A D Nuwan Gunarathne | Sanka Peiris | Kalani Edirisooriya | Ruwanthi Jayasinghe Environmental Management Accounting in Sri Lankan Enterprises A D Nuwan Gunarathne, Sanka Peiris, Kalani Edirisooriya & Ruwanthi Jayasinghe Department of Accounting Faculty of Management Studies and Commerce University of Sri Jayewardenepura, Nugegoda, Sri Lanka Environmental Management Accounting in Sri Lankan Enterprises Disclaimer he opinions expressed in the articles in this book are solely the authors’. hey do not necessarily relect the views of the Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, Nugegoda, Sri Lanka. Copyright A person or organization that obtains this product from the Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, Nugegoda, Sri Lanka may reproduce and amend these documents for their own use or use within their 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 Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, Nugegoda, Sri Lanka. ISBN 978-955-4908-13-0 Cover and text design by Chamara Jayakody, 4th Year, Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, Nugegoda, Sri Lanka. Sponsor Diesel & Motor Engineering PLC, No 65, Jetawana Road, Colombo 14, Sri Lanka. Published 2014 Department of Accounting Faculty of Management Studies and Commerce University of Sri Jayewardenepura, Nugegoda, Sri Lanka ii Dedicated to Department of Accounting Faculty of Management Studies and Commerce University of Sri Jayewardenepura, Sri Lanka for nurturing us with care and providing us a platform to explore the world!! iii Contents Acknowledgments v Head of Department’s Message vi About the Authors vii List of Figures viii List of Tables viii List of Abbreviations ix Preface xi Chapter 1 Introduction 1 Chapter 2 Managing Energy 9 Chapter 3 Managing Water 31 Chapter 4 Managing Waste 51 Chapter 5 Managing Carbon Footprint 77 Chapter 6 Sri Lankan EMA Practices: Some Common Features 94 List of Participant Organizations 98 References 99 iv Acknowledgements his book “Environment Management Accounting in Sri Lankan Enterprises” is the outcome of a mission achieved with the support of many stakeholders. We are pleased to publish the book, which is a product of the involvement and commitment of many persons and institutions. We therefore would like to take this opportunity to acknowledge the contributions made by many parties in completing this challenging task. his book would not have been a reality if not for the generous inancial assistance of Diesel & Motor Engineering PLC, our sponsor. We wish to extend our sincere gratitude to them for their contribution. Our appreciation is also extended to the companies for the opportunity to observe their worthy environmental practices and for their valuable inputs. he representatives of these various companies spent a great deal of time with us amidst their tight schedules to help us to build our cases studies. We would like to convey our heartfelt appreciation to the Head and other staf of the Department of Accounting, University of Sri Jayewardenepura, for their support. We would especially like to acknowledge the guidance of Prof. Mangala Fonseka of the Department of Accounting for his valuable comments. Our special thanks are also extended to the employers of the authors who released them during working hours for data collection. Without their commitment, this project could not have been completed. We are thankful to Chamara Jayakody, 4thYear undergraduate of the Department of Accounting, University of Sri Jayewardenepura, for designing the cover and text. Our thanks are also due to Mr. Carlton Samarajiwa for copy editing our material and CRC Printers for the hassle-free, timely printing of our book. Finally, we would like to thank our family members who are usually the silent victims of such arduous projects. heir patience helped us immeasurably. Nuwan Gunarathne, Sanka Peiris, Kalani Edirisooriya, Ruwanthi Jayasinghe and Uthpala Sankalpani v Head of Department’s Message We would like to convey our heartfelt appreciation to the Head and other staf of the Department of Accounting, University of Sri Jayewardenepura, for their support. We would especially like to acknowledge the guidance of Prof. Mangala Fonseka of the Department of Accounting for his valuable comments. It gives me great pleasure to write this message for the book on “Environmental Management Accounting in Sri Lankan Enterprises” to be launched at the Global Conference of Environmental and Sustainability Management Accounting Network (EMAN), 2015 in Colombo, Sri Lanka, on the theme “Advancing Sustainability Management Accounting in the Asia Paciic Region”. his publication is another pioneering initiative of the Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, the premier academic accounting education institute in the country. he Department of Accounting has always been keen on seeking innovative means to improve awareness of contemporary developments in accounting. Understanding the importance of sustainability accounting education, the Department introduced a course unit on Sustainability Management Accounting in its curricula in 2012 and held a forum on Sustainability Management Accounting in 2014. In addition, the Department has published several books, journals and documentary videos on environmental/sustainability management. hrough initiatives of this nature, we expect to provide thought leadership in accounting to steer the national economy towards better sustainable development and prosperity for the people through learning. I would especially like to congratulate the authors of this book, A. D. Nuwan Gunarathne, lecturer of the Department and his team of past students Sanka Peiris, Kalani Edirisooriya and Ruwanthi Jayasinghe of the irst batch of Sustainability Management Accounting course unit, for their worthy endeavor. Dr. W G S Kelum Head- Department of Accounting Faculty of Management Studies and Commerce University of Sri Jayewardenepura, Sri Lanka. January 29, 2015 vi About the Authors A D Nuwan Gunarathne MBA, B.Sc., ACMA (SL), CGMA, ACMA (UK), ACIM, Dip in Mkt 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. Sanka Peiris B.Sc. (Accounting), CIMA passed inalist Sanka Peiris is a graduate of the Department of Accounting of University of Sri Jayewardenapura. He belongs to the irst batch of students who followed the course unit, Sustainability Management Accounting, during their irst degree. Following the practical relections of the course, Sanka is interested in research in the areas of Sustainability and Management Accounting. 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. Kalani Edirisooriya B.Sc. (Accounting), CIMA passed inalist Kalani Edirisooriya is a graduate of the Department of Accounting, University of Sri Jayewardenapura, and was adjudged the best performer in her batch, winning two gold medals at her degree programme. Kalani currently serves as an Accountant at a renowned diversiied conglomerate in Sri Lanka. Being in the irst batch of students who underwent the Sustainability Management Accounting course unit, Kalani is interested in research in the areas of Sustainability and Management Accounting. Ruwanthi Jayasinghe B.Sc. (Accounting), CIMA passed inalist Ruwanthi Jayasinghe is a graduate of the Department of Accounting of the University of Sri Jayewardenepura. She also belongs to the irst batch of students who underwent the course, Sustainability Management Accounting. Ruwanthi currently serves in a diversiied conglomerate in Sri Lanka as the Stakeholder Interactions Executive, which involves signiicant responsibilities in Environmental Management. Ruwanthi is interested in research in the areas of Sustainability Reporting and Environmental Management Accounting. Special Guest Editor G G Uthpala Sankalpani B A (Business Administration) Uthpala Sankalpani is a Business Administration graduate from Stafodshire University (UK) and currently reading for a Masters’ degree in Environment Management (MEM) at the University of Colombo. Uthpala currently serves as a Resource Eicient Cleaner Production (RECP) Technologist at the National Cleaner Production Centre, a leading sustainable solutions provider in Sri Lanka. In her professional career, she is mainly engaged in resource eicient cleaner production, sustainability reporting and environment management accounting. vii List of Figures Figure 1.1: Comprehensive EMA framework 4 Figure 1.2: EMA beneits interlinked 5 Figure 1.3: An integrated framework for the adoption of environmental management 7 Figure 2.1: Supply of energy by sources in Sri Lanka 13 Figure 2.2: Category wise electricity consumption in Sri Lanka 14 Figure 3.1: Composition of the world’s water resource 31 Figure 3.2: Water use statistics in Sri Lanka 33 Figure 4.1: Composition of municipal waste in Sri Lanka 53 Figure 4.2: Waste management hierarchy 55 Figure 4.3: Steps in a waste audit 56 Figure 4.4: Annual waste - 2014 67 Figure 5.1: World green house gas emissions by source 78 Figure 5.2: World green house gas emissions by type of gas 79 Figure 5.3: Contributors to global carbon emissions 80 Figure 5.4: hree scopes included in Carbon Footprint 83 List of Tables Table 1.1: Deinitions of environmental accounting 1 Table 3.1: Water tarif in Sri Lanka 34 Table 3.2: Integrated water management approaches 35 Table 3.3: Water puriication methods 36 Table 4.1: Recovery items of e-waste 58 Table 4.2: Physical and monetary EMA measures used by the hotel 61 Table 4.3: Physical and monetary EMA measures used by the company 65 Table 4.4: Annual savings of cones – in physical and monetary terms 68 Table 4.5: Improvement of red bag sale and re-use 76 Table 5.1: Sri Lankan GHG emissions levels in 2000 84 Table 5.2: Sources of carbon emissions of the hotel - 2013 85 Table 5.3: Extract of operations part of the dashboard 90 Table 5.4: Total yearly CFP and the annual change in % 91 Table 5.5: Scope-wise contribution to CFP 91 Table 5.6: Intensity ratios monitored by the company 91 viii List of Abbreviations AC- Air Conditioning BFM – Basis For Measurement BFR - Brominated Flame Retardants BOM – Bill of Materials BRT – Barrier Removal Team CBSL - Central Bank of Sri Lanka CCTV - Closed-Circuit Television/ video surveillance CDM - Clean Development Mechanism CEA – Central Environmental Authority CER – Certiied Emissions Reductions CFL – Compact Fluorescent Lamp (Energy Saving Light) CFP - Carbon Footprint CMC – Colombo Municipal Council COP - Conference of the Parties CP – Cleaner Production CSE - Colombo Stock Exchange CSR- Corporate Social Responsibility EA- Environmental Accounting EMA – Environment Management Accounting EMS -Environmental Management Systems EPA - Environmental Protection Agency EPL – Environmental Protection License ERP - Enterprise Resource Planning ERU – Emissions Reduction Units ET - Emission Trading GHS – Green House Gas GTZ - Deutsche Gesellschat für Technische Zusammenarbeit IFAC- International Federation of Accountants IPCC - Intergovernmental Panel on Climate Change ISO- International Organization for Standardization ITI - Industrial Technology Institute JI - Joint Implementation KPI- Key Performance Indicators kVA - kilovolt-amps kWh - kilowatt-hour LBM - London Bullion Market LED - Light Emitting Diode LEED - Leadership in Energy & Environmental Design LKR – Sri Lankan Rupees LME - London Metal Exchange ix LP – Liquid Petroleum MBWA – Management By Walking Around MSDS - Material Safety Data Sheet NSW – New South Wales NWSDB – National Water Supply and Drainage Board PCB - Polychlorinated Biphenyl QC - Quality Circles QMS -Quality Management Systems UF - Ultra Filtration UNCED - United Nations Conference on Environment and Development UNCSD – United Nations Conference on Sustainable Development UNDSD - United Nations Division of Sustainable Development UNEP - United Nations Environment Program UNFCCC - United Nations framework Convention on Climate change WEEE - Waste Electrical and Electronic Equipment WFP – Water Footprint x Preface he idea of writing this book occurred to us a long time back but not in a planned way. Having understood the importance of sustainability accounting education, in 2012, at the Department of Accounting, University of Sri Jayewardenepura, Sri Lanka, we introduced an elective course unit on Sustainability Management Accounting (SMA), perhaps for the irst time in an undergraduate course in the country. As a part of this course unit, the students had to develop a case study on SMA aspects of a selected organization. When visiting various organizations for data collection purposes with students, I witnessed how Sri Lankan companies implemented various environmental management strategies with the help of accounting/numbers. hough very little is written about them, these organizations were doing remarkably well in many respects. When the Department of Accounting held a Forum on Sustainability Management Accounting in 2014 with the primary purpose of educating the business professionals on this emerging ield of accounting, we published these case studies in a Special Issue of the Journal of Accounting Panorama on the theme of Sustainability Management Accounting in Sri Lanka. At the Institute of Certiied Management Accountants (CMA) National Management Accounting Conference, in June 2014, we pioneered another project to publish Environmental Management Accounting (EMA) Guidelines for Sri Lankan Enterprises. hese guidelines were well received by the Sri Lankan business professionals and, in August 2014, I conducted a workshop on Adopting Environmental Management Accounting based on these guidelines. hrough these guidelines and the workshop we attempted to address the “What” question with Sri Lankan business professionals in mind. While disseminating knowledge of this discipline through these various means, we felt it was important to address the “How” question also keeping Sri Lankan and international readers in mind. Over the years of our experience with industry engagement, we observed how EMA was applied by Sri Lankan enterprises in diferent ways. However, little was recorded on how and to what extent EMA was being applied in Sri Lanka or in emerging economies. herefore we thought it was timely to showcase Sri Lankan examples of EMA applications. his was even highlighted when the Department of Accounting, University of Sri Jayewardenepura, was hosting the Global Conference of Environmental and Sustainability Management Accounting Network (EMAN) in January 2015 in Colombo for the irst time in the South Asian Region*. I was fortunate to have a set of students (they are now graduates working in diferent organizations) from the irst batch of the Sustainability Management Accounting course unit, who were inspired to engage in an arduous project of this nature. Ater perusing the literature, we irst decided on the chapter plan of this book. he chapters were arranged to showcase EMA practices in diferent environmental domains such as * Refer http://eman2015.net for more details on the conference & http://eman-ap.org/ for EMAN Conferences in the Asia Paciic region. xi energy, water, waste and carbon footprint. We originally desired to include a chapter on bio-diversity management and EMA, but due to various practical limitations we had to abandon the topic. he next challenge came when we decided on the industry sectors to be covered under these environmental domains. hough the industries were mainly selected on accessibility criteria we attempted to maintain a mix of industries in each chapter. Ultimately we realized that we had been a little biased towards the apparel industry, but due to its importance in Sri Lanka we thought it was alright to leave it that way. he next biggest challenge was when collecting data for the study. In addition to time constraints we had several other obstacles to overcome. hough we wanted to explore the Sri Lankan enterprises, when collecting data we came across a challenge over the generic deinition of “Sri Lankan enterprises”. Some companies who follow noteworthy EMA practices have been largely inluenced by the guidelines of their foreign parent companies. Since we wanted to showcase Sri Lankan practices, we decided to select only companies with a Sri Lankan ownership and control (I doubt whether the term “indigenous Sri Lankan enterprises” is the correct word here). Due to this delineation we had to exclude many companies that were pioneers in environmental management in the country. We also encountered another problem with regard to EMA practices. Some companies follow initiatives that are of a pure CSR nature and those projects do not have any relationship with the core businesses. herefore we had to ignore these EMA practices for which there is no business case. Except for a few exceptions, we visited all the companies described in the book to witness these practices at irst hand. We interviewed several managers of each company in charge of these practices. We used an interview guide to better structure our interviews. Moreover, we always referred to various other documents as a means of triangulation. We were surprised when some companies were not at all hesitant to share their very conidential information with us to build our cases. Now, in retrospect, we realized that we had been collecting data for this study over a period of minimum two years, albeit not at the same level of intensity. When collecting data we found that these companies were at diferent levels of the development stages of EMA. his phenomenon revealed that in some companies there were sophisticated EMA systems in certain environmental domains, while in other domains EMA was e at primitive levels. However, since our focus was on environmental domains we did not have much of a problem here. As I mentioned in the second paragraph the objective of this book is to showcase Sri Lankan EMA practices. An international reader might question why Sri Lanka is important for him/her. hough we have internal validation, we thought it necessary to have some ground for justifying the selection of Sri Lanka. Although the following list is not exhaustive, it provides some justiications for our selection. he list below highlights the natural endowments of Sri Lanka and the challenges to preserve the natural environment while pursuing economic development: xii           Sri Lanka has eight sites that are inscribed on the World Heritage List of UNESCO out of which two are natural sites [Sinharaja Forest Reserve declared in 1998 and the Central Highlands of Sri Lanka declared in 2010] (UNESCO, 2014). 26.5 percent of total land area of Sri Lanka is protected. his is one of the highest percentages of protected areas in all of Asia. Sri Lanka has diferent ecological zones (such as the low country dry zone, low country wet zone, central hill zone, intermediate zone, etc) and diverse ecosystems (shrub lands, savanna and grass lands, wetlands, mangrove forests, tropical rain forests, etc). Sri Lanka is the only country in the world in which both of the world’s largest mammals, elephants and whales are found. Sri Lanka’s natural forest resources have the highest species diversity. Sri Lanka is supposed to be one of the world’s 25 biodiversity hotspots with many threatened and endangered species. As a small island, Sri Lanka falls into United Nations Framework Convention on Climate Change (UNFCCC**) and Intergovernmental Panel on Climate Change (IPCC***)’s category of “vulnerable” small island nations which are under threat from various climate change impacts such as severe droughts, sea level rise and loods. Sri Lankan economy, ater three decades of civil war, is showing an impressive annual growth. Its annual growth rate has been 6.4 percent from 2003 to 2012. Strategies are under way to reach a per capita income of USD 4,000 by 2016, which stood at USD 1,000 in 2004 (Central Bank of Sri Lanka, 2013). hese eforts to improve people’s living standards have put great pressure on the Sri Lankan environment. he Ministry of Environment has identiied ive main problems: land degradation, waste disposal, pollution of inland waters, loss of biodiversity and depletion of coastal resources. Sri Lanka’s greenhouse gas (GHG) emissions have been increasing rapidly over the past decade. As much as 61.4% of the total aggregate emission was from the energy sector which includes transport. (Climate Change Secretariat, 2011). As the country is becoming increasingly dependent on fossil fuels owing to the decrease in the country’s hydropower potential, ** UNFCC is an international environmental treaty negotiated at the Earth Summit, in 1992, with the objective of stabilizing greenhouse gas concentrations in the atmosphere. *** IPCC is the leading international body for the assessment of climate change that was established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) in 1988.z xiii GHG emissions are going to rise considerably in the future. he country’s energy sector experienced signiicant pressure from higher oil prices and lower hydro power generation caused by irregular weather conditions.   hough the country has a rich supply of water, water pollution is considerably high due to lack of water supply and sanitation facilities and poor drainage conditions. Solid waste disposal and management have become a major environmental issue in Sri Lanka that has caused numerous negative environmental impacts such as ground and surface water pollution, air pollution, soil erosion, etc. he high level of urbanization coupled with a lack of proper municipal solid waste management programs have led to serious problems in the recent past. his issue has been further aggravated due to lack of public participation, absence of waste separation at source, limited treatment facilities and haphazard dumping in open areas. Recent human and organizational activities have threatened Sri Lanka’s forests and other natural resources. he lack of efective environmental laws, inadequate law enforcement together with inconsistent and weak policies has created many environmental challenges in Sri Lanka. hey include but are not limited to deforestation; soil erosion; wildlife populations threatened by poaching and urbanization; coastal degradation from mining activities and increased pollution; mismanagement of land, freshwater resources being polluted by industrial wastes and sewage runof; urban and industrial waste disposal; and air pollution in city areas. herefore we hope this book will provide some interesting and useful insights into how enterprises use EMA in their core business operations in a country that faces many environmental challenges as it steers economic development while preserving its natural endowments. Nuwan Gunarathne with Sanka Peiris, Kalani Edirisooriya and Ruwanthi Jayasinghe January 29, 2015 Colombo xiv CHAPTER Chapter 1 | Environmental Management Accounting 1 Environmental Management Accounting (EMA) Environmental Accounting (EA) he term ‘Environmental Accounting’ (EA) has many meanings and is used in loose and ambiguous ways. While EA is open to many interpretations it encompasses several diferent approaches. he boundaries between the subsets of EA can only be deined broadly, and it would be counter-productive to seek for strict applications. he deinition given by the Environmental Protection Agency (EPA) (1995) provides a broader context for EA, according to which EA is the identiication, measurement and allocation of environmental costs, the integration of these environmental costs into business decisions, and the subsequent communication of the information to a company’s stakeholders. In EPA’s attempt to systematize EA, it reports that EA can be regarded as an umbrella term which arises from three distinct sources to support: ( National income accounting ( Financial accounting and/or ( Internal business managerial accounting he following table describes these various deinitions of EA ( Table 1.1). Table 1.1: Deinitions of environmental accounting Type of Environmental Accounting Focus Audience National income accounting Nation External Financial accounting Firm External Management accounting Firm, division, facility, product line or system Internal Source: Adopted from EPA, 1995 1 Environmental Management Accounting in Sri Lankan Enterprises EA, when applied at the national level, falls outside the scope of an organization. It will be relevant for a corporation when applied at the irm level. In this regard, Gray et al. (1993), suggest that EA will cover accounting for contingent liabilities/risks, accounting for capital projections, environmental-related cost analysis, investment appraisal including environmental factors, evaluation of environmental improvement programs and development of non-inancial accounting systems for environmental assets and liabilities. he areas suggested by Gray et al. (1993) can be broadly divided into three major corporate EA systems as suggested by Burritt et al. (2002). hey identify that corporate EA includes environmental management accounting (EMA), external environmental accounting and other environmental accounting. Burritt, et al., distinguishing between EA and conventional accounting, state that EA systems distinctly take into account the environmental impacts related to an organization. EA information can be expressed in monetary and physical units. his gives rise to two types of EA systems, viz., monetary and physical EA systems. Monetary EA systems measure the environmentally induced economic impacts of the company in monetary terms while physical EA systems relect the impacts of company-related activities on the environment in physical unit terms. When EA is applied at the corporate level with the main objective of facilitating internal decision making, EMA takes place. he next section provides an overview of EMA Environmental Management Accounting (EMA) Despite the plethora of studies pertaining to EMA, a clear deinition of EMA is lacking. As it is an evolving discipline it is diicult to ind a universal boundary or deinition for EMA. Yet, EMA is commonly deined as 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 (United Nations Division of Sustainable Development (UNDSD), 2001, Burritt et al., 2002) Since EMA provides physical and monetary information, two types of EMA systems can be identiied: physical EMA systems and monetary EMA systems. Physical EMA information entails the consumption of resources 2 Chapter 1 | Environmental Management Accounting and is expressed in kilograms, liters, cubic meters, joules, etc. Monetary EMA takes place when a inancial value is assigned to physical EMA. It might also arise without any relation to physical measures such as licence fees and environmental ines. EMA can therefore, depending upon the system implemented, provide a broad range of information about inancial and non-inancial aspects of an organization’s environmental performance. EMA systems have the dual purpose of managing and improving the inancial and environmental performance of an entity (Deegan, 2003). Hence, EMA provides information on energy, water, materials that include waste and other environmentalrelated costs, savings and revenues. his book is therefore arranged to cover the role of EMA in Sri Lankan enterprises in these environmental domains. A comprehensive framework on EMA information EMA information, in both physical and monetary terms, may encompass three dimensions/attributes. hese three dimensions of EMA information are: – Time frame Whether the time period is past or future. – Length of time frame Whether the length of the period is short-term or long-term. – Routineness Whether the frequency of information gathering/provision is ad hoc or routine. Combining these dimensions of EMA information with physical and monetary aspects, a comprehensive framework for EMA (Figure 1.1) has been suggested to position various EMA tools (Burritt et al., 2002). 