools and techniques while others are newly
developed. In terms of sophistication, these tools and techniques range
from simple to advanced. In this chapter, we, however, present few of
them which are more practically applicable for Sri Lankan industries.
These are;
h
h
h
h
h
h
24
Energy and water accounting
Material Flow Cost Accounting (MFCA)
Capital budgeting
Life-cycle costing
Activity Based Costing (ABC)
Sustainable Balanced Scorecard (SBSC)
Chapter 4
EMA Tools and Techniques
1. Energy and water accounting
Energy is a signiicant component of costs for most organizations, but
the attention it receives from the management may not be as signiicant.
The same applies for water. However, keeping close track of energy and
water, both in physical as well as monetary terms, can create value to
an organization. It will also be an initial step towards adopting more
complex EMA tools and techniques.
Energy and water accounting
Speciic measures for identifying, quantifying, valuing, recording and
communicating the usage of energy and water within an organization
How to account for energy and water
There is no uniform method to account for energy and water. The motive
is to identify, record and communicate the information in such a way that
it is well considered in the decision-making process. Following are some
suggestions:
( Insert separate meters for energy and water for each signiicant
process/product/service.
( Develop procedures for regular data collection, measurements and
valuation.
e.g. usage of furnace oil by the boiler per day and the resultant cost
per day
( Create separate accounts for diferent sources of energy in the
accounting information system (designate unique codes for each
fuel type in the chart of accounts if possible)
( Input invoices on energy and water separate from aggregated
overhead and other costs
( Develop reporting practices on energy and water, inclusive of trend
analysis, variances and benchmarking
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Environmental Management Accounting (EMA)
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Beneits in accounting for energy and water
“What gets measured gets managed”
Peter Drucker
The simple act of monitoring/measuring water and energy consumption
in your organization on a routine basis, will help you make connections
you never did before. Knowledge and information is a pre-requisite to
controlling and improving anything, and so it is for the usage of energy
and water. Energy and water accounting supports to:
( Identify processes with high usage and/or wastage in order to
minimize if possible
( Identify instances of abnormal usage and identify reasons and/or
apply remedies
( Identify the key drivers behind energy and water usage
( Decide on strategies to improve energy eiciency and minimize
water usage
( Achieve employee discipline by serving as a control mechanism
( Provide inputs for the adoption of complex EMA tools and
techniques
Some simple energy and water saving ideas:
¾ Carry out an energy or water audit* to identify consumption
patterns and potential for savings
¾ Use energy-eicient lighting
¾ Insulate walls/roofs/boilers
¾ Do routine checks for leakages in pipes/lines carrying water/energy
¾ Train staf on energy and water saving practices such as switchingof lights/air conditioners/computers and closing taps when not in
use
¾ Appoint responsible persons for energy and water saving in each
division/area
¾ Keep a suggestion box to gather employee ideas about new
energy and water saving methods
¾ Devise a program to get the involvement of your suppliers,
customers and other stakeholders in saving energy/water,
whenever possible
*An energy/water audit is an exercise of monitoring the current energy/water consumption
pattern of an organization over a period of 2 – 3 weeks and analyzing the patterns.
26
Chapter 4
EMA Tools and Techniques
2. Material Flow Cost Accounting (MFCA)
ISO 14051: Material Flow Cost Accounting (MFCA) was released in
September 2011. MFCA approach has been developed mainly in Germany
and Japan over the years and is now applied around the world fuelled by
the release of the new ISO standard.
MFCA is
A tool for quantifying the lows and stocks of materials in processes or
production lines in both physical and monetary units
Kokubu & Kitada (2012), Strobel & Redmann (2002)
MFCA is an essential instrument of the new management approach
referred to as the Flow Management. In low management, enterprise
is understood as a system of material lows. Diferent forms of materials
enter this system (even energy is considered as materials as it is often in
a material form, for example coal, oil or gas). The system then generates
desirable output and undesirable residues. These undesirable residues
are undesirable from both environmental and economic view points.
MFCA quantiies material lows and stocks in a process or processes in
terms of both physical and monetary units.
As MFCA methodology is based on the principle of material balance (mass
balance), it is implied the amount of input materials could be consistent
with the sum of desirable and undesirable output. In other words it is
based on the principle that “what comes in must go out - or be stored”.
The following igure illustrates this argument.
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Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
Materials balance in an organization
Raw & auxiliary
materials
Packaging
materials
Air emissions
Merchandise
Operating
materials
Products,
By-products
Water
Waste water
Solid waste,
hazardous waste
Source: IFAC (2005)
In MFCA approach, the non product output is referred to as negative
output also. This mass balance can be presented in the following table.
Mass balance in a typical organization
Materials inputs
Raw and auxiliary materials
Packaging materials
Merchandise
Operating materials*
Water
Energy
Product outputs
Products (including packaging)
By-products (including packaging)
Non-product outputs (waste and
emissions)
Solid waste
Hazardous waste
Waste water
Air emissions
Source: IFAC (2005)
Materials that do not become part of products, e.g. cleaning solvents and chemical catalysts,
are referred to as operating materials.
*
28
Chapter 4
EMA Tools and Techniques
Steps of MFCA
The general procedure of MFCA comprises three steps:
Step 1
Creation of low model
Step 2
Physical quantiication of lows
Step 3
Monetary quantiication of lows
Creation of low model
As the irst step of MFCA a low model is created. A low model displays
the sequence of production with the corresponding material lows and
loss lows of the system under consideration. This low model clariies
where and how much material loss is generated.
Physical quantiication of lows
Once the low model is created, the next step is to determine the
physical units on a quantitative basis. In this stage, waste (material loss)
is recognised as negative product as explained previously.
Monetary quantiication of lows
Based on the physical quantiication of lows, the next step is to cost
the material lows. The costs of a particular process are allocated to the
output material lows of this process. In order to calculate the variable
costs, cost drivers are speciied using an Activity Based Costing approach.
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Environmental Management Accounting (EMA)
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Application of MFCA
Let’s look at the following example to understand the costing principles
underlying MFCA.
A company manufactures a inal product (X) by using one type of raw
materials (A) in its process 1. The following details are relevant for the
process 1 for the month of June.