3 Environmental Management Accounting in Sri Lankan Enterprises Figure 1.1: Comprehensive EMA framework Environmental Management Accounting (EMA) Monetary EMA Short-term focus Pastoriented Long-term focus Physical EMA Short-term focus Long-term focus Routinely generated information Ad-hoc information Futureoriented Routinely generated information Ad-hoc information Source: Burritt et al., 2002 here is a wide array of EMA tools and techniques that can fall into sixteen quadrants of the framework. herefore EMA can be understood as a broad set of principles and approaches that provide information for the successful implementation of environmental strategies. EMA acts as an interface between inward focused management accounting and environmental management strategies of an organization. In essence, it is a support tool that facilitates the environmental management strategies of an organization. Day by day, new EMA practices are being introduced or existing practices are being adopted. 4 Chapter 1 | Environmental Management Accounting Beneits of EMA EMA provides various inancial and non-inancial and quantiiable and nonquantiiable beneits. he magnitude of these beneits would depend on many factors such as organization, industry, country, legal frame work and many other aspects. he International Federation of Accountants (IFAC) (2005) divides the numerous uses and beneits of EMA into three broad categories: ( Ensuring compliance by supporting environmental protection via environmental regulations and self-imposed environmental policies. ( Supporting eco-eiciency by using water, material and energy eiciently while reducing environmentally harmful impacts and waste. ( Strengthening strategic position by establishing and strengthening an organization’s long-term strategic position. hese beneits are not mutually exclusive and overlap in many instances. Moreover, their beneits are interlinked as shown in Figure 1.2. Compliance Eco-eiciency Competitive position Source: Adopted from Doody, 2010 and IFAC, 2005 5 Environmental Management Accounting in Sri Lankan Enterprises Roadblocks to EMA Despite the above mentioned beneits and uses, still, there are many challenges faced in EMA adoption. Consequently, management may make decisions based on missing, inaccurate or misinterpreted environmental information. Given below are a few such commonly cited challenges in regard to EMA: ( Inadequate communication links between accounting (inance) and other departments that collect environmental information. ( Lack of manager-awareness of EMA tools, techniques and concepts. ( Lumping of environmental costs with general overheads. ( Inadequate tracking, collection, reporting and analysis of environmental information. hese challenges usually arise from the limitations of traditional management accounting practices or from speciic environment-related information. Due to these and many other reasons it is oten suggested that most of the EMA practices have not been systematically and comprehensively implemented internally thus leading to fragmented or piecemeal approaches. Like many other management practices, a systematic adoption of EMA has to be achieved over time. Hence, it is important to shed some light on the development stages of EMA. EMA development stages EMA development stages fall in line with the development stages of environmental management as EMA provides the interface between management accounting and environmental management. Gunarathne (forthcoming) provides an integrated framework for the adoption of EMA (or environmental management) while suggesting three development stages, compliance, conservation and leading edge. Initially organizations will be compelled to follow environmentally friendly practices due to internal or external force/s (compliance stage) until they realize the conservation (cost saving) potential of these initiatives (conservation stage). he organizations will be propelled into the next stage when these practices become a part of their business model producing superior environmental and economic performance (leading edge stage). By combining these development stages with a coverage of the environmental domains/challenges (such as electricity, water, solid waste, waste water, emissions, pollution, bio diversity, etc), 6 Chapter 1 | Environmental Management Accounting support and involvement of stakeholders (primary and secondary) and use of EMA techniques, the following framework ( Figure 1.3) has been suggested by Gunarathne (forthcoming). Compliance Conservation Leading edge Figure 1.3: An integrated framework for the adoption of environmental management MEMA Comprehensive Exhaustive Advanced Encompassing Improving Expanding Few Limited Basic PEMA Coverage of environmental domains Stakeholder involvement EMA tools Vision Source: Gunarathne, forthcoming he framework, while providing an analytical tool for researchers, ofers practical insights for practitioners to decide on their future course of action to derive better beneits from environmental strategies. 7 Environmental Management Accounting in Sri Lankan Enterprises he Sri Lankan enterprises that were studied in this project displayed diferent stages of development of environmental management/EMA. However, the focus of this book is not to examine their level of development of EMA but to illustrate how EMA practices are interwoven with their core business operations under diferent environmental domains. 8 CHAPTER Chapter 2 | Managing Energy 2 Managing Energy Homo Erectus, one of the earliest humans, irst discovered ire and how to control it. Ever since, human beings have been discovering multifarious ways of generating energy, sources of energy and use of energy. he increased global demand for energy and the scarcity of energy resources has led to rising energy prices. At the same time, legislative pressures on emissions and stakeholder pressures have compelled organizations to give importance to better energy management. It is estimated that the demand for energy will increase by 50% by 2030, but the capacity to generate non-renewable energy will dwindle drastically (World Energy Outlook, 2005). Given the present level of resource exhaustion, it is estimated that coal fossils will be adequate to meet the demand for another 128 years, gas for another 54 years and oil for another 41 years only. hus the global need to save energy has intensiied with the main objectives of resource conservation, climate change mitigation and cost saving while the users will have permanent access to the energy they need. Due to this growing importance of energy, this chapter irst attempts to describe types of energy, energy management and accounting for energy. hen it demonstrates a few cases of how Sri Lankan companies follow accounting for energy. 9 Environmental Management Accounting in Sri Lankan Enterprises What is energy? Energy is the ability to do work. In other words, it is what causes things to happen around us. Energy can be found in numerous sources and in many forms. Forms of energy he forms of energy are classiied into two general categories: 1. Potential energy Stored energy is called potential energy. Chemical energy, mechanical energy, nuclear energy are all stored energy. 2. Kinetic energy Moving energy is called kinetic energy. It is the kinetic energy which does the work. Light, heat, motion and sound are examples of kinetic energy. he process of changing energy from one form into another is called energy transformation. he sources of energy Energy sources are of two types: Sources of energy Primary energy sources Renewable 10 Non-renewable Secondary energy sources Chapter 2 | Managing Energy Primary Energy is created directly from the actual resources, and can be classiied into two groups, which are non- renewable and renewable energy. Non-renewable energy is extracted from the ground and cannot be replenished or made again in a short period of time. Hence, it is limited in supply. It is either in the form of gas, liquid or solid and examples include oil, natural gas, coal and uranium. Renewable energy comes from sources that are constantly renewed such as the sun and wind. Because of its ability to replenish no stress is made upon the scarcity of such resources. Solar, wind, biomass and hydropower are some examples of renewable energy. Currently, less than 2% of the world’s electricity comes from renewable resources. Secondary Energy is derived from primary sources of energy. Secondary sources of energy are used to store, move, and deliver energy in an easily usable form. Electricity and hydrogen are prominent examples of this. he signiicance of energy is talked about today more than at any other time in history as the world is moving towards an energy crisis. he United Nations Conference on Sustainable Development (UNCSD 2014), Rio +20, recognized energy as one of the seven critical issues. It heightened the importance of generating sustainable energy while strengthening economies, protecting eco systems and achieving equity. Energy is ranked No. 1 in the list of “Humanity’s Top 10 Problems for Next 50 Years” (Kamat, n.a) When the world’s demand for energy is rising and many energy generating natural resources like fossil fuels are depleting, the crisis of energy looms large in the horizon. High energy consumption is also linked to environmental degradation and it afects the ecological balance and biological diversity. 11 Environmental Management Accounting in Sri Lankan Enterprises Despite the energy crisis and the depletion of energy sources, the preservation of energy is felt more at the individual level due to the cost. he situation is more serious in the Sri Lankan context where the people are concerned more about energy costs than about energy generating resources. Despite being blessed with many natural resources, Sri Lanka is still at a very primitive stage in terms of the preservation and use of sustainable energy. Energy in Sri Lanka According to the Sri Lanka Sustainable Energy Authority (2014), the energy sector of Sri Lanka can be identiied as a combination of four energy forms. hey are: ( Energy resources ( Energy supply including conversion/ production and distribution ( Energy demand ( End use In Sri Lanka, the selection of sources of energy is based on a number of factors. Availability either locally or globally, technological availability for converting the resources into a more usable form and the economics of using the resource for energy supply have been the determinants of energy resources within the country. According to the Sri Lanka Sustainable Energy Authority (Sri Lanka Energy balance, 2014), the following main renewable energy resources are available in Sri Lanka. ( Biomass ( Hydro power ( Solar ( Wind In addition to the above, petroleum is considered the main energy source available in Sri Lanka through international markets. Eventhough there are other global resources such as coal and natural gas, their use for energy supply is still limited in Sri Lanka. he supply of energy by diferent sources in Sri Lanka is as follows (Figure 2.1): 12 Chapter 2 | Managing Energy Figure 2.1: Sri Lanka energy supply 10,000 Biomass Petroleum Coal Electricity 8,000 6,000 4,000 2,000 0 2008 2009 2010 2011 2012 2013 Source: Sri Lanka Sustainable Energy Authority, 2014 When considering energy usage in Sri Lanka, electricity, which is a secondary source of energy, plays a vital role. he rise of electricity prices and recent tarif revisions have urged the need for better energy management. Figure 2.2 below shows the category-wise electricity consumption of Sri Lanka. As a solution for the intensive use of energy and the burden placed upon energy users, Sri Lanka is now in the process of implementing a National Energy Management Plan with the objective of mitigating the risk of running out of power in the near future (Sustainable Energy Authority, 2014). 13 Environmental Management Accounting in Sri Lankan Enterprises Figure 2.2: Catagory wise electricity consumption in Sri Lanka Religious 1% Hotel 4% General purpose 21% Domestic 40% Industrial 34% Source: Public Utilities Commission, Sri Lanka, 2011 Energy management Energy management is saving energy through a process of monitoring, controlling and conserving energy in an entity. Energy management could take place in private sector, public sector/government organizations and households. Energy saving typically involves the following steps: 1. Metering energy consumption and collecting data. 2. Finding opportunities to save energy and estimating how much energy could be saved. [An analysis of meter data and quantifying routine energy waste and investigating the energy saving that could be attained through replacing equipment (e.g., lighting) or by upgrading the building’s insulation can be done] 3. Taking action to target the opportunities to save energy. [Action will involve tackling routine waste and replacing or upgrading ineicient equipment] 14 Chapter 2 | Managing Energy 4. Monitoring the progress by analyzing the meter data to assess how energysaving eforts have worked. Controlling and reducing energy consumption Energy management undoubtedly brings a range of beneits to an organization if implemented properly. Controlling and reducing an organization’s energy consumption will enable an organization to: ( Reduce costs – Energy accounts for a signiicant amount of the total cost of an organization. With increased energy prices, energy management will be a better option for controlling costs. ( Reduce carbon emissions and the environmental damage caused – Being environmentally prudent and taking green initiatives within an organization will reduce the carbon footprint of an organization. his will also improve the green image of the organization which will in turn ultimately afect the bottom line positively. ( Reduce risk – Greater energy consumption makes an organization more vulnerable to energy price increases or supply shortages which could seriously afect proitability or even threaten the very continuity of a business organization. Better energy management may minimize this risk exposure of an organization. In the process of managing energy, determination of the best energy source suited for each energy need is critical. Factors such as the source of energy (renewable or non-renewable), costs involved (capital and setup costs, ongoing operating costs), size of energy storage required, eiciency of producing one unit of energy, possibility of producing on a large scale, cost to the consumer and the impact on the environment, etc. will be critical considerations. In managing energy, an energy accounting systems plays a key role. he next section of this chapter explains the accounting aspects of energy. 15 Environmental Management Accounting in Sri Lankan Enterprises Accounting for energy Energy accounting is a system for recording, analyzing and reporting energy consumption and cost on a regular basis. It provides feedback on how much energy an entity uses and how much it costs. Accounting for energy will beneit an organization in numerous ways: ( Record and attribute energy consumption and costs Energy costs depend on its consumption and price. For an organization with many facilities or divisions, identifying the energy use and cost separately will enable a better comparison and monitoring, to assess how energy use changes over time. ( Troubleshoot energy problems With the consistent tracking of energy data, sudden changes in energy consumption patterns can be identiied which lead to investigations to identify the cause/s of such variations. ( Provide a basis for energy-related capital investments As energy accounting makes it possible to identify the facility-wise energy data, the highest energy consumption units can be separately identiied. Investments that manage/preserve energy could be given priority. ( Evaluate the success of the energy saving programmes and communicate results Monitoring and reviewing progress will not be possible without a proper recording system. ( Budget more accurately Energy accounting gives a historical look at costs that will assist the preparation of more realistic budgets. Key components of accounting for energy Like in a conventional accounting system, an energy accounting system also involves a number of steps from collection of data to eicient management of energy. 16 Chapter 2 | Managing Energy ( Collecting data In order to generate comprehensive and meaningful information on energy, basically three types of data should be gathered: 1. Consumption data - Data obtained from meter readings (the larger the number of sub-meters, the higher the accuracy of cost allocation). 2. Cost data - Data obtained from the energy bills. 3. Driver data - Factors that inluence energy consumption. his could be either activities or drivers. An example of activities is the number of production units (which can be obtained internally) and an example of drivers is the weather condition (external factors). ( Converting data to information Data is more meaningful and valuable when it is converted into information. Conversion of data into information requires basic skills in data analysis and such techniques are generally known to accountants and engineers. Some of the techniques that can be used for analyzing data are as follows: 1. Comparisons - enable an examination of diferences between current and past and/or internal and external energy performance. hese comparisons should be normalized for variations in the drivers for the periods considered. 2. Trend lines - show the trend in energy use over time in a graphical form. Trend lines can beproduced using ‘moving averages’ toaccount for driver variations. 3. Variances - show the deviations between actual and predicted energyperformance. Whilst useful for an overview, they highlight the areas for improvement ater careful investigation. ( Assigning costs Cost reductions can only be achieved if someone is made directly responsible. In the same way the operational costs are allocated to divisions when monthly accounts are prepared, the energy costs also should be allocated to particular divisions. 17 Environmental Management Accounting in Sri Lankan Enterprises “Energy Accountable Centers” make department managers accountable for the energy costs of their departments. his will guide and encourage them to operate within the allocated budget and achieve agreed targets. ( Setting targets he Key Performance Indicators (KPIs) in relation to energy can be introduced at this stage. For this endeavor to be a success, KPIs should: - be clearly communicated to employees - be simple and easy to use - not incorporate inancial values largely - vary with time to relect changing organizational goals ( Managing and reporting targets Ater the targets for improvements have been set, it is necessary to report on progress in order to ensure that energy management actions have achieved the expected results. he reports should reach the manager who controls the relevant resourcein an understandable format and integrated as far as possible into the existing management information systems to make energy accounting a part of the normal operations of the company. ( Sustaining the system he greatest threat to energy accounting is where the system operates but nobody takes any notice/actions. here are four reasons for this (Tangram Technology, n.a); 1. Lack of authority - the system does not have senior management support. 2. Lack of ownership - the staf has become servants of the system rather than users of the system for efective management. 3. Lack of accountability - the system has not created clear linkages between responsibility and authority. 4. Lack of resolution - the system highlights concerns that do not really exist or does not highlight concerns that do exist. Accounting for energy in an organization can sometimes be largely inluenced by the energy certiication systems in place. ISO 50001 is such a system that is gaining prominence in the Sri Lankan context. he next section of this chapter provides an overview of ISO 5001. 18 Chapter 2 | Managing Energy ISO 50001 – Energy Management System ISO 50001 standard outlines the requirements for establishing, implementing, maintaining and improving an energy management system, as per the speciications stipulated by the International Organization for Standardization (ISO). his standard enables an organization to follow a systematic approach in achieving continual improvement of energy performance, including energy eiciency, security, use and consumption. ISO 50001 is also based on the management system model of continual improvement similar to ISO 9001 or ISO 14001. his makes it easier for organizations to integrate energy management into their overall eforts to improve quality and environmental management. Like other ISO management system standards, ISO 50001 certiication is possible but not obligatory. Some organizations decide to implement the standard solely for the beneits it provides. Using energy eiciently helps organizations to save money as well as to help conserve resources. Some organizations decide to receive certiication to show external parties that they have implemented an energy management system in a bid to improve their green image. he next section of this chapter presents some Sri Lankan cases on energy management and how EMA supports the same. Application of energy management in Sri Lankan enterprises Hotel and leisure industry he hotel industry, in general, is one of the highest energy consumers in its day-to-day business operations. Electricity is the primary energy source used in hotel facilities and is used for air conditioning(AC), lighting, laundry, driers and other miscellaneous equipment used in the kitchen. A hotel in Negombo that belongs to a well-known group of hotels in Sri Lanka follows some noteworthy energy management practices. Enriched with an environmentfriendly culture, the hotel has developed its position as a leading green hotel in Sri Lanka. 19 Environmental Management Accounting in Sri Lankan Enterprises An analysis of energy consumption has indicated that the hotel’s electricity consumption is mainly due to AC, which is 53% of total electricity usage of the hotel. Hence, numerous strategies have been implemented to minimize the energy consumed for AC. he conventional AC process has been replaced with a “chilled water system” which has contributed towards curtailing AC costs signiicantly. he power generated by the chiller installed in the AC system generates 9,120kwh per month, and the saving by installing the same is measured as Rs.134, 396 per month. hus, in order to measure and justify the saving from the chiller water system, physical and monetary EMA has been used. Deployment of “Intelligent hermostats” connected to a room motion sensor which detects the room occupancy and activates an “occupied temperature” or an “unoccupied temperature” is another initiative implemented against high electricity consumption by the AC. Structural and interior changes such as draping of wooden blinds in guest rooms in order to preserve the cool atmosphere and allowing maximum natural ventilation in rooms have also been implemented in order to reduce the electricity consumption from AC. Another important aspect of energy consumption is lighting of the hotel. hrough the implementation of various lighting controls and eicient luminaries while being mindful about health and safety of the staf and visitors and the interior allure, the hotel has been able to considerably curtail the cost of lighting. he hotel has upgraded 90% of standard light bulbs to LED. he saving from this initiative has resulted in 80% less energy compared to standard light bulbs. Monitoring of the results was made possible as separate electricity meter readings were obtained on a daily basis. Installation of occupancy sensors which ensures that lights are only operated when there’s occupancy, especially in storerooms, oices and washrooms, and promotion of a switch-of policy on lighting so that only the lights that are being used are let on are some of the other initiatives taken by the hotel in this regard. he catering function of the hotel has also been considered in reducing energy costs since the kitchen could be identiied as a critical energy consuming unit. A meter system has been ixed in order to monitor the times and the duration the freezer door is opened. he meter system captures basic physical EMA information such as the frequency of opening the door. his information has been used to schedule a proper door opening system. he later analysis of the information has proved that it has reduced the wastage of electricity. It is clear how physical EMA has been used to assist management decision 20 Chapter 2 | Managing Energy making which has also been proved and quantiied using monetary EMA. In order to sustain this practice and other initiatives, continuous training sessions are provided to the kitchen staf to create awareness of eicient energy consumption by using the right kitchen appliance in the right way. In addition to the above mentioned energy conservation practices, the hotel has installed 36 solar panels which generate approximately 20kw per day. he power generated by the solar panels is used for guest room lighting and boiling water where nearly 15,000 liters of water is boiled per day. he physical EMA information on energy and water units saved is evaluated by assigning monetary values for them. he contribution of EMA is signiicant in terms of measuring the daily energy consumption and evaluating the progress of the energy conservation strategies implemented within the hotel. he primary responsibility for generating such information as well as planning, implementing, controlling and reporting lies with the engineering and maintenance department. he staf of the engineering and maintenance departments keeps records of daily and monthly consumption of water, electricity, gas and solar power in order to analyze consumption patterns and variances with reasons. Not only do they collect data on meter readings but also analyze such data in relation to the savings that they could achieve ater executing such energy-saving initiatives. he hotel therefore continuously tracks and monitors physical EMA information and convert it into monetary EMA information to facilitate planning, decision making, controlling and reporting. Even though the involvement of the inance department is minimal in generating energy-related data due to practical diiculties, the Chief Engineer’s Oice supports decision making with a wide array of information. It varies from daily meter readings relevant to many sources of energy, energy generated by solar power, department-wise analysis of energy, total energy consumption of the hotel and inally an analysis of the variances. 21 Environmental Management Accounting in Sri Lankan Enterprises Engineering industry A local conglomerate in Sri Lanka, which is prestigious in automotive industry and engineering products and services, follows some noteworthy practices internally in order to manage energy. he conglomerate is engaged in the sale of vehicles and spare parts, servicing, engine overhaul and machining, medical engineering, lighting solutions, agricultural machinery, tyre solutions, building management systems, power solutions, construction and mining machinery and luid management. he company has identiied electricity, diesel, petrol and liqueied petroleum gas as their main sources of energy. Due to the nature of their business activities expenditure on energy is considered to be very high. he external and in-house energy audits carried out by the company enabled the identiication of regular energy conservation practices. he physical energy-related EMA information generated from the energy audits helped the conglomerate to identify and initiate actions that should be carried out on a daily basis in order to minimize energy consumption within the company. he energy audits have also highlighted the abnormal deviations of energy consumption within the company and revealed corrective action. he use of capacitor banks for power factor correction, replacement of incandescent lighting with CFL and LED lighting, programming of all computers to revert to standby mode within a 5-minute idling period and the setting of AC units at a constant minimum of 24 degrees Celsius or more are some of the measures identiied and implemented across all of its locations with the help of energy audits. Having obtained ISO 14,001 certiication, the company places high emphasis on proper recording of EMS (Environmental Management Systems) and QMS (Quality Management Systems) information in its ERP system. In order to facilitate the energy audits, to take corrective action and to review the progress of the strategies implemented, accounting information is used on a monthly basis. Physical and monetary information such as meter readings for electricity, fuel consumption and the variation of such energy sources of every branch is updated in a central database. Complying with ISO 14,001 requirements, the company keeps records of environmental aspects and impacts in both physical and monetary terms. he 22 Chapter 2 | Managing Energy “impacts” record the activities that afect or inluence the environment on physical terms. Based on its signiicance level, each department is responsible for mitigating their impacts. In order to take such corrective actions, if there is any inancial requirement, the relevant department should make a budgetary allocation in its next budget. his is an example of physical EMA information leading to monetary EMA information. he company has adopted not only routine practices and measures for saving energy, but also made a substantial investment in sustainable energy management commitments and opportunities. he newest built state-of-theart showroom and customer care centre for one of their prestigious vehicle brands is a model facility for a building constructed in line with the green building concept. It employs the latest green technology such as façade cooling and shading devices, low emissivity prismatic sky-lighting to utilize natural daylight and a building management system that eiciently controls the AC system, lighting, access control and many more. he company has also obtained the Leadership in Energy and Environment Design (LEED) Gold Certiicate for another facility which was built in line with the green building concept. With the implementation of energy conservation practices mentioned above, the company has been able to reduce the overall energy usage by 13% over the past years. With the new building designed under the green building concept and the energy preservation initiatives already in place, the company expects to save approximately 25% of energy in the coming year as well. 23 Environmental Management Accounting in Sri Lankan Enterprises Textile and apparel industry - Case one One of South Asia’s leading manufacturers of intimate apparel, performance wear and swimwear has been recognized several times for its sustainable practices. Its main plant located in a suburban area of Kalutara district follows many noteworthy practices in relation to energy. Most of the energy conservation initiatives involve signiicant investments which are justiied in a detailed inancial evaluation by the inance team. he inance team has a substantial stake in the sustainability function for which a dedicated staf member from the inance team is allocated. he processing area of the factory was previously lighted by tube lights. With an investment of more than LKR 5 mn, the factory now uses day light. In order to assess the viability of the project the inance team together with the engineering staf had irst quantiied the energy savings in physical values. Ater assigning a monetary value it has been estimated that the annual saving is more than LKR 1 mn. A similar practice was witnessed when a rice steamer instead of open boiling rice cooker was introduced. Ater doing a detailed analysis the management has understood that boiling rice is one of the most energy consuming activities for preparing 6,000 meals per day for its staf. On average 800kg of rice is boiled per day. With the introduction of the rice steamer, over LKR 2 mn was saved. In order to justify the investment, the factory captures routine physical EMA information by installing separate electricity meters in the kitchen. he inance team then assesses the electricity cost reductions that were made possible through this investment. Similar to most of the similar factories, AC accounts for a major portion of electricity consumption. Several steps have been taken to reduce electricity consumption by ACs. Adoption of evaporative coolers1 is one such initiative. his cooling system consumes 40% less energy than a conventional AC system. At the same time, compared to a conventional AC system, the initial investment is 70%-80% less. In places such as oices where ACs are installed, electricity consumption by the ACs is controlled by AC load management.2 1 An evaporative cooler is a device that cools air through the evaporation of water. Evaporative cooling difers from typical air conditioning systems which use vapor-compression or absorption refrigeration cycle. 2 Load management is the process of balancing the supply of electricity used by utilities, which is achieved through direct intervention to consumer behavior. Load management allows utilities to reduce demand for electricity during peak usage times, which can, in turn, reduce cost. 24 Chapter 2 | Managing Energy Introduction of LED task lamps, replacement of energy ineicient T8 lights with LED, use of natural lights in corridors and use of an insulated boiler3 for the purpose of boiling water to prepare tea are a few other measures taken by the company for managing energy. Along with all the investments made to manage energy, the company has placed high emphasis on measuring and monitoring energy data. A system called “Eco Tracker” keeps records of the use of energy and water, and waste generation periodically. he company also uses another information system known as the “Energy Monitoring System”. his system keeps records of energy use by each department such as the raw material warehouse, cutting department, compressor machine and generator. Having monitored this data the system monitors reports monthly. he reports are compared against the targets set by the group sustainability steering committee. One such target is the intensity ratio of “per standard hour energy consumption”. he company has developed 28 KPIs in 4 main areas, namely, energy, water, waste and operations. When developing KPIs related to energy, the following data is gathered monthly: – – – – – Electricity consumption from the national grid Energy consumption based on area Electricity consumption from the generators (kWh) Running hours of the generators Fuel consumption of the generator Based on the above data, the following KPIs in relation to energy have been developed. – – – – Purchased Electricity per clock hour/ standard hour Total electricity per clock hour Kilo watt hour (kWh) per square feet – production/cutting kWh per clock hour – chiller/ compressor 3 Insulated boiler exhibits the characteristics of minimizing the heat energy loss with the insulation material coating, available inside. 25 Environmental Management Accounting in Sri Lankan Enterprises Having obtained the KPI results, the company has established an “Energy Index” which is calculated as follows: (0.8 * total electricity per clock hour) + (0.2 * generator fuel per run hour) he inal outcome of the energy index along with the other three indices for water, waste and operation is identiied as the “Sustainability Index”. he results of the sustainability index as well as individual KPIs are brought up at monthly operations review if there are any deviations to be addressed. he KPI results also play as a feedback for resource allocation and they signal the budgetary allocation requirements for the next period. his is an exercise solely carried out by the inance team, with the help and inputs from the sustainability team. his exempliies how an accountant could bring in a signiicant value addition for environmental management of an organization. Textile and apparel industry - Case two Sri Lanka, being an apparel manufacturing hub in the world, takes pride in holding a number of leading suppliers for many global brands. A renowned apparel manufacturer in Sri Lanka, which has a history over 100 years, has upheld its glory by designing Asia’s irst carbon neutral factory as well as the irst custom built eco-friendly apparel factory in the world. As this is a custom built factory, undisputedly the design itself has immensely contributed towards managing energy from its inception. Energy conservation is one of the core areas of becoming green in this eco-friendly factory. Not only the factory has adopted several energy conservation practices but also the progress is being monitored against the set monetary and physical KPIs. he factory consists of 126 solar panels which supply for 10%of the energy needs of the plant. his initiative annually saves about 158,630 kWh of electricity from the national grid. he majority of the factory area is lightened using sky light whilst a sensor detection system is set to automatically switch on factory lights depending on atmospheric condition. his system is referred to as defused lighting where the technique is capable of reverting heat back while giving un-shaded sky lighting. In addition, the factory is the irst in the country’s apparel sector to introduce LED task lights in every machine. AC and ventilation is oten recognized as one of the major energy consumers of a 26 Chapter 2 | Managing Energy facility. As a solution for this, an evaporative cooling system is adopted in this factory which consumes only 25% of energy that a conventional AC system consumes. he operator coolers are used as a substitute for ACs and fresh air is circulated inside the factory building continuously. he building has installed with 3M ilm windows and white colored rooing sheets to relect heat as much as possible. he company claims that its energy consumption is 48% less when compared to a conventional factory. In this way, the physical and monetary EMA information provides the basis for justifying the initial capital expenditure decisions of the factory. Recognizing the environmental friendly initiatives taken at the design stage of the building, the LEED certiication4 has been awarded to the factory in 2009. he factory is the irst in the world to get the gold certiication in apparel sector. It is in the process of obtaining ISO 50001, the standard for Energy Management. Measuring and monitoring of data in relation to energy management is given the same prominence as energy management practices. he management believes in order to achieve better performance in future, close monitoring on daily basis is vital. he factory has a customized set of KPIs which monitors the utilization of energy, water, etc. by each division. Energy consumption which is comprised of electricity, gas and diesel is compared against the volume produced at each factory across the group. One KPI set for electricity is the electricity consumption per standard unit. his igure is calculated daily as well as at the end of each month. Monthly results are compared with the previous year’s actual average. his is a clear use of EMA information as the divisional heads are made accountable for any variations in the KPI results. he energy KPIs are also used as a measure of productivity as it is compared with the production levels of the factories. At group level plans are underway to achieve the ultimate goal of becoming a completely carbon neutral organization. In the process of realizing that dream, all the factories of the group are assessed and evaluated based on a rating system. he factories which are ranked best in their ratings are recognized as 4 he LEED certiication is a globally recognized standard for measuring building sustainability. he LEED rating system ofers four certiication levels for new constructions. Certiied, Silver, Gold and Platinum – that correspond to the number of credits accrued in ive green design categories: sustainable sites, water eiciency, energy and atmosphere, materials and resources and indoor environmental quality. 27 Environmental Management Accounting in Sri Lankan Enterprises green factories. As this is an annual activity, the management information is retrieved and monitored throughout the year for decision making. Apart from this routine information related to environmental management, ad hoc information is also generated whenever the need for information arises. Typically, when the staf needs to be educated on certain energy conservation practices, the information on energy consumption and saving is communicated by way of graphs or posters, which are displayed in common areas like the cafeteria. Even the short-term capital expenditure decisions such as CFL bulbs vs. LED bulbs, T8 tube lights vs. T55 tube lights, etc. are supported by the physical and monetary EMA information. Using EMA information is not limited to routine, ad hoc or short-term capital expenditure decisions. he environmental audits are conducted twice a year and the indings of such audits are used for further improvements and in making long-term capital expenditure decisions for future. Food and beverage industry he company which manufactures one of Sri Lanka’s strongest domestic brands for over 100 years is a listed company in the Colombo Stock Exchange (CSE) and is part of a renowned conglomerate in Sri Lanka. As the company is engaged in manufacturing ice cream and sot drinks, the manufacturing process is highly energy-intensive. hus in order to manage the energy consumption within the factory, a number of energy preservation initiatives have been taken. Previously, the factory used four boilers which were powered by furnace oil. Due to surging fuel prices, the company had to look for alternative energy sources which could be used for the boilers. Ater an investment appraisal and the recommendation of the management accountant, the company invested LKR 50 mn in a bio mass boiler project with a payback period of 14 months. In order to arrive at this payback igure the company carried out a detailed discounted payback calculation. In calculating the savings from the bio mass boiler a comparison was made with the furnace oil boiler. To arrive at the savings igure, irstly, the quantity of steam consumption for sot drinks and ice cream was separately identiied in terms of kilograms. hen a volume projection of steam consumption was done ater identifying a trend. 5 T8 and T5 are lightings that use luorescent technology. Eiciency wise T5 lights out performs the T8 tube lights. 28 Chapter 2 | Managing Energy Once the volume of steam was identiied, the cost of steam was calculated for two options: furnace oil or bio mass. Finally, the diference of the cost of each option was considered as the saving and was used as the cash low in the discounted pay back calculation. his exempliies how this company has used physical and monetary EMA information in making ad hoc and long term decisions for environment management, especially the energy management aspect. As the company is in the carbonated sot drink industry, carbon dioxide (CO2) is an input of the manufacturing process. Initially, CO2 was generated by burning super diesel. he company decided to import CO2 from India upon realizing that generating CO2 in-house is not cost efective anymore. his “make or buy” decision was also supported with an evaluation which indicated the most proitable CO2 supply. Ater the installation of the new plant which gasiies liquid carbon into gas form, the CO2 eiciency is measured. Each carbonated drink bottle has a speciic level of CO2 input, and when it is compared against the units of production, the total level of CO2 consumption per day is calculated. he meter installed in the CO2 plant indicates the gas released on a particular day thereby enabling any wastage or ineiciencies to be traced. It is the management accountant’s responsibility to report on such deviations in the CO2 consumption level. Hence, the use of physical EMA information pertaining to CO2 is crucial in managing energy in this organization. he electricity usage is measured through the division-wise meters installed within the factory. Electricity consumption is compared on a daily basis in respect of the production level. At the end of each month the variations from the previous month actual is analyzed. As measures for minimizing electricity consumption, the factory is lighted with daylight during the day time. Wherever the lights are required, LED bulbs have replaced the tube lights. he factory has identiied that reducing the kVA6 (kilovolt-amps) which cost LKR 1,050 per unit is one possible option for reducing the cost of electricity. In order to reduce the kVA, a schedule to switch on machines has been introduced with time gaps between the switching on of each machine. Ater the introduction of this switch-on policy the company has observed a signiicant reduction in kVA units, which ultimately resulted in a reduction of the electricity bill. 6 kVA is called the peak demand, which is the maximum amount of power (Kilowatt) that a facility draws from the system. 29 Environmental Management Accounting in Sri Lankan Enterprises Not only has the factory implemented certain initiatives to conserve energy, but has also taken the information related to energy to the decision making level at the factory. A dedicated report on energy is reviewed at the monthly supply chain cost management meeting, which is headed by the company’s head of supply chain. Prior to the meeting the report is circulated among the managers of the divisions highlighting the concerns and deviations of energy-related information. hus the manager accountable for the relevant area is answerable and is given a deadline at the meeting to come up with an action plan to correct such variations. he information for the reports discussed at this monthly meeting is generated and reported by the management accounting team. his demonstrates how the routine energy EMA information collected and analyzed leads to ad hoc decision making within this organization. Currently, there are four main components of energy that are taken into account when reporting on energy. Electricity, steam, diesel and Liquid Petroleum (LP) gas are the components and the consumption of each energy type is evaluated against the set KPIs. he KPI for electricity is the “electricity requirement (in kWh) per liter of sot drink/ice cream”. Based on the product mix and the volume, the electricity consumption is compared against the KPIs. Steam is also considered as a major source of energy. he KPI set for steam is the “kilograms of steam consumption per liter of sot drink/ice cream”. LP gas is used in the factory to power the forklits. “Number of kilometers per kilogram of gas” is the KPI for LP gas consumption. he freezer trucks used for distribution of ice cream is the main consumer of diesel. “Liters of diesel consumption per kilometer” as well as “number of diesel liters per liter of inished goods” are considered as the KPIs for diesel. Even in this situation, the diesel consumption per liter of inished goods is determined by the product mix of the particular load and the loading capacity. In order to collect the routine information required for these calculations the company has a well-established system. For example, the number of kilometers is tracked through sotware which is updated by the drivers ater each delivery. his company illustrates a very solid link between the environment management practices, speciically energy management, and the contribution of the management accountant in order to facilitate such energy related decisions within the factory. he information is provided for both operational and investment decisions which in fact can be viewed as physical and monetary short-term as well as long-term EMA information. 