–
Material inputs - 200 kg
–
Estimated (normal) Waste – 10% of input materials
The actual costs incurred for the month of June:
–
Material cost - Rs. 30,000
–
Processing cost (labour and overheads) Rs. 24,000
Cost of product X and waste in conventional (process) costing
In traditional (process) costing an expected diference between input and
output, is sometimes permissible and is deemed as “an inevitable loss”
or “normal loss”. Even if waste is visible, the cost of that waste is usually
ignored in conventional (process) costing. This amount is automatically
included in the cost of output (inished products). In such a system the
cost per unit is calculated as follows:
Cost per unit
= Total cost / expected output
Where expected output is the diference between input and expected
loss.
Cost per unit of X
= (30,000+24,000)/ 200-10% (200)
= Rs. 300 per kg
Accordingly, the cost of output
The cost of the waste
30
= 300*180
= Rs. 54,000
= Rs. 0
Chapter 4
EMA Tools and Techniques
Cost of product X and waste in MFCA
However, in MFCA, waste is considered to be another product (negative
product). It is allocated costs in the same way as good output.
Cost per unit
= Total cost / total output
Where total output is the sum of the good output and negative output
(waste).
Cost per unit of X
= (30,000+24,000)/ (180+20)
= Rs. 270 per kg
Accordingly, the cost of output
The cost of the waste
= 270*180 = Rs. 48,600
= 270*20 = Rs. 5,400
From the above illustration it is clear that in traditional (process) costing,
the cost of the good output is overstated. This is because the cost of
the waste is absorbed by the good output. Consequently, the waste
is not given any cost and it is not highlighted for the attention of the
management. However in MFCA the cost of the waste is immediately
brought to the attention of the management for the requisite actions.
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Environmental Management Accounting (EMA)
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Beneits of MFCA
The beneits of MFCA can be evident from economic and environmental
perspectives as shown below.
MFCA Beneits
Economic beneits
Environmental beneits
Decisions can be made to reduce the Reduces the consumption of materials
material consumption and improve the and energy and the waste lows going
eiciency of the production process.
out of an organization
Illustration of a practical application
A company that manufactures activated carbon using coconut shells
has three processes, viz., pre-activation, activation and post-activation
as depicted in the next page. In the pre-activation process, the dried and
cleaned coconut shells are irst crushed into smaller pieces. The product
output, i.e., crushed coconut shells, go to the next process while the
non-product output, i.e. water, undersized coconut shells and heat,
go out of the systems. Then in the next process, activation process,
the carbon is activated in a kiln at a very high level of temperature.
The activated carbon (product output) goes to the next process while
moisture and heat (non-product outputs) go out of the system. In the
post-activation process, carbon is processed for diferent kinds of uses
by adding energy and chemicals. For example, if a customer requires
Granular Activated Carbon (GAC), it has to be processed to a sand-like
product with grains bigger than Powdered Activated Carbon (PAC).
If a customer requests impregnated carbon, elements such as silver
and iodine will have to be added. As non-product outputs, undersized
activated carbon and used chemicals go out of the system. The mass
balance can be applied for diferent processes involved (pre-activation,
activation and post-activation) and for diferent items used (coconut
shells, energy, chemicals). For example, it has been identiied that only
one third of coconut shells that enter the system is derived as inished
product while the rest goes out of the system as non-product outputs.
32
Chapter 4
EMA Tools and Techniques
Mass balance for carbon activation process
Cleaned and dried
coconut
shells
Energy
Moisture/
Undersized
coconut shells/
Heat/Tar
Preactivation
Moisture/ Heat
Activation
Energy
Undersized
activated carbon/
Used chemicals
Postactivation Finished
Energy +
Chemicals
product
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Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
3. Capital budgeting
Capital budgeting, which includes the process of planning and making
decisions on a irm’s future capital investments, is a familiar process for
most organizations. Traditional capital budgeting techniques typically
compare the inancial costs of an investment against the inancial
beneits. Following are some common examples of capital budgeting
techniques:
h
h
h
h
Net Present Value (NPV)
Payback period/ Discounted payback period
Internal Rate of Return (IRR)/ Modiied IRR (MIRR)
Proitability Index (PI)
However, most managers fail to account for environmental considerations
when calculating costs and beneits as input for these techniques.
Environmental capital budgeting
The process of capital budgeting in which, potentially hidden,
contingent and image-related costs and beneits are considered.
Steps of environmental capital budgeting
To incorporate environmental costs and beneits, the following steps can
be followed:
Step 1
Identifying the environmental impacts of the investment
Step 2
Physical quantiication of the impacts
Step 3
Monetary quantiication of the impacts
Step 4
34
Incorporating monetary quantiications to the usual
calculations under capital budgeting
Chapter 4
EMA Tools and Techniques
Step 1
Identifying the environmental impacts of the
investment (both positive and negative)
Since many environmental costs and beneits accrue in the long-term, it is
advisable to select a considerably long time-horizon to identify most of the
environmental costs and beneits of the projects. If organizations already
have established environmental information systems or procedures (E.g.
accounting for energy, water, waste, etc), the identiication of potential
costs and beneits would require less efort.
Some simple energy and water saving ideas:
¾ High material yield
¾ Low energy use
¾ Low waste to be treated/managed
¾ Lower cleaning costs
¾ Savings on potential penalty costs
¾ Savings on potential environmental damage restoration
¾ Savings from sale of scrap/waste/by products
¾ Contribution to company/brand image
Steps 2&3 Physical and monetary quantiication of the impacts
While physical and monetary quantiication is easily applicable for many
environmental costs and beneits (e.g. Value of energy saved, cost
of restoring damaged sites), it may be diicult for some others (e.g.
Improvements to the image). This diiculty in quantifying is explained in
detail in Chapter 3. For capital budgeting purposes, the costs and beneits
that are diicult to quantify can be qualitatively analyzed and reported.
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Environmental Management Accounting (EMA)
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Step 4
Incorporating monetary quantiications to the usual
calculations under capital budgeting
When selecting capital budgeting techniques, it is desirable to use
techniques that consider time-value-of-money, (such as NPV or IRR)
because of the longer time periods involved. The quantiied environmental
costs and beneits should be incorporated into the normal incremental
cash lows of the project. The resultant igures/ratios can then be
interpreted and reported to the management along with an analysis on
non-quantiiable items.
Beneits of capital budgeting with an environmental orientation
The beneits of environmental capital budgeting can be evident from
economic and environmental perspectives.