30 CHAPTER Chapter 3 | Managing Water 3 Managing Water Water is a unique natural resource that covers two thirds of the planet’s surface. Nevertheless, 97.5% of the surface water is composed of salty water leaving only 2.5% of the water resource non-salt. Even out of this 2.5% of non-salt water, 69.7% is ice and snow cover, as depicted in the diagram below (refer Figure 3.1). Hence the actual water resource that is in a form suitable for day-to-day human use is just 0.76% of the total water resources of the planet earth. Figure 3.1: Composition of the world’s water resource Non salty water Salty water 2.5% 97.5% Usable water 30.3% Snow & Ice 69.7% Source: United Nations Water Conservation Program, 2014 31 Environmental Management Accounting in Sri Lankan Enterprises he following are excerpts from the United Nations’ Water Conservation Program’s website in 2014. ( “Water scarcity afects more than 40% of people on the planet. By 2015, two-thirds of the population will be living under water stressed conditions.” ( “In 2030, 40% of the people will be living in areas of high water stress.” ( “Water resource management impacts almost all aspects of the economy, in particular, health, food production and security, domestic water supply and sanitation, energy, industry and environmental sustainability.” ( “Water use has been growing at more than twice the rate of population increase in the last century.” ( “World population is growing by 80 mn people a year, implying increased freshwater demand of about 64 bn cubic meters per year.” ( “World fresh water use: irrigation and food production (70%), industrial (20%) and domestic use (10%)” Source: United Nations’ Water Conservation Program, 2014 Importance of water management in Sri Lanka Sri Lanka, completely surrounded by the waters of the Indian Ocean and covered by 103 river basins, is a highly water rich country. However, as per the National Water Supply and Drainage Board (NWSDB)(2014), a geographical area of 16% in Sri Lanka does not have access to safe water. NWSDB, which provides puriied drinking water, covers only 44% of Sri Lanka. here is another portion of the population (37%), who uses tube wells and dug wells and face diiculties in collecting water during droughts. he following chart summarizes the water use statistics of Sri Lanka (refer Figure 3.2). 32 Chapter 3 | Managing Water Figure 3.2: Water use statistics in Sri Lanka Rain water harvesting Tube wells 3% 1% Covered by NWSDB No access to safe water 44% 16% Protected dug wells 37% Source: NWSDB, 2014 Prolonged droughts in the country in some years have severely afected the Eastern and North Central provinces. Dwindling weather patterns such as severe droughts experienced in 2014 are urgent reasons why Sri Lanka should take further steps to manage water despite its abundant water resources. Being a developing country, Sri Lanka has reported a lower Per Capita water Footprint (WFP) in the past. Nonetheless, in the wake of the post-conlict economic and social boom in the island, Sri Lanka is expected to increase its WFP. hough Sri Lanka does not contribute to the world water crisis and pollution, the country has vast potential to conserve water and create new opportunities. Due to the low cost of water, the domestic and corporate sectors have paid little attention to preserve water when compared with attempts to save energy (refer Table 3.1). Yet, many initiatives have been taken by the corporate sector of Sri Lanka, which will follow ater a discussion of a few important concepts related to water management. 33 Environmental Management Accounting in Sri Lankan Enterprises Table 3.1: Water tarif in Sri Lanka No. of units Usage charge LKR/per unit 00-05 06-10 11-15 16-20 21-25 26-30 31-40 41-50 51-75 Over 75 12 16 20 40 58 88 105 120 130 140 Monthly service charge LKR 50 65 70 80 100 200 400 650 1000 1600 Source: NWSDB, 2014 Approaches to water management his chapter focuses on two main approaches to water management: behavioral and engineering. Behavioral approaches mainly involve eforts to educate human resources (employees, customers, suppliers, community, etc.) to bring about changes in water use. his is the most efective form of water management as it saves both water and costs. Water savings could be identiied in two diferent forms: preservation of fresh water by reducing unnecessary water use and avoidance of grey water. he cost savings connected to these water savings are associated with reduced direct water use cost and avoidance of grey water treatment cost. Engineering approaches involve changes in physical capital directed at preserving water. his may range from water faucets that prevent water waste at the source to water treatment plants. 34 Chapter 3 | Managing Water Table 3.2 shows an integration of some aspects of the waste management hierarchy (commonly known as the 3Rs) with the above two approaches. (Refer Chapter 4: Managing waste, for more details of the waste management hierarchy.) Table 3.2: Integrated water management approaches Waste management option Reduce Re-use Recycle Behavioral approaches Change in attitude to avoid water waste at source and unnecessary use of water Change in attitude to reuse water as much as possible rather than simply using fresh water Educating the people on the importance of recycling water and persuading the top management to invest in physical capital for water recycling Engineering approaches Use of technical aspects to reduce water use e.g. water faucets, dual lush systems in bathrooms, water free urinals and commode systems, sensitive taps Use of technical aspects that enable the reuse of waste water Use of engineering techniques to recycle waste water e.g. aerobic and anaerobic water treatment plants Water puriication Water puriication involves using diferent methods to bring water resources up to requisite levels for human use. he following table is a simpliied illustration of diferent puriication methods with a description of diferent levels (refer Table 3.3). 35 Environmental Management Accounting in Sri Lankan Enterprises Table 3.3: Water puriication methods Preliminary Primary treatment treatment L Removal of Removal of E waste water suspended constituents solids and V that may organic E cause matter L operational through S problems sedimentation during treatment Solid liquid separation 1. Filtration – removal of larger particles from waste water M 2. Sedimentation – removal E of particles from waste water T H 3. Removal of oil and grease O D S Secondary treatment Removal of biodegradable organics and suspended solids Tertiary treatment Removal of nutrients from water Biological treatment performed to lower the organic load of dissolved organic compounds Chemical/advanced treatment 1.Disinfection – killing the present undesired microorganisms in the water 2. pH – adjustment 3. Reverse osmosisremoval of dissolved salt and minerals from the water 3. Using activated carbon 4. Air stripping – removal of ammonia nitrogen and volatile organics Mainly two types; 1. Aerobic treatment 2. Anaerobic treatment 36 Chapter 3 | Managing Water Sewage water treatment As an engineering practice categorized under biological treatment, sewage water treatment has received much attention for the following reasons. ( As per the regulatory requirements of the Central Environmental Authority, it is mandatory for some industries to ensure treatment of waste water before disposing of it to the environment. ( Treated water could be re-used for gardening and other purposes and would reduce the water consumption. ( Sewage treatment avoids contaminants and eluents in waste water reaching ground water and surface water sources and hence preventing a disastrous pollution of water. ( Chemical free sludge, which is by-product of sewage water treatment, could be used as organic fertilizer. What is sewage? Waste and unwanted parts of material contained in water eluents What is sewerage? Physical facilities involved with carrying or treating waste/ sewage What is sewage treatment? A method involved with both biological and chemical processes to remove contaminants from waste water eluents resulting from industrial and household use, before waste water is discharged to the environment. What is sewage sludge? Solid waste collected during sewage treatment. his is a by–product of sewage treatment. Solid waste is separated from liquid water. Some sewage sludge is used as fertilizer for farming. However, sewage sludge derived from industrial waste water may contain chemicals or contaminants which need to be properly disposed 37 Environmental Management Accounting in Sri Lankan Enterprises here are two main methods of treating sewage: a) aerobic treatment, and b) anaerobic treatment. Both systems make use of microorganisms within the input water to digest waste. Digestion of waste occurs as a result of growing and reproducing mechanisms of microorganism (bacteria) using oxygen. In aerobic treatment input water goes through the open atmosphere and the microorganisms within the water use atmospheric gaseous oxygen. However, in the anaerobic method, input water goes through sealed tanks which don’t have gaseous oxygen. Hence, the bacteria make use of elemental oxygen within the eluents themselves or inorganic oxides supplied externally. However, the output composition of the two methods is diferent from each other. Aerobic treatment results in more sludge and CO2, whereas anaerobic treatment emits more methane and CO2. Water accounting Accounting for water involves collecting, measuring, recording, analyzing and reporting of physical and monetary data related to water. Physical aspects of water are measured in liters/ cubic meters and monetary aspects of water are measured in currency. he irst step in accounting for water begins with the collection and measurement of water data. In a simple business enterprise, the monthly water bill relects both physical and monetary data related to water. However, to make more informed decisions in business, the water usage of individual departments is required (water audit). his demands separate water metering, collection of data and maintenance of proper records. he initial infrastructure paves the way for better analysis which could be undertaken in the following ways; ( Comparing water use over months or equal periods (Periodic analysis) ( Comparing water use with similar units (Comparative analysis) ( Using integrated measures (Intensity analysis) - his involves creating integrated measures by combining water-related data with some other information, probably a possible driver of water usage. e.g. daily water units per operating hour of a business or monthly water use per employee of an enterprise 38 Chapter 3 | Managing Water Intensity analysis can be undertaken both periodically and/or comparatively. Reporting aspects of water involves communicating the water-related information or analysis to stakeholders through properly structured reporting mechanisms. he Water Footprint (WFP) of an organization can be viewed as an efective measurement as well as a powerful communication tool. Water Footprint (WFP) WFP is a comprehensive approach to measure water use. his could be applied to per capita, a country, an industry, a product or a business. his is unique owing to its life time focus as well as due to the inclusion of both direct and indirect water use. Hence, WFP includes the following; – – – – Green water footprint – volume of rainwater consumed Blue water footprint – volume of rainwater consumed Grey water footprint – volume of waste water generated Black water (foul water/ sewage) footprint – volume of waste water containing fecal matter and urine. Application of water management and related accounting in Sri Lanka his section irst describes the country-wide eforts of the Government of Sri Lanka to manage water followed by an explanation of industry-wide application of water management and accounting. Eforts of the Government of Sri Lanka Island-wide eforts to conserve water resources in Sri Lanka are still at a low level of intensity compared to other environmental management eforts such as energy management, prevention of air pollution and wild life conservation. Nevertheless, there are a few government institutions that are working towards this. Among them are: a) Central Environmental Authority (CEA), b) National Water Supply and Drainage Board (NWSDB), c)Water Resource Board and d) Department of Irrigation. 39 Environmental Management Accounting in Sri Lankan Enterprises he role of the CEA is predominantly to provide regulatory requirements and ensure the maintenance of environment-related law, i.e., issuing the Environmental Protection License (EPL) to prescribed industries. As per the requirements of EPL, enterprises should ensure that waste water disposal standards and tolerance limits in particular are met to dispose of industrial eluents into inland surface waters, land for irrigation purposes and marine coastal areas. In addition, speciically focusing on water conservation, CEA is currently carrying out Surface Water Quality Monitoring although the coverage is still at an infant stage. he NWSDB is the public utility provider that provides paid clean water to households. In addition to this main task, other water management activities of NWSDB include operating large-scale sewage treatment plants and carrying out awareness programs. he Water Resources Board is a government body paying more attention to matters pertaining to ground water resources in Sri Lanka. Carrying out hydro geological surveys to identify ground water availability in given areas, design and construction of deep tube wells, carrying out large-scale ground water assessment studies, chemical and bacteriological analysis of water, environmental impact assessment pertaining to ground water issues, undertaking in-depth water quality studies and conducting awareness programs for the public on ground water resources are some of the services provided by the Board. he Irrigation Department’s activities are focused on managing surface water resources. Hence the objective of its activities is to develop river basins for optimum use of water and land. 40 Chapter 3 | Managing Water Application of water management in Sri Lankan enterprises Hotels and leisure industry A prestigious hotel group in Sri Lanka which operates 22 graded resort hotels has taken signiicant eforts to manage water. Two ive-star hotels of the group located in a coastal tourist hotspot, Negombo, has identiied that on average three fourths of the used water is turned into waste. his important physical accounting information was the starting point that triggered many initiatives to actively engage in managing water. In a hotel environment, the water bill accounts for a considerable portion of the total cost owing to water intensive activities such as swimming pools, gardening, guests’ use, laundering, cooking, cleaning and many more. With the assistance of separate water meters set up for every department and division, now the hotel has laid the infrastructure for physical accounting data gathering related to water. his facilitates more informed decisions rather than hiding the cost of water simply in the overheads. he hotel pursues both engineering as well as behavioral techniques to manage water. Behavioral practices mainly consist of regular awareness programs for the staf aimed at highlighting the importance of the sustainable use of water. hese awareness programs focus on the basics of water management: delivery of water, costs of water services, importance of water conservation and the need for active participation in conservation eforts. Proper maintenance of water accounting has enabled such awareness programs to include real statistics/ information on the water use of the hotel. Water savings through employee initiatives are rewarded back to the staf welfare fund to promote their further commitment. In order to calculate the savings from these initiatives, the hotel uses both physical and monetary EMA information on water use such as historical water consumption patterns, integrated water use measures such as average monthly water units per guest and cost of national water units. Moreover, the hotel uses the “Green Directory” to enhance guests’ awareness of the hotel’s sustainability practices. All guests are provided with a Green Directory that summarizes the hotel’s green practices. It also requests the guests to conserve water and reduce waste. he hotel also displays quotes in diferent places such as tissue papers, bathrooms and rooms etc that highlight the potential contribution from merely changing attitudes with minimum investment. 41 Environmental Management Accounting in Sri Lankan Enterprises he hotel also considers many engineering aspects of water management. Practices such as replacement of all toilets with low-lush commodes and urinals, dual lush commodes, faucet aerators, pressure reduction in ixtures and low lush shower heads have enabled the hotel to reduce water consumption signiicantly. For example, conventional toilets use 3.5 to 5 gallons of water per lush but low-lush toilets use only 1.6 gallons of water or less. his data coupled with other physical and monetary water accounting information provide useful information to evaluate the inancial and environmental feasibility of the initiatives. he following illustration depicts how the monetary EMA is used in appraising the investment in low-lush toilets. Total water savings per low lush commode (water units) = (water lushed in existing commode – water lushed in the suggested investment) * frequency of usage per guest night * estimated number of occupied nights per year Total savings per low lush commode (in LKR) = Total water units saved * water unit cost faced by the hotel As a larger engineering project, the hotel has established both anaerobic and aerobic water treatments plants in the hotel premises itself. One of the two hotels is located facing a lagoon and the hotel has invested in recycle lagoon water. his initial investment was done a long time back without a proper inancial appraisal. Nevertheless, later by gathering of physical and monetary accounting data for the project, the hotel found that electricity units consumed for recycling have overtaken both environment and economic beneits. his led to the subsequent abandonment of the project. his is a clear illustration of how environmental management eforts should be backed by proper EMA information. In addition to the aforementioned behavioral and engineering approaches, the hotel adopts a reporting structure that further facilitates the integration of EMA with environmental management practices. he hotel conducts three main meetings related to sustainability. hese meetings are daily morning meetings, monthly green directory meetings and engineers’ meetings. hey provide for and shape the reporting frequency and the structure of environmental information. At daily morning meetings General Manager 42 Chapter 3 | Managing Water discusses with the respective Department Heads the water consumption of each department of the previous day to identify deviations. For this purpose integrated measures such as water units per occupant guest is compared. he same measures with respect to monthly data are discussed in monthly meetings. Engineers’ meetings provide a platform for long-term water conservation solutions. his forms the reporting infrastructure in facilitating the organizational-wide EMA application. Printing industry A giant in the Sri Lankan newspaper industry has set an exemplary move in the area of environmental management and water management. his was prominently visible in its main news paper printing plant that accounts for more than 80% of the current production. A Special feature of this plant is that it has incorporated the Cleaner Production (CP) concept in the main operations. his establishment is a great revelation of how the behavior of staf can result in efective water management practices. Quality Circles (QC) have immensely helped this plant to promote the creativity of staf to improve these environmental programs. As a prerequisite for the CP method for water management both physical and monetary EMA aspects have been considered as an integral part of the operations. he company irst identiied the sources of water used in the operations: 57% from the national water supply and 43% from tube wells. On the other hand, these water sources are used for eight main water consuming activities. he balance between the two - water supply and consumption - indicated that only a very small percentage of input water is actually made use of. A sub metering system has enabled the company to accurately trace the sources of water waste. Hence, a water consumption analysis reveals the application of input-output analysis/ mass balance. In line with this, several water management initiatives have been implemented by the company. Among them the replacement of the urinal system, reuse of condensed water of the urinal system, installation of waste water treatment plant and changing the shower system are important. 43 Environmental Management Accounting in Sri Lankan Enterprises he company has replaced the existing urinal system with new water saving urinals having identiied that the existing urinals are a major source of water waste. he new urinal system releases only one liter of water per manual lush compared to the continuous water supply in the previous system which consumed 1,682 cubic meters in 2012. he result was encouraging where nearly 1, 616 cubic meters of water for the year 2012 have been saved which relected as a cost reduction of LKR 121, 217. Measuring the amount of drain water generated from the AC system revealed that 60 liters of water per hour falls to the ground. he factory uses AC machines for 85 hours a week on average, which represents a considerable amount of water - 265 cubic meters - annually. he company then set up a pipe line to collect the wasted water and to store it in a tank, which was ultimately re-used for gardening and cleaning vehicles and lavatory areas. his demonstrates the “re-use” option of the waste management hierarchy. he company uses water as an input in the printing process along with chemicals. Hence the waste water generated in the printing processes cannot be released to the grounds unless the water is treated so as to reduce the pH value to tolerance levels as stipulated by the CEA. herefore an anaerobic sewage treatment plant has been set up. Waste water treated from the plant has been measured in physical terms and then been assigned monetary values to justify the viability of the investment. hanks to the sub-meter system and physical water records, the entity has identiied that rest rooms have considerably high water consumption. A simple inspection revealed that ball valve showers in rest rooms that give a superluous water low have caused unnecessary water waste. hus, the company has replaced existing showers with concealed valve showers which enable manual regulation of the water low. Although this is a simple engineering technique to manage water through the “reduce” approach, water savings have been quantiied to be 127 cubic meters. In essence, the company has properly maintained physical and monetary water-related information that paved the way for many water saving actions. In addition, ater the investments the company has measured the cost savings in terms of physical and monetary data. his past-oriented EMA information used in post-completion audits has conirmed the viability of investments 44 Chapter 3 | Managing Water which encourage management to go further in its sustainability agenda. Moreover, EMA information has given the company an added advantage in applying for various local and international awards and certiication standards. Textile and apparel industry: Case one he irst custom-built green apparel factory in the world, the exemplary Sri Lankan model, has embedded water management on par with energy, waste and carbon footprint (CFP) management initiatives of the plant. he green building concept has invested the factory with unique engineering features in relation to water management. hey are mainly: a) Dual water system– Factory design and plumbing have allowed supplying water to commodes and cisterns from dual sources; 60% of water is reused treated water and 40% as fresh water. he treated water is supplied from the anaerobic water treatment plant set up in the factory premises that re-uses water from washrooms and cafeteria. b) Rain water collectors –Building rooing has special allocations for rain water collection and drainage. All these drains ultimately gather water into a tank (capacity of 115,000 liters) in the factory garden. he water collected in the tank is reused for purposes such as cleaning and gardening. In addition to tangible physical initiatives, the company strongly believes in a behavioral change in the staf to produce the results of water conservation and other environmental eforts. his is clearly evident in the two-fold induction program of the factory in which sustainability induction is given a central attention by management. he induction covers sustainability aspects of the factory on the very irst day at the job of newly recruited employees to inculcate the value of saving water, energy, etc. his has become very efective in molding the behavior of the employees to suit the expectations of management. Since the factory has incorporated many aspects of water management from the inception, now attention is devoted to maintaining the actual progress against the set KPIs while making kaizen improvements. 45 Environmental Management Accounting in Sri Lankan Enterprises In this regard, the separate water metering at major water points such as washrooms and the canteen enables the engineers to track the physical accounting aspect of water. Going a step further, the factory makes use of an integrated physical accounting measure-“daily water usage per employee”to monitor the use of water. Daily communication of this measure not only monitors the department-wise water use but also facilitates identifying underground water leakages based on deviations. he factory has always been maintaining this measure at a lower level of below 35 liters, the lowest among the group, whilst the industry target set by the BOI is 50 liters per employee per day. More importantly, this measure is one of the KPIs set at the group level. he achievement in this KPI including other sustainability KPIs are shared among all factories within the group on a monthly basis. he sustainability index maintained by the group sustainability division includes the performance in this KPI along with other sustainability KPIs. Eventually, the achievements above the threshold score will indicate those factories that can be recognized as green factories. his is where EMA plays the role of performance management in sustainability eforts and drives the business forward. In a business case where dramatic achievements have already taken place, keeping the KPIs at target would be the key to success, and EMA is the interface that supports it. Textile and apparel industry: Case two An apparel manufacturing factory that comes under one of Sri Lanka’s main foreign exchange earners is located in a green rich village in Sri Lanka, just about 40 kilometers from the capital city of Colombo. he factory showcases numerous water conservation eforts interwoven with a supportive EMA system. he apparel maker has to manage the water needs of about 5000 workers, one of the largest managed by a single entity in the country. Drinking, preparing two meals for all the employees on a daily basis, washing, cleaning and gardening 46 Chapter 3 | Managing Water are the major water consuming activities that have resulted in projects aimed at conserving water. hus, it is the business case that has necessitated the adoption of water conservation practices at the apparel factory. ISO 14001 certiication, top management inluence and also a group reporting structure have shaped the water conservation practices and accounting aspects of the factory. Moreover these demand not only the best possible action to reduce water consumption but also being accountable by providing accurate and consistent information in a timely manner. Hence all the water conservation/ management projects have to be justiied by both physical and monetary savings that clearly demonstrate the use of EMA. Water accounting aspects of the factory and EMA in general demonstrate diferent inherent characteristics in its application. he irst level is the gathering and record keeping of basic information related to water supply and consumption. Daily water usage of the factory amounts to 250, 000 to 300, 000 liters. he main water sources are a) city water supplied by NWDB, b) tube wells and c) rain water. Going a step further, the factory has set up a sub-metering system to identify the water consumption by diferent units. In addition to primary water sources, water treated from the sewage treatment plant can be identiied as a secondary source. here are two treatment plants. One of them treats waste water generated from wash rooms and the other plant treats oily waste water generated from the canteen. he data relating to the amount of water fed to and treated in these plants are gathered separately. In addition to this physical water-related data, the entity monitors and keeps track of monetary aspects such as monthly total water bills, water treatment costs and electricity costs related to tube wells. he second level of water accounting involves the calculation of intensity ratios for water. Many intensity ratios in relation to water are calculated such as: – – – Water usage per unit of production Water usage per head Percentage of city water/tube water/rain water from the total water usage Going a step further, the inance team has pioneered the introduction of a sustainability index. his index is a development of EMA that incorporates more than one intensity ratio through a weighting system to arrive at a single 47 Environmental Management Accounting in Sri Lankan Enterprises value. In this index, two water-related intensity ratios are calculated: water usage per head and water usage per unit. hese two KPIs are then given a weight of 50% each which add up to 100% of the water aspect of the sustainability index. he sustainability index comprises three other environmental aspects: energy, waste and carbon footprint (CFP). Each of these aspects has its own KPIs and weightings. Finally the index value is calculated as Sustainability index = (water sub-index + energy sub-index + waste subindex + CFP sub- index) / 4 2013 is considered as the base year for the index and since then, the index has been calculated on a monthly basis. his index is useful in signaling the trend compared with the base year, the year in which major initiatives were taken by the factory. he water-related EMA system also provides ad hoc physical and monetary accounting information to appraise the sustainability projects. When appraising water conservation projects, physical and monetary water data us used. However, with regard to water, the monetary value is negligible or even too small to yield an attractive pay-back. In such circumstances, water projects are approved based on qualitative factors such as risk level, regulatory requirements and environmental impact. To improve the rationale and scientiic base, a new EMA system is currently in the development stage at group level that allocates scores to sustainability projects through lines such as inancial, regulatory, people and environmental. he factory has also beneited from the co-existence between the inance and sustainability divisions. Passionate environmentalists working in the inance team not only support sustainability projects but also help develop, maintain and innovate EMA systems. Food and beverage industry One of the longstanding Food and Beverage companies listed in the Colombo Stock Exchange (CSE) showcased a strong case of ground water management. he sot drink and ice cream manufacturing factory of this indigenous company is located near the Kelani river basin, one of the major four main river basins in Sri Lanka. Like other identical manufacturers, the factory is 48 Chapter 3 | Managing Water strategically located for the purpose of extracting water from underground natural water springs as water is the main raw material in the sot drink manufacturing process. he factory entirely depends on ground water extracted by using tube wells located adjacent to the manufacturing premises as the primary water source. he factory extracts nearly 1200 cubic meters of ground water per day on average. Water consumption related to production is reported mainly from bottle washing plant that accounts for 650-700 cubic meters of water per day. In addition, manufacturing plant has the second highest production related water usage. Staf cafeteria, wash rooms, vehicle washing and gardening are the non-production water consuming activities. On average 650 cubic meters of raw water extracted daily go through the water treatment process daily before its use. he other portion of extracted water is directly used without treatment for purposes such as wash rooms, toilet lushing, vehicle washing, gardening and low washing. Reduction of water extraction is the most acknowledged method of water management due to three reasons: a) it avoids unnecessary water extraction from ground water springs, b) it avoids electricity costs related to water extraction and c) it reduces water treatment costs. Nevertheless, the main barrier to such activities is the conventional mind set of the factory employees. he parent company acquired this factory in 1992 with agreements with employee unions and staf. Since then, except for the executive staf, the factory has not recruited any factory employees. Hence, this poses a huge constraint in changing behavior. Water re-use and re-cycle also play an integral part, which can be identiied in several stages: a) he water treatment process which raw water goes through before being used directly from tube wells for purposes such as production and bottle washing. Average water treated per day is 650 cubic meters. b) Water re-treatment using aerobic and anaerobic methods by which water used in bottling plant and wash rooms are treated. Treated water is reused for purposes such as gardening, vehicle washing and toilets. c) Ultra Filtration (UF) technology, from which water used for bottle washing 49 Environmental Management Accounting in Sri Lankan Enterprises is iltered and microorganisms are eliminated. Water treated using this method is only used for washing loors. Although this plant has a capacity of 250 cubic meters per day, the actual usage is only 50 cubic meters per day due to employee reluctance to use treated water. his is a clear indication of how behavioral change plays an integral part in implementing the waste management hierarchy. d) Glass bottles go through the washing plant thrice before they are sent to the production plant. Water used in the third round, which contains less eluents, is re-used in the irst round washing of the next batch of glass bottles. EMA in relation to water comes into place to fulill the needs of supply chain cost management meeting. his is a monthly meeting led by the head of group sustainability where the management information is reported in a comprehensive report covering diferent aspects such as water, energy, material etc. he management accountant plays an important role by compiling the information and circulating the report prior to this monthly meeting. Particularly in relation to water, both physical and monetary EMA information is used. he main physical water information used is the total liters of raw water processed monthly from ground wells and the consumption of treated water by the main two production divisions: ice cream manufacturing division and sot drink manufacturing division. Moreover, the total monthly use of water is compared with the drivers: production level, product mix of the month and number of days operated. However, the company does not calculate any intensity ratio such as water consumption per unit of production as the product mix could drastically vary over months (e.g. demand for ice cream and sot drink has a seasonal component). For the purpose of provision of monetary information related to water, ground water treatment plants are considered as separate cost centre and all individual cost items are separately monitored. In this way the information needed to assign a monetary value for ground water treatment is compiled. his case therefore demonstrates the heavy use of physical water related EMA information for routine decision making purpose and for reporting purposes. 50 CHAPTER Chapter 4 | Managing Waste 4 Managing Waste Over the past few years, public concern has been growing over disposal of waste resulting from population increase, urbanization and aluence, among other reasons. Waste levels are rising continuously due to dramatic changes in consumption where consumers have multiple choices with single use and disposable products. Higher living standards and technology advances indicate that the quality of life has increased, but they also mean that the generation of waste is more than ever before creating a signiicant impact on the environment and severe loss of materials (European Union, 2010). herefore “waste” has become a global problem. Waste dimensions he concept of waste has two distinct dimensions according to Gray and Bebbington (2001): Wastefulness (Human/economic dimension) Relates to using more than what is needed; the by-products of production and use, disposal of by-products. Pollution (Ecological dimension) Relates to the efect of this process on the biosphere. 51 Environmental Management Accounting in Sri Lankan Enterprises Classiication of waste Next, it is important to classify waste into groups that pose similar risks to the environment and human health. he proper classiication of waste facilitates efective management and appropriate disposal strategies. Although there are many methods of waste classiication, this chapter focuses on the ive major waste classes suggested by the Department of Environment, Climate Change and Water, NSW (2009). ( Special waste A class of waste with unique regulatory requirements and impact which need to be managed to minimize the risk of harm to the environment and human health (e.g. clinical and related waste, asbestos waste and used tyres). ( Liquid Waste Any waste that becomes free lowing at or below 60 degrees Celsius or when it is transported, or generally not capable of being picked up by a spade or shovel. ( Hazardous waste Generally falls under two categories: - Listed hazardous waste Waste from generic industrial processes, wastes from certain industries, and unused pure chemical products. - Characteristic hazardous waste Waste that exhibits one of the four characteristics of ignitability, corrosivity, reactivity and toxicity and not speciically listed as hazardous waste. ( General solid waste (Putrescible) Decayable waste types such as animal waste, food waste and manure. ( General solid waste (Non - putrescible) Non-decayable waste types such as building and demolition waste, garden waste, virgin excavated natural material and wood waste. 52 Chapter 4 | Managing Waste Composition of waste in Sri Lanka he average composition of waste in the municipal areas of Sri Lanka is shown in the chart below (Figure 4.1). Despite the slight variations in the composition of the municipal waste, the major portion of waste (40% - 66%) is composed of short term biodegradable waste. Figure 4.1: Composition of municipal waste in Sri Lanka Polythene and plastics 5.91% Other 1.68% Saw dust & garment wastes 6.04% Slaughter house 2.34% Bio degradable short-term 56.57% Building 3.89% Paper 6.47% Glass 2.03% Wooden 6.35% Metal 2.76% Bio degradable long-term 5.94% Source -Ratnayake, 2012 Even though the composition of waste shows that the major portion of waste is short-term biodegradables (giving a volume ratio of about 8 times that of plastics and polythene), a study done by Ontario Waste Diversion Organization (2001) shows that the lower density ratio of plastic reverses the volume ratios to nearly 4 times plastics and polythene to that of biodegradables. In addition, the lower density makes the loose plastics rise to the top when dumped, and since oten the other garbage is covered with plastic bags, the harmful impact of plastic and polythene is more severe than their volumes. 53 Environmental Management Accounting in Sri Lankan Enterprises hus it is necessary to have a comprehensive waste management programme at national and organizational levels. Importance of proper waste management in Sri Lanka he urban population across Sri Lanka has increased from 10% in 1970 to 40% in 2010 with accelerated economic and social development and eforts to increase the standard of living. he capital city of Colombo and suburbs have also developed into metropolitan areas and several provincial cities such as Kandy, Kurunegala, Galle and Matara too have expanded. he rapid economic expansion and urbanization has not been properly supported by improved infrastructure facilities. his has resulted in the dumping of solid waste in major city areas (Abeygunawardena, 2010). Local provincial and municipal authorities are obliged to collect and dispose of solid waste in the areas under their jurisdictions on a daily basis. Yet, island-wide collection and transport of solid waste is carried out at diferent levels and with little capacity for meeting accepted health/environmental standards. Daily waste collection by local authorities is estimated at 2,500 tons of which the Western Provincial Council accounted for 60% in year 2010. his is witnessed in the tons of waste and garbage that continue to accumulate to mountainous proportions in Bloemendhal and Sedawatte areas which have been an eyesore and a health hazard plaguing the city for the past 16 years or more. Until recently little attention was paid to the municipal solid waste a company produces. Many businesses have therefore been content simply to establish and manage an eicient system for removing trash. Times have changed, however, and so has waste management. In many areas of the country, companies are seeing a dramatic increase in the complexity and costs of managing their waste. At the same time, public concern over the efects of all this waste has grown signiicantly. Today, more and more customers are taking environmental considerations into account when purchasing products and services. Waste management, which has therefore begun to receive wide attention as it is visible and politically sensitive, consumes a considerable share of the municipal councils as well as company budgets, and has a direct impact on public health, environment and natural resources. 54 Chapter 4 | Managing Waste Waste management It is obvious that waste and its disposal increasingly afect lives, environment and health while placing a growing burden on business and national economies. herefore the management and minimization of waste have received increased attention in most of the commercial operations. According to Kirk (2009), waste management is a process that afects all the stages of an operation (from product design to stock control). He emphasizes that it is not simply a matter of disposing of unwanted or hazardous output but diferentiates between waste minimization and waste disposal management. Waste management hierarchy Gray and Bebbington (2001) stated that most companies that address the issue of waste throughout all aspects of operations have realized signiicant inancial savings. Hence, a sensible waste management policy can reduce costs of a company and thereby maximize the inancial returns while reducing the burden placed on the environment. Organizations have various options for managing waste. hese options can be represented through a waste hierarchy as shown below (Figure 4.2). Figure 4.2: Waste management hierarchy Minimization Recovery Recycle and reuse Disposal Co-processing Incineration Land illing Unmanaged waste 55 Environmental Management Accounting in Sri Lankan Enterprises he hierarchy highlights that the following options are available when managing waste: – – Avoidance and minimization - involves minimization of waste. Reuse - involves the use of products or materials again for the same purpose for which they are intended. Recycle - involves altering the physical form of an object or material and making a new object from the altered material. Co-processing - involves the use of waste as raw material, or as a source of energy. Incineration - involves the burning of waste. Land illing - involves dumping and incineration of waste without energy recovery. – – – – Waste audit When managing waste it is important to understand the status quo of the quantity and composition of waste streams in an organization. An efective waste reduction programme should therefore essentially commence with a waste audit. here are three major steps in a waste audit (Figure 4.3). A waste audit should begin with the selection of an audit team representing each area of the business. A vital point to be noted here is that the top management of the business need to serve in the team for successful completion of the task. Figure 4.3: Steps in a waste audit Step 1 Step 2 Step 3 56 Create of a detailed plan for the audit Source the waste samples and gather correct information Develop a waste management plan Chapter 4 | Managing Waste Waste audit is an ideal eye- opener for an organization to identify, sometimes, low-tech solution to the growing waste management issue, while taking advantage of existing infrastructure, equipment and human resources of an organization. In 2008, as per a request made by the Colombo Municipal Council (CMC), a waste audit was carried out in Colombo City by the Industrial Technology Institute (ITI) of the Ministry of Technology and Research. Based on the data provided by the CMC, representative samples have been selected from each division and the segregation of waste has been done. Based on the information provided through a waste audit there are three main ways in which organizations can account for waste (Gray and Bebbigton, 2001). hese approaches range from simple to advanced. Method 1 (Simple approach) Recognition of total actual and potential costs of waste management of a company (activity/site basis) and adjustment of policy accordingly. his is identiied as the simplest approach to accounting for waste. Method 2 (Moderate approach) Establishment of a recording and communicating information system that captures physical quantities of waste. his employs non-inancial accounting as its driver. Method 3 (Advanced approach) his approach is the most sophisticated and directly related to conventional accounting which charges all waste management costs back to line management through a comprehensive waste accounting system. 