Environmental capital budgeting
36
Financing beneits
Decision beneits
Operational beneits
Faster, easier
approvals of capital
investment plans due
to increased trust
by fund providers,
regulators and host
communities
More informed
decision making
(i.e. full costs and
beneits considered)
compared to
traditional capital
budgeting
Management
attention given to
potential operational
cost savings and
revenues from
environmental
initiatives in longterm plans
Chapter 4
EMA Tools and Techniques
4. Life-cycle costing
Life-cycle costing is a costing technique used in the design phase of
a product/process to identify the cost over its entire lifetime. Hence,
in life-cycle costing up-front, operational and back-end costs will be
considered. This includes capital costs, installation costs, operating costs,
maintenance costs, and disposal costs discounted over the lifetime of a
product/process.
Mere life-cycle costing will not by itself lead to improved environmental
performance. For that, an environmental focus is required. The same
process can be used for identifying environmental costs attached to a
product/process.
Environmental life-cycle costing
A systematic process for evaluating the life-cycle costs of a cost object
(product, product line, process, system, or facility) by identifying
environmental consequences and assigning measures of monetary
value to those consequences
Incorporation of environmental costs/beneits in life-cycle costing can be
done in two ways:
Environmental life-cycle costing
Considering environmental costs/
beneits as part of the total lifecycle costs
Considering environmental costs/
beneits over the life-cycle in
isolation
Considering environmental costs/
beneits over the life-cycle in
isolation
Incremental value creation/
destruction
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Environmental Management Accounting (EMA)
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Steps of environmental life-cycle costing
Environmental life-cycle costing is conducted in three main stages as
shown in the following diagram. This can be considered as a repetitive
cycle as well.
Step 1
Life-cycle inventory
(data collection)
Step 3
Step 2
Improvement analysis
(company response)
Impact assessment
(environmental evaluation)
Step 1
Life-cycle inventory
In this stage, the product/process is reviewed to identify and describe
resources, emissions, discharges and disposals throughout its life.
The life of the product will typically include raw material acquisition,
manufacturing, distribution, use/reuse/maintenance and disposal/waste
management. The concept of mass balance can be used to identify the
inputs and outputs.
Step 2
Impact assessment
Once the data is collected, the environmental impacts can be assessed.
For this, a matrix with quantitative values or qualitative descriptions can
be used. Below is an example of such a matrix:
38
Chapter 4
EMA Tools and Techniques
Environmental imapact matrix
Disposal
Utilization
Distribution
(including
packaging)
Production
Product life-cycle
Pre
production
Environmental
ields
Waste relevance
Soil pollution and
degradation
Water
contamination
Air contamination
Noise
Consumption of
energy
Consumption of
natural resources
Efects on echo
systems
Source: Gray et al. (1993)
When conducting this assessment, you will notice that the life cycles
of other products may also be linked to your product. For example, in
printing a book, the ink is a material which has its own life-cycle and in
the ink’s life-cycle, certain dyes and chemicals will be raw material which
will have their own life-cycles as well. Hence, you will have to decide the
boundaries based on materiality and signiicance before conducting the
impact analysis.
39
Environmental Management Accounting (EMA)
Guidelines for Sri Lankan Enterprises
In addition, the environmental impacts can be deined at diferent scopes
such as private costs and societal costs (refer Chapter 3 for details). You
will have to decide the scope you want to apply based on feasibility and
relevance.
Step 3
Improvement analysis
Life-cycle cost assessment can then be used to evaluate options for
reducing total life-cycle costs and optimizing the use of resources. Some
examples for possible improvements are:
h
h
h
h
h
h
Reducing raw material usage
Increasing energy eiciency
Reducing emissions and waste
Less packaging
Recycling and waste management options
Cleaner production technologies
Beneits of environmental life-cycle costing
Beneits of life-cycle costing would be of two folds:
Environmental life-cycle costing beneits
Planning beneits
By considering the environmental
costs and beneits over the complete
life-cycle, potential improvements can
be identiied and implemented in the
product/process design stage itself
40
Funding beneits
Approvals of capital investment
plans will be faster and easier due
to increased trust by fund providers,
regulators and host communities
Chapter 4
EMA Tools and Techniques
5. Activity Based Costing (ABC)
Traditionally, assignment of overhead costs to diferent objects (such as
products and processes) of a company was conducted based on a uniform
overhead allocation rate system which is known as traditional absorption
costing. Overtime, with the changes of business environment, absorption
costing was considered too arbitrary, and received much criticism. In this
regard, Activity Based Costing (ABC) has emerged as a better mechanism
to relate overhead costs to cost objects based on a clear cause-efect
relationship. This is achieved by pooling costs into diferent activities and
allocating them according to the use of those activities by diferent cost
objects.
However, environmental costs have continued to remain or hidden in a
general overhead cost pool in most instances without being allocated
based on a cause-efect relationship. If the environmental cost component
is signiicant, this may lead to improper cost allocation where one product
may bear costs greater than warranted, while another less than its actual
contribution. The ultimate result of this misallocation would be:
–
–
Poor product pricing, which can afect turnover and proitability
Poor cost information, which can lead to inaccurate decision making
If environmental costs are pulled out of overhead and allocated only to
product/products that trigger these costs using appropriate cost drivers,
these issues would be minimized.
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Environmental Management Accounting (EMA)
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Steps of ABC
The process of ABC can be conducted in ive steps:
Identify cost objects/products
Identify signiicant activities the objects pass through
Identify total resources/expenses incurred
Pool total expenses to identiied activities using identiied resource
drivers
Allocate activity costs to cost objects using identiied activity
drivers
Application of ABC for environmental costs
The allocation of environmental costs using ABC principles can be
demonstrated through a simple example.
Let us assume that an entity engaged in manufacturing garment products
produces two types of garments.
Garment A: No dye inish required
Garment B: Color-dyeing required
The entity has the following costs under its general overhead pool:
Building rent
Head-oice administration
Audit fees
Disposal of chemicals
42
Chapter 4
EMA Tools and Techniques
Under traditional overhead costing, all these costs would be pooled
together and allocated to Garments A and B as follows:
Building rent
H/O admin.
Chemical
disposal
Audit fees
Overhead
Direct labor
& material for
Garment A
Garment A
Garment B
Direct labor
& material for
Garment B
However, if the chemical waste is created only from the color dyeing
process, the chemical disposal cost would arise only for activities relating
to Garment B. Hence this improper cost allocation has overestimated the
cost of Garment A and underestimated the cost of Garment B. Using ABC,
the environmental costs can be segregated and applied to the relevant
cost category as follows:
Building rent
H/O admin.