57 Environmental Management Accounting in Sri Lankan Enterprises E-waste management in Sri Lanka E-waste is a popular, informal name for Waste Electrical and Electronic Equipment (WEEE) (European Union directive, 2012). hese electronic and electrical products that have come to the end of their “useful life” include computers, televisions, mobile phones, calculators, CFL bulbs, stereos, copiers, electronic toys and fax machines. E-waste contains both hazardous as well as valuable substances such as lead, mercury, cadmium, copper, gold, silver, polychlorinated biphenyl (PCB) and brominated lame retardants (BFR) (Bandara, 2014). At present irresponsible disposal of e-waste has created a severe negative impact on the environment/ human health and this has become a critical problem in Sri Lanka also. Considering the numerous risks caused by e-waste on human health and the environment, it is important to manage the proper disposal of e-waste. hree main subsequent steps need to be followed: ( Collection ( Pre-processing (sorting/dismantling) ( End-processing (reining/disposal) E-waste management can even be proitable and creates positive externalities in terms of health and environment. Sri Lanka currently has invested in two major e-waste recycling plants. One such registered e-waste recycling factory in Sri Lanka, which recycles all types of e-waste (except CFL and tube bulbs), was able to recover the following quantities out of the total e-waste collection of 177,609 kg in 2012 ( Table 4.1). Table 4.2: Recovery items of e-waste Item Plastic Metal Glass Bandara, 2014 58 Quantity (kg) 35,724 58,526 83,358 Chapter 4 | Managing Waste his factory earned foreign currency through exporting complex metal for reinement to the world’s largest precious metal reinery and by trading the extracted gold, silver, palladium and copper in the London Bullion Market (LBM) and London Metal Exachange (LME). Further, it has also created new jobs for skilled and unskilled personnel across Sri Lanka. he Asia Recycling Company under Orange Electric is the irst recycling company in South Asia that particularly recycles all types of CFL and tube bulbs. hey extract materials such as glass, plastic, metal and wood, which are sold to diferent companies within the country for re-use, and export chemicals such as mercury and phosphorous powder to Germany for reining, thus earning foreign currency (Bandara, 2014). he CEA as the regulatory arm of environmental management in the country declared a week for “National Waste Electrical and Electronic Equipment Management” from May 27 to June 2, 2014 to make society aware of this burning issue of e-waste and to take appropriate action to mitigate the risk. Nineteen private companies (Partner Companies) joined CEA in this event. Further, island wide collection centres were established to encourage citizens to bring all the e-waste in order to dispose of them in a safe manner. Now let’s look at some practical applications of managing waste in Sri Lanka. Application of waste management in Sri Lankan enterprises Hotels and leisure industry A luxury hotel chain in Sri Lanka believes that tourism cannot exist in isolation without an close relationship with the local community and the environment. he hotel chain has earned a prestigious name for its best environmental management practices, especially for its sustainable waste management approach. In a hotel “waste” is a key word since almost all its regular activities generate waste. In most hotels, waste is created at a minimum rate of 1 kg per guest night and above - a large amount as far as the Sri Lankan tourism industry as a whole is concerned. Much of the waste created in hotels stems from either handling food and beverage (packaging material and food waste, aluminium cans, glass bottles, corks and cooking oils) or housekeeping activities 59 Environmental Management Accounting in Sri Lankan Enterprises (cleaning materials and plastic packaging). Waste is not only generated in guest rooms but also in public areas, hotel gardens (anything from engine oil, pesticides, paints and preservatives to grass and hedge trimmings) and oices (toner cartridges, paper and cardboard waste). Regular refurbishments add TVs, mini bars, carpets, towels, linens, and many more to this equation. he hotel chain conducts a waste audit on a regular basis which emphasizes the use of accounting for a sustainable waste management approach. he efective separation of solid waste has been initiated through the separation of garbage and trash at their sources of origin in all departments of the hotel such as the kitchen, restaurant and bar, housekeeping, and maintenance. When conducting the waste audit, the hotel chain measures the amount of waste generated at each source at regular intervals to identify from where most of the waste is being generated and whether it is beyond the accepted waste limit. Garbage is sorted properly and a colour coded garbage bin system is used to hold each type of garbage separately (wet garbage, polythene and plastics, glass, metal, paper and cardboard etc.). More than 50% of wet garbage generated in kitchens and restaurants, the food waste, is given to a nearby piggery which indicates the possibility of re-using. All the other wet garbage and garden waste are used to produce compost which relects the recycling of waste in the waste management hierarchy. A special compost machine (Agronova machine) is used by the hotel to produce compost. Investment in this machine has been done solely considering the non-inancial and social aspects irrespective of inancial feasibility since it has a pay-back period of more than 20 years and the inancial beneits are negligible. he machine is capable of producing compost mainly through the remaining 50% of the wet waste which is taken away by the piggery. he compost generated by this machine is used as fertilizer for gardening and to maintain the organic vegetable garden of the hotel. he wet garbage which cannot be separated or recycled is collected by the Municipal Council. he hotel hands over only less than ive percent of waste generated to the Council. he hotel chooses to dispose of waste only if there is no other way to re-use or recycle. Hazardous and toxic substances are properly disposed of taking health and environmental aspects into consideration. he housekeeping department is responsible for ensuring proper disposal of waste and to obtain the Material Safety Data Sheet (MSDS) certiicate for chemical waste disposal. 60 Chapter 4 | Managing Waste Supply chain management of the hotel gives priority for the suppliers who follow sustainable practices, especially suppliers who avoid secondary covers and excess packaging. his can be seen as an important step since it enables avoiding waste at source (reduction approach in the waste management hierarchy). In addition, the hotel has displayed notices at the receiving bay notifying a strict principle on use of polythene when supplying raw materials. Selecting suppliers and educating them on preventing where possible or minimizing the use of polythene wrapping when delivering food supplies has enabled a drastic reduction and virtual elimination of the use of plastics within the hotel. hese waste management practices have been supported and interwoven with physical and monetary EMA information. Moreover, EMA enables the hotel to assess the impact it makes on the environmental and on its inancial performance. he table below highlights a few noteworthy physical and monetary EMA measures taken by the hotel in its waste management approach. Table 4.2: Physical and monetary EMA measures used by the hotel Physical EMA measures: ( Number of waste bins issued to the piggery ( Number of wet waste bins issued for the Agronova machine/ Number of kilograms of compost generated per month ( Kilograms of e-waste, waste paper sold ( Food waste per guest Monetary EMA measures: ( Chemical cost/operating cost of Agronova machine ( Amount of savings from the use of organic fertilizer in the garden Source: Company data, 2014 his comprehensive waste management approach has not only reduced its environmental impact signiicantly but also contributed to saving millions of rupees over the years. Moreover, this approach has strengthened the hotel chain’s brand image as a caring and environmentally friendly hotel chain locally and internationally. 61 Environmental Management Accounting in Sri Lankan Enterprises Textile and apparel industry - Case one Sri Lanka is globally known for its apparel industry. One of the leading apparel manufacturers in Sri Lanka, which has been awarded with LEED Gold Certiication for one of the factories, has its own waste management practices. his is the irst custom-built green apparel factory in the world and an exemplary Sri Lankan model. A “zero waste policy” has been adopted by the factory which always strives to achieve this goal at its full potential. he main waste item -scrap materials generated from production processes- is shipped to China. hese scraps are shredded and pulped to be spun and woven into new products or sold for car insulation or upholstery. Almost all the waste is recycled or disposed of by the factory in an environmentally friendly manner. Moreover, the factory measures the quantity of waste before dispatching it to the waste collectors on a regular basis. his routine physical EMA information enables the company to keep track of its main waste stream and also minimize the same. hese waste collectors are selected by the management based on some designated criteria and essentially they should obtain the license issued by the CEA. Due to the large number of employees in the factory, another signiicant waste stream generated is food waste. Approximately 2,300 kg of food waste per month is generated and sent directly to a piggery. he other biological wastes of the factory that amount to 270 kg per month are used to generate compost in-house. he company gives part of this compost to the farmers in the neighborhood to be used in the farms (especially orange and pineapples). his can also be seen as a community project of the factory named “Ran Aswanu” (meaning golden harvest). he rest of the compost is used in inhouse vegetable and herbal gardens, the harvest of which is given to the female expectant employees. he company has a strong belief in its employees and presumes that their behavioral change afects the company’s culture of sustainability. Sustainability has therefore been embedded into every activity of the company enabling the employees to mould their behavior accordingly. he behavior is irst ignited by the sustainable induction given to each employee at the start of their career with the company. 62 Chapter 4 | Managing Waste In parallel to managing food waste, the factory has also implemented a lunchbox project where each employee is encouraged to use lunchboxes rather than a lunch sheet (polythene) that Municipal Councils cannot recycle unless properly washed and cleaned. At the inception of the project it was found that around 614 contaminated lunch sheets were used per day. In a bid to reduce the contaminated lunch sheets, free lunchboxes were provided for all staf members. Subsequently, the progress was measured and displayed in the canteen using graphs and timelines. During lunch time, the top management of the factory has made it a practice to go and observe which employees do not use the lunch box. he constant efort and the follow up by the management through MBWA approach coupled with PEMA information used for communication have led to the success of this project. Now the lunch sheets generated per day has been reduced to 84. he daily counting of wasted lunch sheets, keeping records of them and graphical illustrations/ analysis emphasise the use of physical EMA information in support of the waste management initiatives of the factory. Moreover, the factory also keeps records of its polythene and cardboard waste as well as the water bottle waste which are sent to diferent companies for recycling. In a context where it has been custom-built to be green, achieving and maintaining the targets given is the pathway to success. In this pathway EMA plays a major role as a facilitator. Financial services industry Even though managing waste is among the key priorities of a corporate agenda when striving towards sustainability, the inancial services sector in Sri Lanka has, so far, portrayed little commitment. According to Eccles and Serafeim (2013), low sustainability performance of the inancial service sector can be mainly attributable to continuous inancial crises. A local business, which is one of the leading and strongest inance companies, registered under the Monetary Board of the Central Bank of Sri Lanka under the Finance Companies Act No. 78 of 1988, is doing exceptionally well in the sector by adopting a comprehensive waste management strategy. his is clearly evident in the considerable care given at each stage of processing gold bars. 63 Environmental Management Accounting in Sri Lankan Enterprises he Company engages in providing pawning advances on gold articles with a designated settlement period where inability to redeem the articles passes ownership to the company. Any of these unredeemed articles are used to crat gold bars. his process is the major driver of change towards implementation of waste management practices within the manufacturing arm of the organization. hroughout the whole process of crating a gold bar, waste is generated from ive major processes: a) polishing and cleaning, b) plating, c) stone and other material separation, d) cutting, and e) melting. Waste minimization strategies have been incorporated in each of these processes to ensure maximum utilization of gold. In the polishing and cleaning process, a separate tank has been built to collect the gold dust waste generated and at the end of a speciic period this waste is collected, measured and fed into the system. A diversiied team is involved to ensure a smooth low and accurate measurement of this gold dust. At the end of each year, the collected gold dust waste is sent to an outsourced company for cleaning and reining which ultimately leads to a marketable by-product for the organization. In stone and other material separation process and cutting process, gold dust is created as a waste and it is collected separately and entered into the system through a systematic measurement process. his allows the company to create a valuable by-product in the reining process as well. he company manages to maintain both physical and monetary measurements of waste. his is achieved by calculating the number of gold grams lost and the cost of lost gold through gold weight variance analysis and variance reconciliations at the end of each reinement. he application of Physical and Monetary EMA has enabled the management of the company to make decisions to improve the quality of the gold bar manufacturing process using unredeemed pawned articles. 64 Chapter 4 | Managing Waste Table 4.3: Physical and monetary EMA measures used by the company Physical EMA measures: “Number of grams of gold lost in a batch” Monetary EMA measures: Cost of lost gold = Variance (in grams and milligrams) * per gold gram cost Where, Per gold gram cost = Transferred cost from pawning division Transferred weight of that gold item Source: Company data, 2013 In Sri Lanka, the process of gold reining and melting is hardly popular since most of the industries are used to importing the necessary gold for production. Hence gold reining is a new concept practised among very few companies. he detailed physical and monetary EMA for routine decision making is quite evident in this organization mainly due to the high value of its raw material, i.e., gold. Manufacturing industry he company is a leading provider of all kind of threads for textile, automobile, tea and ishery industries. he company focuses on continuous innovation and delivery of state-of-the-art products and solutions to maximize customer value while reducing the impact on the environment. hus sustainability is embedded in the company to ensure the stated deliverables. As a leading manufacturer of threads, the company has recognized waste management within the facility as a key concern. It has implemented a solid waste management strategy to reduce waste generated within the facility, optimize material value and eliminate waste generated through manufacturing operations which ends up in landills. 65 Environmental Management Accounting in Sri Lankan Enterprises Yarns, dyes, lubrication agents and plastic cones are the key raw materials used in thread manufacturing. he company has taken many initiatives in waste minimization of these raw materials. he company has established a Basis for Measurement (BFM) to identify hidden wastage of yarn and appointed a Barrier Removal Team (BRT) with a wastage reduction target. BRT is a cross functional team with the responsibility of analyzing the root causes and providing solutions. In analyzing and providing solutions for wastage BRT relies heavily on physical EMA measures such as the yarn yield conversation factor7 , yarn shrinkage factor 8 and liquor ratio9. Revision of the yarn yield conversion rate alone resulted in reducing yarn wastage from 13.3% in 2009 to 2% in 2013. With the help of suppliers, a research was carried out to design the optimum yarn package size which helped the company to reduce wastage of packaging materials too. By using various physical EMA information, the company arrived at the right formula for predicting the fast moving shades in a bid to minimize the probability of stock write-ofs. Moreover, the company has a comprehensive waste segregation and management procedure. Based on segregation of solid waste, some of it is reused, recycled, put into a diferent use or incinerated. he following diagram depicts the annual summary of waste segregation and management procedure ( Figure 4.4). 7 his measure indicates how many kilos of yarn to be dyed to obtain a particular number of cones into a particular length. 8 his measure identiies the reduction in length and width of fabric induced by conditioning, wetting, steaming, chemical treatment, and wet processing. 9 his measure indicates the ratio of the weight of liquor used to the weight of material being treated. he ratio not only inluences the amount of water and energy consumed in the dyeing process, but also plays an important role in the level of exhaustion of the dye and in the consumption of chemicals and auxiliaries. 66 Chapter 4 | Managing Waste Figure 4.4: Annual waste -2014 5.3% 43,613 kg 2.1% 17,677 kg 52.6% 433,460 kg 40.0% 329,521 kg Incinerated waste Recycle amount Reuse amount Composted waste Land fill waste Source: Company data, 2014 With these solid waste management strategies, the company has reduced the waste sent to landills to zero levels in 2013 and 2014, which stood at 338,650 kg in 2009. By extending its waste management strategies towards down-stream activities in the value chain, the company focused on proper management of plastic cones which are generated during its operations. In 2008, a project was launched to collect the plastic cones from customers which could be reused in its operations. he customers of the company usually dispose of empty cones ater using the thread. By deploying distribution vehicles on their way back, the company started collecting empty cones from the customers. Neighboring families have been allocated to clean residual thread in the cones which is then used locally. he annual savings of the project are as follows (Table 4.4). he monetary EMA information of the savings achieved through the project enabled the company to follow this project more vigorously in the subsequent years. 67 Environmental Management Accounting in Sri Lankan Enterprises Table 4.4: Annual savings of cones – in physical and monetary terms Year Re-used cones Annual saving (USD) 2011 1,688,727 28,204 2012 1,347,351 23,011 2013 3,029,145 54,171 Source: Company data, 2014 his project was environmental friendly due to the reduction of dumping plastics, economically advantageous due to cost savings through reduction of plastic cones used in operations, and socially beneicial due to the generation of a source of income for neighboring families. he company has been able to realize sizable inancial gains by proper waste management strategies, which were fortiied by physical and monetary EMA information. Moreover, EMA has assisted the company not only to manage waste but also achieve national and international recognition for its integrated report. Textile and apperal industry - Case two One of the most recognised apparel manufacturing companies in Sri Lanka, located in a suburban area of Colombo district, is a forerunner in the industry in terms of sustainability. Doing the right thing has always been the way of life in the company and business development and growth have always focused on Coporate Social Responsibility (CSR) from its inception. he company monitors its waste generation along with energy and water consumption using a dashboard called the “Eco Tracker”. he system allows maximum use of scarce resources. In a bid to minimize its main raw material waste, i.e. fabric, the factory monitors its material utilization periodically by setting up a standard called “Marker Eiciency Ratio”10 using Bill of Materials (BOM) and this igure is compared against the actual of each month. his ratio is calculated for every individual order and a report is circulated among the production lines which alerts them on material usage. 10 Marker Eiciency Ratio = (Used area /Total area)*100 Total area = cut fabric width*cut fabric length 68 Chapter 4 | Managing Waste Waste generated from day-to-day activities of the factory amounts to 50,000 kg per month and is separated as recyclable and non-recyclable waste. As much as 40% of the waste is recycled within the factory premises and 60% is sent to a waste management solution provider. hese noteworthy waste management practices have led the factory to be honoured nationally for environmental friendly discharge of waste. In addition to the fabric waste generated in the main operations the factory has focused on managing food waste also. he factory has a separate dumping area for cafeteria waste and this food waste which amounts to 9,000 kg per month is sent to a piggery. Despite various attempts taken by the management to reduce food waste, this large quantity of food waste still remains as a formidable challenge. According to the Manager of Sustainability and Projects, “Managing food waste is really hard. We have even set up CCTV cameras in the cafeteria but still it is really a diicult task to control it” It has been a real challenge to identify which employee/group of employees is causing food waste as they tend to change their seating arrangement on a daily basis. herefore the management has arranged the cafeteria premises of the new factory to be launched, according to production lines and each line is monitored by Closed Circuit Television (CCTV). his will create competition among the employees of each line to reduce food waste. Further, the number of main courses for breakfast used to be two or more earlier where employees tend to serve themselves with all three menus given, but mostly ending up as letovers. Hence currently the company has limited the main course options to just one for a given meal. So the company contributes to efective utilization of food through the vigilance of management, in an era in which 30% of food is wasted in Sri Lanka, according to the Manager of Sustainability and Projects. Hence it is clear that continuous management eforts have been supported by physical EMA information. he company has also focused on managing paper used in the oices. he company recycles the paper in collaboration with a professional recycler where the shredding of conidential papers is done at the factory premises itself. Awareness programmes like “Paperless Day” to communicate and educate the employees are carried out by a team of employees who are inspired to 69 Environmental Management Accounting in Sri Lankan Enterprises initiate sustainability within the factory environment. Furthermore, e-waste of the company is also sent to one of the e-waste recycling plants in Sri Lanka. he Group Sustainability Steering Committee is watchful about achieving sustainability targets given to each company and reasons have to be furnished for any deviations in the KPIs. An sustainability Index developed by the inance team is one such measure which highlights the use and development of EMA. his index is used to provide a single igure that indicates how the company has performed in terms of resource eiciency and management. KPIs are developed in four major areas, namely, waste, energy, water and operations. In relation to waste the following KPIs are developed: – – – – Food waste per head/plate Fabric waste per output unit Branded waste per output unit Fabric waste sold/ burned he company calculates a Waste Index as a sub-index of the Sustainability Index using two critical KPIs: fabric waste per output unit and food waste per plate by giving 70% and 30% weightings respectively. Fluctuation of the index is monitored each month and there is a forum to share the best practices across the Group. But still each plant index needs to be calculated and monitored separately due to the operational level diferences and the nature of the plant. Electricals industry A premier electronic power products manufacturer with a well-recognized brand name in Sri Lanka has adopted many noteworthy practices in managing waste. he main products of the organization are switches and sockets, CFL, low voltage switchgear alpha and sigma, cables, industrial applications and other electrical accessories such as electric mountain boxes, electric lamp holders and electric plug tops which are produced and assembled in the organization’s own factory situated in Sri Lanka. he company has taken various measures to manage waste and these initiatives are mostly visible in cable, switch and socket manufacturing. Although the company does not practise Cleaner Production (CP) as a concept, the “3Rs” practice, which includes waste management through Reduction at source, Re-using and Re-cycling have allowed them to achieve the objectives of CP. 70 Chapter 4 | Managing Waste he organization has achieved “process change” through improving input materials especially in the cable manufacturing process. he company uses imported copper wires as input raw material. Copper, the main raw material of the cable manufacturing process, is an expensive raw material costing around LKR 2,000 per kg. Copper wires once input to the process are pressurized under heat and pulled until they become thinner to the width of a cable line. his process is carried out using a specialized machine that results in copper wastage of 2% - 3%. In order to reduce the cost of copper, currently measures are in progress to develop a plant to recycle copper parts collected from outside parties as well. his new venture is expected to reduce costs as well as provide a solution to the copper waste that is generated in the manufacturing process. In this industry, product quality mainly depends on the choice of the right raw materials. Hence, the company checks the quality of raw materials from time to time and suppliers are evaluated once in three months. hese measures which are aimed at improving the quality of input materials have been very efective in managing waste, too. In producing switches also waste management practices are clearly visible. Production of runners and switch panels is done separately in two machines and it is the only in-house production part of the switch creation process. In this process 52% of raw material input is wasted. However, the company reuses 20% of the wasted material ater some processing. Also, the company, ater getting constant inputs from the production level employees, attempts to reduce the waste through continuous improvements. hese kaizen improvements are supported by physical EMA information on a regular basis. Waste management practices are also visible in socket manufacturing as well. In the production of terminators, which are used in sockets and switches, brass and copper are the main inputs. here are two special machines for this which also produces all the small connectors and other parts for the switches and sockets. hese machines cause a waste of used copper and brass dust which is sold to external parties for production of copper and brass handcrats. In respect of waste generation, the management always monitors the deviations in the production run. he raw material inputs which are used in molding machines, the purchased components and the produced components used in assembly lines are measured in quantities and recorded in the daily production plan. he Physical EMA information continuously provides 71 Environmental Management Accounting in Sri Lankan Enterprises valuable inputs for the management to identify variations which would lead to timely action. he estimated output and the actual output are measured and the eiciency of each production process or assembly line is measured daily and recorded by the “line leader”. Normally the eiciency of an assembly line should be maintained at 85% and if the assembly line achieves it, the employees are rewarded with monetary incentives which indicate how the use of EMA can beneit organizations and lead to success. Further, the behavior of the employees directly impacts the eiciency and efectiveness of a process. herefore close supervision of each division is carried out and the employees are motivated through various means. Based on a concept of the Managing Director of the company, they conduct an annual meditation programs in which LKR 20,000 is given to each employee who participates. he Finance Manager says: “Employees participate just for monetary beneit, but according to our experience there is a direct impact on the production process. Providing lunch with a vegetarian menu is another approach to develop the morale of the employees.” his clearly indicates the beneit of the programme in ensuring better “process control” while improving employee commitment towards better waste management. Furthermore, all machines are cleaned using a speciic chemical at the end of every operating day and special duty allocation has been designed for maintenance staf to prepare the machines for immediate operations. Production divisions have set a maximum waste percentage and KPIs are continuously evaluated on the 25th of each month, which indirectly provides a better platform for the organization to reduce/manage waste to a greater extent. his case illustrates how the organization has mainly concentrated on the reduction and reuse of raw materials waste. Raw materials are the single most important cost item. In this exercise monetary and physical EMA information has been the decision support tool. 72 Chapter 4 | Managing Waste Engineering industry A prestigious local conglomerate which is pioneering the automotive industry in Sri Lanka has some noteworthy practices to manage the waste generated within the company. he company has forty branches/display points and customer contact points through which it engages in the sale of vehicles and spare parts, servicing, engine overhaul and machining. Further, it sells a wide variety of products such as medical engineering equipment, lights, agricultural machinery, tyres, construction and mining machinery, building management systems, etc. he company recognizes around twenty waste categories in their island- wide branch network, and each branch has appointed a responsible person to monitor and record data related to each waste category. Being an ISO 14000 certiied company, it places much emphasis on proper recording and disposal of waste in an environmentally-friendly manner. his is strengthened by the comprehensive waste management policy adopted by the management internally. he level of contamination of certain waste categories is a deciding factor in determining whether to recycle or to dispose of waste in an environmentallyfriendly manner. Waste items such as sludge which arises from the vehicle service stations, saw dust, rigifoam, uncontaminated polythene, metal scrap and metal dust, paint waste and cardboard waste of the company are collected by a sustainable waste management solution provider in Sri Lanka. Responsible waste disposal has been ensured through the introduction of appropriate methods according to the diferent characteristics of waste. he waste oil of the company is sent to a particular collector for reuse as furnace oil ater the collector provides certiication of the CEA and a declaration that the collected waste oil will not be disposed of to the environment resulting in soil contamination. In fact, all the waste collectors are monitored through a checklist before appointing them as the company’s waste collectors and recyclers. Uncontaminated paper waste of the company is sent to a leading paper recycling company while the food waste of the company is sent to a piggery on a daily basis. Each and every branch, workshop and display point of the company are responsible for recording sustainability data on a monthly basis on a central 73 Environmental Management Accounting in Sri Lankan Enterprises server ile. his data is available for analysis based on the level of consumption, material use, waste category and location. All these records are updated by the tenth of the following month and then they updated in a central database which gives an overview of the waste generated by the company. his can be seen as an example of the use of physical EMA within the company. he waste information recorded by each branch is used to create awareness among the employees of the company. One such example is carrying out an awareness campaign targeting “World Food Day”, to educate employees on the importance of economizing on food by using information such as total food waste of the company, food waste per employee, number of people that can be fed with the food wasted, etc. he use of such physical EMA information with respect to food waste has been very efective in delivering an inspiring message to the employees. As the company pays special attention to the proper management of waste, the best options for collecting waste from diferent locations island-wide and responsible disposal strategies are also considered. In this regard, a inancial evaluation was carried out to justify the best mode of transport out of the two options: whether to use the company’s own transport which is committed to waste management or to use the services of a third party transporter. he two options were compared using the type of waste/quantities from each location on a daily/weekly basis, total distance travelled by the vehicles, fuel price per liter, CFP of fuel consumption, driver salaries/ maintenance/license/ insurance/renewal fees of the vehicles, investment in vehicles and fees per month if outsourced. herefore this can be seen as the use of physical and monetary EMA information for ad hoc and long-term decision making. Further, when complying with ISO 14001, the company keeps records of environmental concerns and the impact on the environment on a departmentwise basis and the most signiicant aspects are identiied. his alerts the company that the level of signiicance needs to be minimized or eliminated by the next inancial period where a budgetary allocation has to be made for this particular purpose. his shows how physical EMA information has led to monetary EMA which enables the company to achieve environmental sustainability in managing waste. 74 Chapter 4 | Managing Waste Retail industry he retailer is a part of one of the most respected conglomerates in Sri Lanka that has diverse business interests in many sectors. his leading supermarket chain has been operating in the country for the last two decades while ofering the best quality products and services to their customers. In 2008, supermarket chains in Sri Lanka planned to charge for plastic carrier bags to discourage their use in view of the environmental problems caused by these bags. However, the Supreme Court struck down the decision and banned the supermarkets and other retailers from charging for carrier bags given to shoppers free of charge. he court also directed supermarkets to provide an alternative such as bio degradable bags, if plastic bags create environmental problems. Apart from this legal requirement, internal cost calculations too showed the retailer that there is a considerable cost incurred for these bags. he legal requirement when coupled with cost savings potential motivated the retailer to seek viable environmentally friendly solutions. In a bid to achieve these dual purposes the company introduced a reusable “Red Bag Promotion” that allows the customers to carry their shopping items without causing air and soil pollution through non-biodegradable materials. his can be seen as a noteworthy waste management tactic followed by the company in an era where the hazards of polythene and plastics are omnipresent. he reusable red bag is made out of non-woven material. hese bags have been made available at all the supermarkets of the company island-wide at a nominal price of LKR 50 each and each bag can hold up to 10 kg in weight and is waterproof which gives convenience to the customers. Further, these bags come in a handy size which is very easy to carry. he retailer keeps records of the red bag sales and the polythene bag sales on a daily basis which allows them to monitor the progress of the initiative taken. Due to constant promotions at the supermarket counters there is a signiicant growth in sales and the reuse of red bags within a shorter time span (Table 4.4). his in turn ultimately implies a drastic reduction in the use and disposal of polythene bags to the environment. In order to assess the progress of the initiatives the company captures some physical EMA such as absolute number of red bags sold and reused per customer. With the help of the EMA information the company has introduced some incentive schemes to cashiers at the counters to promote the use of red bags. Moreover, with the 75 Environmental Management Accounting in Sri Lankan Enterprises objective of promoting the reuse of the bags, the retailer ofers reward points linked to a loyalty card system for the customers who reuse these bags. Table 4.5: Improvement of red bag sale and reuse Financial Red bag sale Red bag Total reuse year reuse 2012/2013 73.416 84,140 157,556 2013/2014 211,214 202,758 413,972 Per customer reuse 0.013 0.031 Source: Company data, 2014 Since supermarkets are the main contributors to air and soil pollution by making customers use polythene, this initiative taken by the company is noteworthy even from a purely CRS point of view. Driven by compliance and cost savings motives, the internal management decisions of this initiative have been greatly beneited and supported by EMA information that is collected, analyzed and reported in a timely manner. 76 CHAPTER Chapter 5 | Managing Carbon Footprint 5 Managing Carbon Footprint Climate change has become an imminent threat to the very existence of mankind. It is now largely agreed that global warming is the main cause of climate change. he focus of this chapter is on carbon emissions, which is the main reason for global warming. Emerging need for managing carbon footprint Global warming is the general increase in temperature of the earth’s atmosphere. his is mainly caused by Carbon Dioxide and other Green House Gases (GHGs) released to the earth’s atmosphere. GHGs are released mainly when fossil fuels are burned for energy and transportation activities and many other human activities (refer Figure 5.1). GHGs increase the atmospheric temperature as they naturally absorb the earth’s energy. hese gases would remain in the atmosphere for 10 years to 100 years afecting both present and future generations. he immediate consequence is the melting down of ice glaciers and coastal looding, which result in imbalances in the earth’s natural carbon cycle, the exchange process of carbon between the atmosphere, forests and ocean. Human activities cause imbalances in two ways: a) rapidly increasing the atmospheric Carbon Dioxide (CO2) at a rate unbearable for natural carbon sinks such as trees and the ocean to absorb them back and b) destroying these natural carbon sinks. 77 Environmental Management Accounting in Sri Lankan Enterprises Figure 5.1: World GHG emissions by source Waste and waste water Residential and commecial building 3% 8% Energy supply 26% Transport 13% Agiculture 14% Industry 19% Forestry 17% Source: Intergovernmental Panel on Climate Change (IPCC), 2007 What is carbon footprint? A measure of the direct or indirect carbon emissions associated with, for example, 1.the operation of a site, 2. manufacture or use of a product, 3. all of the activities, products and services of a company. his is a life cycle concept and considers both direct and indirect emissions. What is “carbon emissions” included in carbon footprint? Carbon emissions are usually considered as the total GHGs emitted. GHGs include Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydroluorocarbons (HFCs), Perluorocarbons (PFCs)and Sulphur hexaluoride (SF6) (refer Figure 5.2). Carbon Dioxide (CO2) forms the biggest portion of GHGs. Moreover, for the purpose of calculation, GHGs other than CO2 are measured in CO2 equivalents. 78 Chapter 5 | Managing Carbon Footprint Figure 5.2: World GHG emissions by type of gas Fluarinated Gas Nitrous Oxide 1% 8% Methane 14% Carbon Dioxide 77% Source: Intergovernmental Panel on Climate Change (IPCC), 2007 Global commitments and developments to combat carbon emissions he irst world-wide initiative to combat carbon emissions dates back to 1985 when scientists from 50 countries gathered in a conference at Vilach, Austria, organized by the United Nations Environment Program (UNEP). Subsequently, IPCC was formed in 1988. Now IPCC produces scientiic, technical and socio-economic reports that support the main international treaty on Climate Change, United Nations’ Framework Convention on Climate Change (UNFCCC). UNFCCC was agreed upon at the United Nations Conference on Environment and Development (UNCED) held in Rio de Janeiro in June 1992. he objective of the treaty is stated as to “stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. Although the treaty set no binding targets on the signatories, it acts as a framework within which Protocols with binding targets for GHG could be negotiated. Following this, the most signiicant milestone in that route was the agreement on the Kyoto Protocol to the UNFCCC in 1997 where 192 parties signed the protocol. Nevertheless, the Kyoto Protocol came into force only ater February 16, 2005. 79 Environmental Management Accounting in Sri Lankan Enterprises Many developed countries have adopted legally binding reductions in their GHG emissions in the irst commitment period, 2005-2012. hus developed countries were put under greater pressure in calculating, accounting and being accountable for carbon emissions. Since then the Conference of the Parties (COP) to the UNFCC convened annual conferences. he Bali Action Plan (2007), the Copenhagen Accord (2009), the Cancun Agreements (2010) and the Durban Platform for Enhanced Action (2012) marked key milestones that necessitated a second commitment period (2012-2020) as well as quantiied reporting and disclosure aspects of carbon emission. However, although developing countries do not have binding targets, they are committed under the treaty. Whist the nations have gradually made an efort to meet their commitments since then, in 2014 a world-shattering commitment arose when the largest two contributors to global emissions, China and the USA, (42% share in combination as indicated in Figure 5.3) agreed upon mutual commitments. Under this, the USA has committed to reduce net GHG emissions (2005 levels) by 26% to 28% by 2025 whilst the China has pledged that it will not see any increase in GHG levels ater 2030. In this regard, China has committed to a 15% increase in non-fossil fuel in primary energy consumption by 2015 and 20% by 2030. his mutual commitment by the two largest economies has led to serious attention by successor economies to commit to reducing GHG emissions. Figure:5.3: Contributors to global carbon emissions EU-27 USA 13% 19% India 6% Russian Federation 6% Japan 4% Canada 2% China 23% Other 27% Source: Intergovernmental Panel on Climate Change (IPCC), 2007 80 Chapter 5 | Managing Carbon Footprint Kyoto Protocol introduced three mechanisms for countries to meet carbon reduction targets; 1. Joint Implementation (J/I) – A developed country committed to protocol (investing company) can earn a carbon credit (emission reduction unit) from another developed country (hosting country) by investing in a GHG reduction project of the host country. In this mechanism the investing company will have to invest or provide technology to support the project. 2. Clean Development Mechanism (CDM) – CDM allows a country with a target commitment to of-set carbon emissions of the said country by investing in an emission-reduction project in a developing country. 3. Emission Trading (ET) – his is a trading system where a country with a committed target is allowed to of-set carbon emissions by buying carbon credits traded in an ET. Carbon accountability Carbon accountability is the responsibility vested upon countries and business enterprises for the amount of carbon emitted by the respective entity. Such accountability has been allocated among countries though diferent commitments discussed above. his concept focuses on the answerability of the emitters for their activities and enforceability where actors fail to deliver on their commitments. Hence currently carbon accountability is predominantly operated through carbon commoditization. Carbon commoditization/Carbon trading Carbon trading is a mechanism strengthened by the Kyoto Protocol discussed above. Such a trading system operates under the concept of carbon accountability where the accountability is of two types: accountability of nations to the protocol and accountability of individual enterprises in a county to its local or central regulatory authorities. Hence in addition to direct reductions, nations and enterprises can purchase carbon credits to meet their carbon reduction targets. Such purchase units are purchased from an emissions trading. One carbon credit equals one ton of Carbon Dioxide. 81 Environmental Management Accounting in Sri Lankan Enterprises hese carbon credits are of two types: 1. Certiied Emissions Reductions (CER) arising from CDM 2. Emissions Reductions Units (ERU) arising from JI In addition to these regulatory carbon reduction programs derived from the Kyoto Protocol, there are other regulatory mechanisms that allow carbon trading. Carbon credits under these trading systems are recognized as follows: 1. EU Allowance - under the European Union Greenhouse Gas Emission Trading System 2. NSW Greenhouse Gas abatement certiicates - New South Wales Green House Gas Reduction Scheme 3. RGGI Allowance - Regional Green House Gas initiative Further, it is worth mentioning that there are voluntary trading systems such as Over the Counter Voluntary Emission Reduction and Chicago Climate Exchange to facilitate carbon reduction world-wide, especially for those countries which don’t have binding legal commitments. Carbon accounting Key infrastructure needed to operate the above discussed country commitments and the whole Kyoto Protocol is carbon accounting. he most important aspect of this would be physical accounting where a larger portion of efort and time would be consumed by data collection and measuring of foot print. Due to inherent technical dependency of the calculation, engineers and scientists are greatly involved in this process rather than accountants. Due to the high importance of the required accuracy and consistency of measurement, the calculation is governed by international standards and should be certiied by external certifying companies. Ater the initial measurement of CFP, entities will have to constantly assess/appraise the impact of new projects which again involve accounting. he monetary aspect of carbon accounting comes into place when an entity decides to buy or sell CER. Particularly where business enterprises are concerned, inancial accountants need to assist in ratifying such transactions and maintaining proper accounting records. Moreover, reconciliations are required to showcase the movement in CFP (physical units) as well as inventory values (monetary). 82 Chapter 5 | Managing Carbon Footprint Measuring carbon footprint Carbon Foot Print calculation is a comprehensive measurement that takes both direct and indirect emissions into account. here are three main types of emissions that are considered in this calculation. hey are known as Scopes. Figure 5.4: hree scopes included in CFP Scope 1 hose arising directly from company activities which “occur from sources that are owned or controlled by the company” Scope 2 Emissions from the generation of purchased electricity consumed by the company. Scope 3 Indirect emissions that result “as a consequence of the activities of the company, but from sources not owned or controlled by the company”. Developments in Sri Lanka Ater Sri Lanka became a signatory to UNFCCC in 1993, county-wide involvement was initiated to combat carbon emissions. Sri Lanka issued a national communication on climate change in 2000 by declaring GHG inventory levels for 1994 (refer Table 5.1). In 2002, the government established two Clean Development Mechanism (CDM) centers led by the University of Peradeniya and the University of Moratuwa. September 2002 marked the year in which Sri Lanka ratiied the Kyoto Protocol. Since then several initiatives have been taken such as establishing DNA to the Climate Change Secretariat of the Ministry of Environment in 2008, establishing the Sri Lanka Carbon Fund in 2008, preparation of the Second National Communication on Climate Change in 2010, preparation of the SARRC Action Plan in 2012, Formulation of Climate Change Policy & CDM Policy in 2012 and research studies and awareness programs. 83 Environmental Management Accounting in Sri Lankan Enterprises Table 5.1: Sri Lankan GHG emissions levels in 2000 CO2 (G.gr) CH4 (G.gr) N2O (G.gr) NOx (G.gr) CO (G.gr) NMVOC (G.gr) SO2 (G.gr) Energy Sector 10431.6 0.8 1.13 64.9 141.9 26.5 58.8 Agriculture, Land use and Forestry -4581.2 243.2 2.6 1.3 48.7 0 0 266.3 0 0 12.1 38.0 80.2 49.8 0 75.5 0 0 0 0 0 6116.6 319.5 3.7 78.3 228.7 106.7 108.6 Industry Waste Total net emissions Source: Climate Change Secretariat Sri Lanka, 2010 Sri Lanka National Climate Change Policy set out by Climate Change Secretariat Sri Lanka Vision “A future where climate change will have no adverse consequences for Sri Lanka” Mission “Addressing climate change issues locally while engaging in the global context” Goal “Adaptation to and mitigation of climate change impacts within the framework of sustainable development” Objectives Sensitize and make the communities aware periodically of the country’s vulnerability to climate change. Take adaptive measures to avoid/minimize adverse impacts of climate change on the people, their livelihoods and ecosystems. Mitigate greenhouse gas emissions in the path of sustainable development. Promote sustainable consumption and production. Enhance knowledge on the multifaceted issues related to climate change in society and build their capacity to make prudent choices in decision making. Develop the country’s capacity to address the impacts of climate change efectively and eiciently. Mainstream and integrate climate change issues in the national development process. 