Cutting
Direct labor
& material for
Garment A
Stitching
Garment A
Chemical
disposal
Audit fees
Garment B
Dyeing
Direct labor
& material for
Garment B
It is clear that by using ABC, the cost allocation becomes more relevant
and accurate.
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Environmental Management Accounting (EMA)
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Beneits of ABC for environmental costs
The issues with traditional costing highlighted previously can be overcome
by applying ABC to the costing of products.
ABC beneits
44
Pricing beneits
Operational beneits
Since only relevant costs are
considered in costing products, the
pricing will be more realistic
Since environmental costs are
highlighted, managers will be
motivated to ind creative alternatives
that lower environmental costs and
enhance proitability
Chapter 4
EMA Tools and Techniques
6. Sustainability Balanced Scorecard
The Balanced Score Card (BSC) provides a lexible approach to address
many of the sustainability issues of an organization. As per the original
work of Kaplan and Norton (1992), BSC encompasses four perspectives,
namely, inancial, customer, internal business and learning and growth.
It is argued that these four perspectives should only act as a template
which facilitates necessary adjustments. Taking this view, BSC has been
suggested as an efective tool to incorporate economic, social and
environmental dimensions which led to the development of Sustainability
BSC (SBSC).
Sustainability Balanced Scorecard
¾ integrates the three pillars of sustainability into the mainstream
strategic management process
¾ makes possible to take into account non-monetary strategic success
factors that signiicantly impact the economic success of a business
¾ improves social and environmental accountability by explicitly
including performance metrics
How to prepare a SBSC?
There are three ways to integrate environmental (and social aspects) into
a conventional BSC to make it a SBSC.
Integration of environmental (and social) aspects to the existing four
standard perspectives.
ii. Addition of a ifth perspective to consider environmental (and social)
aspects.
iii. Formulation of a speciic environmental (and/or social) scorecard.
i.
45
Environmental Management Accounting (EMA)
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i) Integration of environmental (and social) aspects to the
existing four standard perspectives
Under this approach it is necessary to integrate environmental and social
aspects to the four perspectives through respective strategic themes,
namely economic, environmental and social. The following diagram
demonstrates this integration.
Integrated environmental (and social) aspects to the existing BSC
Financial
perspective
Customer/
stakeholder
perspective
Internal
business
processes
perspective
Learning &
growth
perspective
Economic
Social
Strategic themes (Triple bottom line)
46
Environmental
Chapter 4
EMA Tools and Techniques
ii) Addition of a ith perspective to the existing four standard
perspectives
Under this approach, a ifth perspective, called non-market perspective is
added to the existing BSC to integrate environmental and social aspects
as shown below.
Fifth dimension to the existing BSC
Non-market
(environmental and
social) perspective
Financial
perspective
Customer/
stakeholder
perspective
Strategy
Internal business
perspective
Learning and growth
perspective
Note:
The non-market perspective does not incorporate all sustainability oriented
objectives and indicators of the business, but only non-market issues that
cannot be covered in the conventional perspectives.
47
Environmental Management Accounting (EMA)
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iii) Formulation of a speciic environmental (and/or social)
scorecard
Under the third approach, an environmental (and/or social) scorecard
can be developed separately. However, it should be noted that the new
environmental (or social) scorecard cannot be developed in parallel to
the conventional scorecard. Hence, it should be an extension to the two
approaches discussed previously and not an independent alternative for
integration.
Conclusion
The chapter described few, yet, important EMA techniques and tools.
If an organization is already using some of them you can modify those
to incorporate environmental considerations. If not, you can gradually
start adopting them. As the information provided by these tools and
techniques are used for internal reporting you can be explorative or
even adventurous in your approach. With your own leanings and insights
and with the developments in the ield, you can perhaps develop your
management accounting information system over time. What is essential
is the irst step in your long journey of EMA.
48
Chapter
5
EMA Success Stories
The purpose of this chapter is to demonstrate how some organizations
in Sri Lanka adopt and successfully sustain various environmental
management practices while supporting EMA.
Cleaning up the unwanted costs: Successful waste
management by a hotel
The Case Hotel (referred to as the Hotel in Negombo) belongs to a
prestigious hospitality group in Sri Lanka and is considered one of the
pioneers of sustainable tourism in the country. The group commenced
operations 40 years back in Negombo, an area known to be a key tourist
hot spot in Sri Lanka. The hotel was awarded the 5-star certiicate in 2012.
Environmental practices
The Hotel in Negombo employs a “Naturalist” who is responsible for
the areas of waste and water management. The hotel follows the waste
management hierarchy (i.e. waste reduction, waste re-use, waste recycle
and waste disposal) in managing its waste.
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Environmental Management Accounting (EMA)
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“Water
management
initiatives
focus
on both
engineering
and
behavioral
aspects”
As the most desirable form of waste management,
waste reduction, is an important practice that allows
hoteliers to avoid waste at source. In managing the
supply chain the hotel gives priority for the suppliers
who follow sustainable practices, especially suppliers
who avoid secondary covers and excess packaging of the
goods. In addition, the hotel displays notices at receiving
bay notifying a strict principle on usage of polythene
when supplying raw materials. To support this, the
staf has been given plastic crates to bring vegetables
and other supplies from the market. The hotel reduces
the use of plastic bottles (non-degradable material)
with the installation of the bottle puriication and reilling plant. Moreover, the hotel uses wooden display
boards, wooden cocktail stirs in order to avoid plastic
straws as much as possible. As a green building practice,
environmental friendly, easily degradable clay tiles have
also been used instead of ceramic tiles after considering
life cycle efects of the usage.
Waste reduction is witnessed in managing water as well. These water
reduction practices can be identiied as engineering and behavioral
practices. The engineering practices represent the technical aspects
used for reduction of water consumption and include the use of lowlush
ittings, dual lush in cisterns, low lush shower heads, faucet
aerators and dip rinsing technique for cleaning dishes. Behavioral
practices represent the actions aimed at changing the behavior of
employees and guests and include awareness and training programs.
In changing the employee behavior, the hotel conducts programs that
are aimed at highlighting the importance of sustainable use of water by
educating them of the basics of eicient water use, water puriication,
costs of water service and importance of water conservation. The water
savings from various initiatives are rewarded back to staf welfare fund.
In an attempt to get the support of the guests for water conservation,
the hotel exhibits displays and quotes in diferent places such as tissue
paper dispensers, bathrooms and rooms. The behavioral changes have
contributed signiicantly towards water savings without any signiicant
investment. Moreover, the hotel uses a Green Directory2 as a powerful
2
50
A book that contains various environmental information of the hotel
Chapter 5
EMA Success Stories
tool that conveys the sustainable practices of the hotel to guests to
receive acceptance.
Waste re-use is also an integral policy in waste management of the hotel.
Hence, as the irst step for efective waste re-use, the hotel categorizes
the waste. The hotel generates diferent types of waste, namely, solid
waste, wet waste, hazardous waste and liquid and oil waste. Considering
the above material types, solid waste is further categorized and
separately collected as glass, metal, paper and plastic in a small store
room, named “Resource Center”. 50% of the wet waste is reused by a
local piggery farmer for which, the hotel does not have any disposal
cost. Oil waste is reused by selling to small vendors who manufacture
detergent- powder-related products. Other solid waste such as metal
and wood has been used to create ornaments and decorations for the
hotel. The hotel has established two Sewerage Treatment Plants based
on Aerobic and Anaerobic methods. The recycled water from the plants
is re-used for gardening. In addition, the hotel has installed rain collectors
in each building that is re-used for hotel’s pond as a means of rain water
harvesting.
Waste recycling is an option for waste which is not re-usable. The hotel
has set-up a compost producing machine, which recycles 50% of the
wet waste. The compost generated by this machine is used for the
hotel’s organic and general gardening. Moreover, the compost is being
distributed among schools and other charities as a CSR project.
The hotel chooses to dispose waste only if there is no other way to reuse
or recycle. Hazardous and toxic substances are properly disposed taking
health and environmental aspects into consideration. The housekeeping
department of the hotel has to obtain the MSDS certiicate (Material Data
Safety Sheet) for chemical waste disposal. Waste water is disposed only
if it is hazardous and cannot be used after any treatment. The disposal of
hazardous toxic waste water is carried out through the municipal council.
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Environmental Management Accounting (EMA)
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Supportive accounting practices
“Engineering
division plays
a major role in
the EMA
system with
the help of the
Naturalist”
In order to support these practices the hotel has
a sound EMA system in place. The EMA system of
the hotel collects and measures water and waste
data (both monetary and physical) and calculates
integrated performance measures for reporting.
The physical information includes carbon foot print,
water units for each of the department, number of
waste bins issued for piggery farmers, number of wet
waste bins issued for compost machines, kilograms of
e-waste, kilograms of waste paper, kilograms of glass
waste, etc. The monetary information includes the
income from waste sold, monthly water bill, chemicals
and operating costs of composting machine and
sewerage treatment plants. Some of the integrated
measures include monthly water consumption per
occupied room, monthly water consumption per
guest, percentage of waste recycled and percentage
of annual linen discarded. Engineering division plays
a major role in the EMA system with the help of the
Naturalist. In addition, the Naturalist is responsible for
waste related data.
Environment related projects such as compost machine and solar panel
systems that involve considerable capital expenditure are evaluated
based on pay-back period. The engineering team is predominantly
involved in identifying costs and incomes of new projects due to technical
sophistication. However, the accountant takes part in attributing inancial
values together with the engineer.
The hotel conducts three main sustainability meetings. These meetings
are daily morning meetings, monthly green directory meetings and
engineers’ meetings. These meetings provide and shape the reporting
frequency and the structure of environmental information.
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he way forward
Voluntary certiications such as ISO14001 and establishments of posts
such as Naturalist/Environmentalist airm the holistic implementation
of waste management in the hotel. However, these practices face
many challenges. Main sources of solid waste and waste water are
attributable to guests and employees. In this situation convincing the
guests is challenging where some guests do not respond to the concept
of sustainability. Although employees are aware of the practices, they
tend to neglect under less supervision. However, with the continuous
commitment of top level management and the support of internal and
external stakeholders, the hotel in Negombo is showcasing its passion
for environmental conservation.
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Environmental Management Accounting (EMA)
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Information is the key: Environmental management
triggered through information low in a printing
company
This printing company was founded in 1979, as a company engaged in
adding value to tea products by shipping tea in a pre-packaged form. Later,
the company diversiied into printing areas such as cartons and labels,
tea bags, tags, prepaid phone cards and other digital media services.
Currently the printing company serves customers in all ive continents.
Few of its major customers are MAS Holdings, Tesco, McDonald’s and
Marks and Spencer.
Environmental practices
“he
company
believes that
the work
force is the
key to waste
management”
54
Environmental management is at the forefront of the
company and is relected in its top down management
approach,
performance
evaluation
system,
comprehensive information system, continuous
awareness programs, and involvement of green teams.
The company follows a top down approach to
implement sustainability practices in the organization.
The sustainability committee, with representatives
from each section of the company and headed by
the managing director, is involved in improving the
sustainability performance. Further, they ensure that
‘continuous monitoring and evaluation’ is part of their
sustainability targets. Another strategy followed by
the company to sustain environmental management
practices is to link its performance evaluation system
to production waste. e.g. the engineering team has to
make sure that the machine break down is below 2% of
its running hours.
Chapter 5
EMA Success Stories
The sophisticated information system of the company also plays a key
role in sustaining these practices. Following are some examples to this
end:
–
–
–
The ERP system of the company is the main information system that
assists the waste management initiative. It automatically calculates
the waste percentages to each order and this percentage will be
used as a key performance indicator for the production section of the
company.
During the year 2013, the company has implemented a paperless
ordering system, in which purchase orders are generated automatically
and emailed to suppliers. This paperless ordering system has saved a
signiicant amount of paper usage at the oice premises.
The company monitors the usage of water by auditing all the processes
that use water. Separate meter readings are done for water.
Following the company’s belief that the work force is the key to waste
management, it ensures that they posses required skills andknowledge
to perform activities. Environmental Audits are performed to keep
employees vigilant. The incentive policies are managed so that the
employees will be awarded on the basis of their environmental
performance. Moreover, employees are nurtured to be environmentally
friendly leaders.
Another major trigger point of the company is the
forming of a “Green Team” which is responsible for
operating ISO 14001 requirements, generating new
innovative ideas to manage waste and discussing the
progress of environment related activities. The team
meets periodically to discuss the upcoming issues in
terms of environmental impact. An incentive scheme
is in place to recognize new ideas; in 2012, a group
of employees were awarded for the idea of a new
heating system.