84 Chapter 5 | Managing Carbon Footprint Application of CFP management in Sri Lankan enterprises Hotels and leisure industry he hotel industry receives much attention as the leading key growth sectors in the post-war economy of Sri Lanka. Consequently, the sector witnessed a sizeable inlux of investments over the recent years. At a time when competition is getting intensiied internationally and discerning tourists are becoming more environment-conscious, reducing CFP has been on the top of the list for many hotel groups in Sri Lanka In this wake, some hotel groups have successfully incorporated carbon emissions reductions into their sustainability agenda. An A- graded boutique city hotel in Sri Lanka showcases how EMA continuously supports achieving its sustainability goal as well as upliting its brand value. he hotel has embedded sustainability into the company brand through the goal of “ofering guests around the world a unique experience without the guilt of producing carbon, also to ofset hotel carbon emissions produced during the operation”. his brand promise essentially requires assessment of carbon emissions, measuring the footprint, analyzing data and taking action when necessary. his is where EMA has become immensely supportive to the company. Importantly, involvement of a third party that ensures the technical versatility and transparency is a must. Hence the hotel has received paid services from a local carbon reduction solutions provider. As indicated in the independent assessment, the total carbon emissions of the hotel during year 2013 was 352.7 tCO2. he sources of emissions from the assessment were as follows (Table 5.2): Table 5.2: Sources of carbon emissions of the hotel -2013 Source Share Direct emissions 18.0% Indirect emissions associated with generation of imported energy 47.7% Other indirect emission sources 33.3% Source: Company data, 2013 85 Environmental Management Accounting in Sri Lankan Enterprises Armed with this physical EMA information on carbon emissions, the hotel has taken various in-house steps to reduce carbon footprint during its recent renovation program. hese steps include but are not limited to reducing the need for AC, using recycled materials, and planting as many trees as possible. he above data reveals that a major source of emission is attributable to the use of electricity, which stands at nearly 48% of the emissions. Hence the hotel has taken action such as installing solar panels for water heating in all rooms and powering the oice building, installing CFL and LED bulbs and using inverter type ACs. To of-set the residual emissions, the hotel has purchased carbon credits under the Kyoto Protocol to fund a methane capturing project in China. In essence, this boutique hotel is now crowned as Asia’s irst boutique carbon neutral hotel. he hotel highlights how reliance on and actions based on EMA helped meet its band promise while generating a favorable public image to attract environment-conscious tourists. Textile and apparel industry Textiles and garments is the single largest item in the export income composition of Sri Lanka (43.4% contribution in 2013 as per CBSL, 2013) whilst being a key employment provider for the economy (300,000 direct employment and 600,000 indirect employments as per CBSL). Sri Lanka has maintained its premier position as a quality apparel hub over the years with global super brands such as Victoria’s Secret, GAP, Next, Nike, Triumph, Marks and Spencer, Speedo, Jones New York and Pink sourced and manufactured in Sri Lanka. Embedding ethical and green practices, the industry has accelerated its environmentally friendly practices in the recent past. Textile and apparel industry: Case one A renowned conglomerate with its roots in the apparel industry, celebrating a history of 120 years has been in the forefront of many green and ethical manufacturing practices in the country. he group witnessed a gigantic step in the area of CFP management by developing the world’s irst custom-built green apparel factory in 2008. Moreover, CarbonNeutral® Company, a global provider of carbon reduction solutions has certiied the factory as Carbon Neutral. his factory currently accounts for 12% of the garment capacity of the group. 86 Chapter 5 | Managing Carbon Footprint he factory is the irst of its kind in Asia (in the apparel industry) which has been planned, designed and built on green concepts. Consequently, the factory has easily incorporated engineering aspects to save water and energy, and manage waste and carbon emissions from the design stage of the life cycle of the factory. Hence a larger portion of carbon emissions is derived from scope 2 sources; purchased electricity has been minimized. Not only has the factory design minimized electricity consumption but also uses renewable energy such as solar power (at its own factory premises), wind power and hydro power ( at the group level) which have brought about enormous carbon reductions compared to national electricity that is generated by burning mainly fossil fuel. he management of the organization had carried out and justiied the feasibility and costs and tangible and intangible beneits of the investment, which requires a higher capital expenditure budget than a conventional building. hus the organization has relied heavily on future oriented, ad hoc and long-term EMA information as explained by Burritt et al. (2002) during its planning stage. Carbon assessment is carried out annually from the inception of the factory by an independent carbon consultant company. he factory’s footprint is airmed as the lowest in the industry. Green building design has allowed 30% of the land area to be occupied by a mini-rain forest with native lora and soil in Sri Lanka’s largest rain forest, Sinharaja, situated in the close vicinity. Further, 12% of the land premises is allocated for a wet garden. To ofset the residual carbon footprint, the factory has purchased carbon credits by funding a green project in China. he physical aspect of EMA used in terms of CFP management is mainly routine and is of two main types: a) inputs required for CFP measurement and b) CFP igures, which are the output of the process. Hence, the independent GHG assessor continuously works throughout the year with the engineering and technical staf of the factory to access these input EMA information. Under scope one - entity’s direct emissions - the factory maintains information related to staing, consumption of materials, transportation and shipping, fuel consumption from factory’s vehicles and machines, etc. Under scope two category - emissions from purchased electricity - the factory maintains daily electricity meter readings from the national grid and separately monitors electricity generated from the solar and wind power plant and the hydro- 87 Environmental Management Accounting in Sri Lankan Enterprises power plant. Scope three - emissions from indirect activities - is based on independent estimates. Hence the factory staf continuously assists in providing related data. Moreover, the physical accounting data maintained by the sustainability executive of the factory such as the number of trees and their sizes, additions to the forest stock, etc. help measurement of the carbon of-setting efect derived at the residual net CFP. herefore it was evident that proper record maintenance is a prerequisite of a factory of this nature which has committed to carbon reduction. Ultimately, the EMA system is largely articulated by the needs of the independent carbon assessor. In addition to comparison of the total CFP of the factory on an annual basis, the company uses an integrated EMA KPI such as CFP per standard minute. he Company evaluates this number to a four decimal places which suggests the level of importance it has given to this KPI. Although the total CFP of the factory has increased over the years with production expansion, CFP per standard minute has been under control. he company’s physical EMA output related to GHG is heavily tied with its monetary aspects where the residual emissions are valued and purchased in terms of carbon credits at the corresponding market value (1 carbon credit = 1 ton of carbon equivalent). Textile and apparel industry: Case two An apparel factory that covers a land area of 291,000 square feet, supposed to be one of the largest area occupied by an apparel factory in the country, has now taken a new dimension in environmental commitment by continuously reducing its carbon emissions. he apparel maker that produces branded intimate apparel for retailers in UK has identiied that merely focusing on water, energy and waste management would not suice if carbon emissions are ignored. Following this notion, the factory was certiied as a carbon conscious company11 in March, 2014 by an independent certiication company. he carbon conscious certiication requires the following criteria: 11 Carbon conscious certiication awarded by the independent environment solution provider requires that companies continuously measure its CFP and lay out an action plan to mitigate the CFP. However Carbon Neutral Certiication goes a step beyond by fully of-setting its net emissions ater any mitigating actions taken by means of purchasing carbon credits from an ET or any other means discussed in the beginning of this chapter. 88 Chapter 5 | Managing Carbon Footprint ( Calculation of CFP for at least two consecutive years. ( Setting up an emissions reduction target and an action plan to achieve it. ( Existence of a cross functional organization-wide team to drive the activities planned to achieve emissions targets. Moreover, recertiication in the subsequent years would depend on the achievement of the targets and action taken. Commitment to carbon conscious operations has two sides: one side is the activities to be undertaken to meet reduction targets and the other is accountability through numbers. As speciic actions completely aimed at CFP management, the factory has selected carbon neutral logistics providers for third party delivery. Further, when selecting suppliers, the company always tries to select local suppliers instead of overseas suppliers despite the cost factor. It is apparent that the efective management of water, energy and waste efortlessly minimizes carbon emissions to a large extent. In this regard several initiatives to manage electricity such as the introduction of LED lighting, installing evaporative coolers and a series of steps taken to improve the employee attitude to save electricity have contributed towards enormous emission reductions. Rigorous waste management policy has resulted in completely stopping onsite incineration which in turn has reduced CFP. he water management arm of the company was able to resume the abandoned water treatment plant which again reduced CFP. he most crucial part of CFP management involves calculation of CFP, setting up the information system to support the information needs and continuous commitment to targets through analyzing information, which outs the EMA system in place. he CFP calculation is undertaken annually by an independent carbon solutions provider. Considerable time and efort are devoted by the company to provide information for this fee-based calculation. Initially the required data was provided annually where the company faced many diiculties in ensuring accuracy and this inevitably resulted in a lapse of two months for the report to be completed. Nevertheless, subsequently the inance team identiied the information needs for the calculation and developed a dashboard by gathering data on a monthly basis. he dashboard includes data on water, energy, waste and operations. Table 5.3 summarizes the “operations” part of the dashboard and relevant data gathered each month. 89 Environmental Management Accounting in Sri Lankan Enterprises Table 5.3: Extract of operations part of the dashboard Operations General details Emissions Vehicle running hird party deliveries No. of work days Refrigerant – R 134 (kg) Fuel consumption – company vehicle (liters) Air imports (kg) Output Refrigerant – R 22 (kg) Fuel allowance (liters) Sea imports (kg) Eiciency Fire Extinguishers reilling (kg) Fuel consumption – hired vehicle (km) Sea exports (kg) Direct head count Oxyacetylene (kg) Air exports (kg) Source: Company data, 2014 he information is not only used for annual CFP calculation but also to calculate KPIs in the dashboard. A few such KPIs (intensity ratios) maintained using this information are: – – – – – – – LP gas per plate Sea to air ratio LP gas consumption per head Generator fuel per run hour Vehicle running km per head Fuel allowance per head Production pieces per head (total) In addition to these sub KPIs calculated on a monthly basis, the company monitors several aspects of CFP annually. 1. Total yearly CFP and the annual reduction or increase: When interpreting this KPI, it is equally important to take into account any capacity enhancements. In 2012 another facility was added to the apparel group which has resulted in 0.5% increase despite reductions witnessed in existing factories (refer Table 5.4) 90 Chapter 5 | Managing Carbon Footprint Table 5.4: Total yearly CFP and the annual change in % Year Total emissions % change 2011 10,092 2012 10,144 0.5% 2013 9,092 -10.4% Source: Company data, 2014 2. Scope-wise contribution: Compiling scope-wise contribution to total CFP allows the company to identify signiicant areas and direct the action plan accordingly (refer Table 5.5). Table 5.5: Scope-wise contribution to CFP Year Scope 1 Scope 2 contribution contribution 2011 6% 37% 2012 7% 36% 2013 5% 43% Scope 3 contribution 57% 57% 52% Source: Company data, 2014 3. Unit level intensity ratios: Two unit level intensity ratios are calculated and monitored: 1. Scope 1 & 2 emissions per head and 2. Total emission per standard hour. hese KPIs provide more insight into the level and nature of emissions particularly when situations of capacity enhancements take place. Despite an increase in total CFP reported in 2012 due to capacity enhancement as depicted by Table 5.4, the actual results recorded for the two KPIs showed a continuous reduction over the years as shown in Table 5.6. Hence intensity ratios facilitate more informed decisions. Table 5.6: Intensity ratios monitored by the company Year Scope 1 & 2 Total emissions per emissions per head standard hour 2011 600 kg 2.3 kg 2012 570 kg 2.1 kg 2013 517 kg 1.7 kg Source: Company data, 2014 91 Environmental Management Accounting in Sri Lankan Enterprises he company beneits from an efective EMA information system that provides physical information on a routine basis for CFP calculations. With the support of its EMA system the company has taken many noteworthy initiatives that have reduced its CFP per unit of volume (as indicated in Table 5.6). Hence this case further illustrates the importance of EMA for CFP management. Financial services industry In order to manage carbon emissions, a listed inancial institution in Sri Lanka follows some noteworthy practices that are entwined with EMA information. he inancial institution is a development bank (hereater referred to as the Development Bank) that has many branches around the island. One of the Development Bank’s the major revenue streams is the leases given for three wheelers, and it accounts for 40% of their customer portfolio. In many Asian countries including Sri Lanka three-wheelers remain an important mode of transport and contribute to a large share of GHG emissions, air pollution and traic congestion. Improperly maintained two or threestroke three-wheelers cause substantial pollution in cities such as Colombo and the suburbs. One of the irst Asian countries to ban the importation of two-stroke three-wheelers to the country was Sri Lanka. However, the existing three-wheelers will continue to be used in the cities for a considerable period of time. Understanding the importance of managing carbon emissions related to its core business, the Development Bank conducts awareness programs and workshops for three-wheel drivers who have obtained leasing and insurance facilities. Drivers are given awareness on proper maintenance of three-wheelers. In addition, the Development Bank has joined hands with two of the authorized vehicle emission testing companies to issue Vehicle Emission Test certiicates12. When the insurance is renewed annually or when the lease payments are made the score of Vehicle Emission Test is taken into account by the Bank. he score of the Vehicle Emission Test would be a relection of the three12 he Government of Sri Lanka has made Vehicle Emission Testing and Certiication mandatory and it is tied to the issuance of a vehicle’s Annual Revenue License. he program identiies vehicles that exceed the relevant emission standards and places them through a repair and certiication process. 92 Chapter 5 | Managing Carbon Footprint wheeler’s maintenance condition. If the score improves r, the Development Bank allows a discount on the lease rentals or insurance premiums. his highlights how this bank uses physical energy data (the score in the green air emission test) to strengthen its core business operations while contributing to reducing GHG emissions related to its main business. hrough these initiatives, the Bank attempts to portray the three-wheelers that have obtained its leasing facilities as “green three-wheelers”. When the tourism sector of the country is experiencing a boom, these green three-wheelers will be given preference as a mode of transport by the green-conscious tourists. his will generate a competitive edge for the three-wheelers that have obtained leases from the Development Bank which will in turn strengthen its main leasing business. 93 CHAPTER Environmental Management Accounting in Sri Lankan Enterprises 6 Sri Lankan EMA Practices: Some Common Features his chapter attempts to identify some common features of EMA practices in Sri Lankan companies based on the case studies presented in the previous chapters. he features will not give a full picture of Sri Lankan EMA practices because of the limited number of cases presented here. But we believe they represent a fair picture of what most of the Sri Lankan enterprises focus on. In identifying these common features we were largely inluenced by “Exploring corporate practices in management accounting for sustainability” by Bennett et al. (2014). his chapter therefore attempts to bring to light who is in charge of EMA and what information is collected and communicated under the main environmental domains covered in this book -energy, water, waste and carbon footprint (CFP). Who is in charge of EMA information lows? Energy he generation of operational level energy-related information is the responsibility of either the engineering or the maintenance departments. But there is also a signiicant contribution from the management accountants/ inance professionals in charge of sustainability functions/teams when it comes to energy-related investment decisions. Water Mainly the engineers are in charge of maintaining and analyzing physical water related data. However, inance teams are involved in monetary aspects of water-related data, especially when appraising water-related investments. Nevertheless hybrid engineers who also possess accounting knowledge have taken over the role of the inance team in some organizations. 94 Chapter 6 | Sri Lankan EMA Practices: Some Common Features Waste In almost all the companies, the individuals with an engineering background are in charge of capturing waste-related data. However, in analyzing the monetary low of the waste-related data inance teams get involved. herefore it can be seen that the inance individuals take part in the monetary aspect of waste management but not in the physical waste-related data. Carbon footprint (CFP) Due to the technicalities involved in CFP calculation, independent assessors continuously work with organizations to obtain the required information. Most of the organizations that measure CFP have a sustainability division or a steering committee in charge of maintaining and reporting the required data. hese teams are comprised of a combination of engineers, technical oicers as well as individuals from the inance team. What information is needed, collected and communicated? Energy In many organizations the main source of energy used in organizations is electricity obtained from the national grid. In order to collect electricityrelated data, meter readings from diferent electricity sub-meters installed within the plant/ premises are obtained on a frequent basis. Depending on the intensity of energy consumption and its costs, some organizations take the meter readings sometimes on an hourly basis. For those companies that use diferent types of fuel (such as petrol, diesel or furnace oil) as a source of energy, their consumption of fuel levels are also obtained. Having obtained the energy-related data, the units of production/jobs carried out are considered to arrive at “per unit/job energy consumption”. hese calculations result in energy-related intensity ratios that link energy consumption for the activity levels of an organization. For example, energy used per standard minute is calculated in the apparel sector. In addition, to facilitate these computations, energy and production information is also collected based on the loor area, divisions, and product type. When the standards/ KPIs are set for energy consumption, if there are any deviations or variances from the normal consumption patterns, that information is communicated to the relevant manager for action. Hence these companies monitor the daily/weekly/monthly electricity consumption and compare it against actual consumption in previous periods. 95 Environmental Management Accounting in Sri Lankan Enterprises Apart from routine energy-related information gathering and analysis, all these organizations consider energy-related costs in their long-term decisions. he energy consumption data is collected and analyzed for future and past oriented decision- making situations such as pre-investment and post-investment consumption of energy. Water he irst level of water-related information is the total water supply and consumption and their respective sources. Going a step further, some companies gather and analyze water consumption of individual departments or activities through separate water metering systems. In addition, certain companies require the total monthly water bill (monetary aspect) to be analyzed and linked to the respective divisions. National water tarif data and physical water savings are used in appraising water-related projects/ information as well as for post evaluation of the projects. Some companies follow in-house waste water treatment and puriication initiatives. hose companies maintain physical water data such as the water treated and used as well as the cost of treatment and cost savings. Waste Almost all the organizations separate the waste generated at their source of origin. In addition to the absolute quantiication of waste-related data such as waste per month, and the number of kg of e-waste, these organizations calculate intensity ratios for diferent waste categories. For example, food waste per person in the apparel sector and kitchen waste per guest in the hotel sector are used to identify the severity of the particular waste type. In some cases this waste-related data is utilized in investment decisions such as how the particular organization is beneited from their own recycling plants or machinery to reuse the waste generated. he waste data generated is communicated internally among employees and externally among customers, if they are responsible for waste generation so as to educate them on the need for waste minimization. For example, paper waste per person is linked with the number of trees that has to be cut down, the number of people that can be fed with the food wasted, etc. 96 Chapter 6 | Sri Lankan EMA Practices: Some Common Features Carbon footprint Information needs in respect of CFP can be divided into two. he irst level of information is the information needed by the independent CFP assessor to calculate CFP. he second level of information is the information required by the company management to manage CFP. Information needs of the third party assessor could also be identiied under three aspects: 1. data required to calculate scope 1 emissions such as direct production volume, material used, etc. 2. data required to calculate scope 2 emissions such as purchased electricity consumption, and 3. other data required to calculate indirect emissions (scope 3). In many organizations the calculation of CFP is limited to absolute values such as the total value of carbon emissions. However, some of these organizations calculate carbon-related intensity ratios such as CFP per unit of output. We witnessed a high level of involvement of non-inance professionals playing a major role in environmental management in many Sri Lankan enterprises. Accountants, owing to various reasons, have traditionally considered environmental management as an area outside their domain. We therefore witness engineers still playing a major role in environmental-related information generation and reporting in Sri Lankan enterprises. However, when the sustainability teams get together with inance professionals the journey to EMA has become quite adventurous as suggested by Bartolomeo et al. (2000). his is evident in some companies as they calculate a sustainability index that captures the performance of several environmental domains into a single coherent measure. 97 Environmental Management Accounting in Sri Lankan Enterprises List of Participant Organizations A&E Lanka (Pvt) Limited Ceylon Cold Stores PLC Citizens Development Business Finance PLC (CDB) Colombo Courtyard Hotel Diesel and Motor Engineering PLC (DIMO) ETI Finance Limited Hirdaramani (Mihila) Jetwing Hotels (Blue and Lagoon) John Keells Holdings PLC (Keells Supermarkets) MAS Holdings (Bodyline 1) Orange Electric Wijaya News Papers Ltd 98 Referenses References            Abeygunawardena, A. 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