“Information
needed for
valuing waste is
generated
through the
ERP system ”
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Environmental Management Accounting (EMA)
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Supportive accounting practices
As explained earlier, the company pays signiicant attention to cost
saving by focusing on adopting a comprehensive waste management
system through reducing, reusing and recycling of waste. The company’s
information systems keep records of various types of waste materials
which are generated within the company. These waste streams are
separately measured with the help of an EMA system.
Further, the company clearly identiies diferent types of waste streams
generated and there is a well-deined management process in place for
these wastes. Some waste types are: paper and cardboards (4% sold for
reuse, 96% recycled), polythene, plastic, used ofset plates and scrap iron
(recycled), shredded boards and contaminated cotton waste (discarded),
paper cores, golf foil and waste oil (sold for reuse), iron barrels, tins, used
blankets, wooden pallets, hardboard, scrap machine plastic pallets (sold
for reuse).
The company also keeps record of the costs incurred for waste
management activities, further demonstrating the use of monetary
EMA information. For instance, it has incurred a total of Rs.2,262,060
for protecting the environment in the inancial year 2013 out of which
Rs.1,521,089 was for upgrading the new treatment plant. The company’s
accounting for waste thus relects monetary and physical EMA systems
as accounts are kept in both inancial and physical terms.
In addition, the company’s ERP system calculates the average waste
expected based on historical trends. Extra material is decided based
onnthis average waste rate. Thereafter, it is the duty of the factory
manager to ensure that this waste is not exceeded. If the order was
performed below waste levels for ive consecutive instances, then the
average waste rate is reduced with an aim of reducing more waste. All
these waste management initiatives are enabled by the company’s EMA
practices that include accounting for material, energy, water, oil, waste
etc.
The Sustainability Report published by the company is a reporting
mechanism that takes into account environmental, social and economic
impacts of the company.
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Chapter 5
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he way forward
The printing company has successfully incorporated Environmental
Management through mechanisms such as ISO14001 and Green Teams.
Top management involvement and the sustainability embedded
strategies are signals of continuing success. Implementation of an ERP
system and automated data related to waste has assisted physical and
monetary accounting of environmental activities. The EMA system not
only provides physical and monitory information, but also links rewards
to performance and supports environmental reporting. Nevertheless,
better cost classiication, consideration of a wide array of investment
appraisal techniques for Environment capital decisions and sophisticated
cost accounting tools such as ABC and carbon footprint accounting could
further enhance the EMA system.
Spotlessly proitable: Cleaner Production(CP) approach
to environmental management by a news paper printer
The News Paper Company, which was established in 1979, currently
publishes six news papers, ive weekly papers and ive magazines
claiming over 70% of the market share. The factory is one of the two
factories available for the country’s market leader in news papers. The
factory under discussion accounts for 80% of the News Paper Company’s
demand and is located in a residential area. Apart from several news
paper industry awards, company has secured National Cleaner Production
Award in many occasions including numerous other productivity and
waste management awards continuously.
Environmental practices and related accounting practices
The factory practices Environmental Management through a Cleaner
Production approach. The main elements in this regard are 3R concept,
5S concept, Kaizen, Quality Circles and Root Cause analysis. A major
focus has been given to waste reduction strategies and most of them
are triggered by employees under Quality Circles. Quality Circles are
equipped with well trained personnel, and include brainstorming
sessions, awareness programs and intensive training. As a result of these
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Environmental Management Accounting (EMA)
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“Sub metering
system for
water provides
information for
input-output
balance”
strategies, the factory has reduced the waste rate
to 3% while the industry average is at 4.5-5%. Physical
accounting comes into play when measuring and
keeping records of resource usage and waste.
Monetary accounting is also considered an integral
part as a means of attributing value to waste, a base
concept in CP. All initiatives are hence evaluated
based on the inancial savings they derive. In 2012,
the factory has saved Rs.38.5 mn and 76.2% of that
amount is directly attributable to CP eforts.
Few of the initiatives and strategies implemented under the Cleaner
Production concept are discussed henceforth.
– The company focused on the largest component of waste, the
“newsprint” which is the main raw material in the production process.
Through Quality Circles, they established a target to reduce the
Newsprint waste by 10%. Accordingly, through the brainstorm activity
various suggestions were proposed and ultimately implemented,
namely notifying the factory staf to be mindful when handling the
material in the process and displaying notices, reducing the amount of
operator faults in machine handling, providing training to the factory
staf to improve their skills and capabilities and so on. Ultimately the
factory was able to achieve a saving with regard to material news
print reel butts amounting to Rs.6,578,628.
– Company experienced savings from “Computer to Plate dimension”
by requesting customized CTP of 720 x 576mm from suppliers instead
of the standard CTP which comes in the size of 750 x 576mm. This has
reduced the CTP material consumption by 11% in 2012.
– Another successful efort was to introduce a CTP baking machine that
makes a CTP cable of printing 300,000-500,000 news paper copies
after baking compared to 100,000-125,000 copies from a non-baked
CTP. This efort resulted in a 29% saving in material cost of CTP.
– Moreover, after some studies, the company reduced the diameter
of the reel butt to 130mm from the global standard of 140mm.
This resulted in saving in white paper whereas under the previous
condition, 30 to 35 copies of good news papers are lost from each
paper reel. In addition, company has replaced the ink spray guns with
ink injectors which have reduced the ink waste as well as damage to
nearby machines.
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–
Further, the management of the Printing Plant has instructed the
operators to remove the damage paper from the paper reel manually
without using the damage removal machine and limit it to a maximum
of one or two rounds from one reel. Management conducted training
programs to introduce minor strategies to improve the efectiveness
and eiciency, such as training fork lift drivers to eliminate the
damages caused to the paper reel when unloading from the container
and reilling the container with newspapers. Competitions are
organized between two shifts of the staf to encourage continuous
improvement in eicient material usage. These strategies too,
resulted in a signiicant quantity of material savings with less technical
and inancial investments.
In the area of water management, company aims
to reduce the water consumption from national
water supply by fulilling 43% of the requirement
using tube well. Sub meter system has been ixed
to accurately measure the water usage of each
activity which in turn could be used to balance the
water input and output and identify any deviation.
In addition, the printing plant established a water
treatment plant to purify the contaminated water
of the printing process. With this plant, the company
was able to purify 120 cubic meters of water, which
is valued at Rs.88,800 in 2012. This water is reused
in gardens, washing and cleaning activities. Other
initiatives aimed at water management are water
control system for urinals (1,616 cubic meters of
water saved valued at Rs.121, 217 in 2012), collecting
air condition condensing water for gardening and
washing vehicles (265 cubic meters of waste water
per year), replacing ball valve showers with conceal
valve showers in rest rooms (127 cubic meters of
water saved valued at Rs.9,112 in 2012),
“Buildings
are designed
to maximize
natural
ventilation and
lighting”
As a reduction strategy in the area of energy, a large amount of electricity
is being saved as it uses natural lights during day time. Moreover, the
printing facility also uses natural ventilation within the premises.
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Environmental Management Accounting (EMA)
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he way forward
Whilst the company has secured tangible improvements in the area of
Environment management through CP approach and being accredited
as a ISO14001 company, going forward, it could focus on energy
management through ISO50001 standard. Moreover, carbon foot print
could also be measured and the company can incorporate carbon foot
print related targets as well.
hey’re cool, they’re hot, and they’re economical:
Successful energy management by a hotel
The green hotel presented here is a spa resort of distinctive elegance,
designed by a renowned architect in the west coast of the country. The
hotel envisioned a greener future and sustainable tourism, long time
back. Being a preferred tourist destination for most of the nature lovers
who visit Sri Lanka, the hotel has earned a prestigious name for its best
environmental management practices.
Environmental practices
Environmental practices adopted by the hotel could be mainly looked at
from diferent aspects such as ventilation and air conditioning operations,
lighting, catering and use of alternative energy sources.
Ventilation and air conditioning is important to the hotel as 53% of the
hotel’s electricity bill is accounted by air conditioning. Hence numerous
strategies aimed at reducing the electricity consumption have been
implemented by the hotel. Conventional air conditioning process has
been replaced with a “Chilled Water System” that drastically reduces the
electricity usage albeit the comparatively high initial capital. Moreover,
“Intelligent Thermostats” have been connected to every room’s
motion sensor which detects the room occupancy and activates an
“occupied temperature” or an “unoccupied temperature”. The occupied
temperature would be activated with the sense of occupancy i.e. the
temperature preferred by the guest. When the room is unoccupied, the
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Chapter 5
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unoccupied temperature would be activated which the suitable humidity
and air quality set by the property management. Though the resulting
reduction in energy consumption using such a system is not immediate,
it is signiicant. Wooden blinds in guest rooms also aims at preserving
the cool atmosphere in the room which would lessen the need for high
air-conditioning. The rooms are designed to allow maximum natural
ventilation as much as possible to further lessen the need of high airconditioning. Guests are being educated through the Green Directory to
keep the windows and external doors closed as much as possible when
air-conditioning is on.
Environmental Management initiatives for lighting
are also inevitably important since customer
comfort, satisfaction and health and safety of
stakeholders need to be preserved while achieving
eiciencies. 90% of standard light bulbs have been
replaced with LEDs, which use up to 80% less
energy and provides approximately 50,000 hours
of use. Occupancy sensors installed in every room,
gymnasium, storerooms, oices, washrooms,
corridors and service areas ensure lights only operate
when there is occupancy. A ‘Switch of’ policy on
lighting is promoted, so that only lighting that is
being used, is left on. For this, the hotel raises staf
awareness by placing stickers above light switches
and posters in staf areas. Lights in unoccupied areas
are switched of, without compromising health
and safety implications particularly in corridors and
stairwells. As part of the policy, light switches have
been labeled in a color code system and a card-key
system which guides the user to select only those
lights required and the time frame which they should
be switched on.
“Energy data
are collected
daily and
compiled
monthly
for each
activity and
department”
Catering is also carefully undertaken to maximize energy eiciency. A
meter system has been ixed in the freezer doors, which captures and
records the number of times and the duration of the freezers opened and
closed. To minimize the number of times the freezer door is opened, the
hotel has formed a freezer door opening schedule and had reduced the
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Environmental Management Accounting (EMA)
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wastage of electricity. Extensive staf training is carried out for kitchen
staf in order to raise awareness on eicient energy consumption for
kitchen appliances that consume signiicant amount of electricity. Some
examples for energy-eicient handling include equipment labeling with
minimum warm up times, usage of correctly sized equipment and switch
of unnecessary kitchen equipment and lights etc.
In addition to the above mentioned aspects, the hotel uses alternative
energy sources such as solar power, wind power and bio-gas. The hotel
is equipped with 36 solar panels which generate approximately 20kw
per day. The power generated by the solar panels is used for guest room
lighting and boiling water, and nearly 15,000 liters of water is boiled per
day in this way. The hotel’s solar power generation is measured on a daily
basis and is continuously monitored by the Chief Engineer.
During 2011, the hotel initiated electricity generation through two wind
power turbines and generated electricity that was suicient to fulill
the lighting requirement of the garden. However, due to maintenance
issues, the wind turbines were removed in 2012. The hotel commenced
a Sewerage Treatment Plant (STP) in 1996 which was improved
subsequently by the addition of a bio-gas production unit. Currently the
cookery functions in the staf canteen are entirely powered by the biogas produced in the STP.
Supportive accounting practices
The engineering and maintenance department of the hotel is responsible
for planning, implementing, controlling and reporting energy
conservation and green practices. Hence, despite the presence of an
accounting department, the engineering and maintenance department
headed by the Chief Engineer takes initiative in the reporting aspect of
energy and green practices due to technical expertise required.
Physical accounting data being maintained include: energy consumption
both daily and monthly for each activity and department; and meter
readings relevant to energy sources such as electricity from the main
grid, solar power, wind power, bio-gas and L.P gas.
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The results and variances of the data collected are discussed and analyzed
during the engineering meetings. Subsequent to discussion on the energy
consumption rates, the total amount of carbon emission is calculated and
ultimately the total carbon footprint is calculated based on activities. In
addition, the engineering team does the appraisal relevant to new energyrelated capital investments considering costs and potential beneits in
terms of energy savings. Due to the practical diiculties, the involvement
of the accounting department for the accounting aspect of energy
practices is comparatively limited. However, the cost incurred for energy
conservation projects are recorded by the accounting department and it
is the responsibility of the engineering and maintenance department to
ensure the efectiveness of the projects.
he way forward
The Hotel’s strategies to manage energy over time, have beneitted
it in inancial terms, reputation as well as carbon foot print reduction.
However, these initiatives are within the control of the engineering
team; the record keeping, accounting, reporting and decision making in
this area depend on engineers rather than accountants due to technical
component involved.
Going forward further improvements could be achieved through
encouraging voluntary guest involvement since rooms account for major
part of the total area of hotels and resultantly energy consumption.
Then guests can be given full control over indoor thermostat settings,
individual air conditioning units as well as operable windows and doors.
The inance team’s involvement in EMA and the improvement of the EMA
system is also of paramount importance.
63
Chapter
6 Framework for the Adoption
of EMA
This chapter focuses on presenting a generic framework for the systematic
adoption of EMA. As you can probably imagine, the EMA system in an
organization depends on many factors. These factors are broadly divided
into;
h External factors
h Internal factors
Factors afecting the EMA system
–
–
–
–
External factors
Intensity of regulations
Geographical environmental
conditions
Inluence of stakeholders
Availability of infrastructure
facilities
–
–
–
–
–
–
64
Internal factors
Nature of product/service and
operations
Organizational structure
History and ownership
Availability of resources
Support/commitment of the
top management
Access to technology
Chapter 6
Framework for the Adoption of EMA
Current status of EMA
Many researches around the world, including Sri Lanka, have revealed
that the existing EMA practices have not been systematically and
comprehensively implemented internally. Thus, these practices are largely
fragmented. In most cases, these EMA practices have been developed
from time to time as a response to the aforementioned internal and
external factors. Therefore organizations do not usually reap the full
potential of EMA.
EMA development stages
An organization can’t simply accomplish systematical adoption of EMA
practices at once. Like many other management initiatives, the EMA
system has to be developed over time with continuous commitment of
the organization.
When an organization starts adopting EMA, they will usually pass through
three phases of development. These phases are
h Compliance
h Realization
h Integration
Development stages of EMA
Stage 3 Stage 2 - Integration
Realization
Stage 1 Compliance
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Environmental Management Accounting (EMA)
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Compliance stage
Organizations in “Compliance” stage will develop environmental
management practices as a passive response to both external and internal
pressures. In other words, adoption of EMA is triggered by internal or
external factors.
Characteristics of organizations in compliance stage
–
–
–
Paying attention to few items that are critical for the business (e.g.
waste, energy, water, etc)
Obtaining the support of few key stakeholders (such as employees
or suppliers) in order to adopt these practices
Adopting a few less sophisticated EMA practices (e.g. accounting
for waste or energy accounting). These EMA practices mainly focus
on PEMA.
In order to steer the organization towards the next stages of development
an organization should;
–
–
–
–
66
Have the support and commitment of the top management
Develop an environmental policy
Prepare an operational plan to achieve the goals set in the
environmental policy
Establish an environmental management system to provide the
necessary information for the operational plan
Chapter 6
Framework for the Adoption of EMA
Realization stage
If the aforementioned initiatives are properly taken, with the help of its
EMA system, an organization will soon realize the cost saving potential
of the environmental practices adopted. This is where an organization
moves into the next stage of development, i.e. Realization stage.
Characteristics of organizations in realization stage
–
–
–
–
–
Gradually expanding its focus to other aspects contained in the
environmental policy
Developing/designing products or processes taking environmental
impacts into account
Attempting to obtain the support of other stakeholders such as
customers, distributors
Developing more EMA practices to provide information necessary
for enhanced coverage of environmental aspects
Experimenting the adoption of sophisticated and advanced EMA
practices
If these attempts are successful and expected beneits are derived,
organizations will move to the next level, i.e. Integration stage. Hence, it
is evident that this stage is a transition stage until an organization reaches
the third stage.
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Environmental Management Accounting (EMA)
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Integration stage
The third stage of development, integration stage, is the most desirable
stage of EMA. During this stage, organizations derive the full beneits of
their environmental management programs. In this stage, environment
is a factor that is considered in the daily decision making process of the
organization at all hierarchical levels and across the value chain.
Characteristics of organizations in integration stage
–
–
–
–
–
68
Paying attention to all the items contained in the environmental
policy (comprehensive coverage rather than just a few selected
items)
Having well developed EMA practices to support these practices
(more MEMA systems)
Obtaining the support of all stakeholders across the value chain
Marketing green products or services
Reporting its environmental performance to (internal and external)
stakeholders
Chapter 6
Framework for the Adoption of EMA
Framework for the adoption of EMA
The following framework summarizes the key features of the EMA
development stages.
Framework for the adoption of EMA
Integration
Advanced
Exhaustive
Comprehensive
Realization
Expanding
Improving
Encompassing
Compliance
MEMA
Basic
Limited
Few
Stakeholder
involvement
Coverage of
environmental
aspects
EMA tools
PEMA
Vision
According to the framework, it is the vision that lays the foundation
and drives the environmental strategies of an organization. The arrow
indicating the integration stage suggests that there’s potential for further
development. Hence, the integration stage is not a desired end status,
rather a desirable status in the current context. However, when the
external and internal environment factors change, these practices will
have to be adjusted to withstand such challenges on an ongoing basis.
The framework highlights how the key features - EMA tools, involvement
of stakeholders and coverage of environmental aspects - should evolve/
develop when an organization gradually progresses. It further highlights
the focus of an EMA system in terms of PEMA and MEMA in each stage.
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Environmental Management Accounting (EMA)
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Beneits of the framework
The beneits of the framework include, but not limited to;
–
–
–
It helps you map where you currently stand in terms of the
development stages of EMA.
[However, it should also be noted that your organization may display
some characteristics in diferent stages. Hence, what is important is not
a perfect mapping of your current status but identiication of lagging
areas for future improvement.]
It directs you on what your future focus should be in the key
dimensions of EMA.
It guides you to develop an integrated sustainable environmental
management program when the internal and external factors change.
Conclusion
The EMA adoption framework presented here is generic. Hence, it can
be applied to any organization irrespective of the size, ownership or
industry sector. In order to apply the framework, it is important that you
get acquainted with EMA, environmental cost analysis and EMA tools
and techniques which were described in the previous chapters. The EMA
success stories presented in Chapter 5 demonstrate the application of
certain features of this EMA framework in diferent business sectors
and for diferent environmental aspects. On the whole, we hope that
the ideas contained in this book will be a stepping stone for Sri Lanakan
business enterprises to derive full potential of EMA in their contribution
towards fast tracking economic development.
70
References
–
–
–
–
–
–
–
Burritt, R., Hahn, T. and Schaltegger, S. (2002), Towards a
comprehensive framework for environmental management
accounting: links between business actors and environmental
management accounting tools. Australian Accounting Review, Vol. 12
No. 2, pp. 39–50.
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