Environmental Management Accounting: A travel through tourism

Setting the scene As a guest to a hotel you would have seen this notice –“save our planet”and sometimes might have not taken it seriously. However, it is a sign that a hotel requires your (guest’s) support in preserving water, energy and environment. Unlike any industry the support of a guest is indispensable in a hotel to successfully implement any initiative aimed at preserving environment. Preserving environment in tourism industry is getting increasingly import due to various reasons including, but not limited to, growing green consciousness of tourists, mounting media coverage of environmental impacts created by tourism industry and development of new concepts such as eco tourism and responsible travel. This is further compounded when the tourism industry is planned to attract 2.5 million tourists annually and USD 3 billion as foreign direct investment to the country, by the year 2016 while providing 500,000 employment opportunities. With this impressive growth prediction of tourism, the environmental management is getting popular and important in hotels not only in Sri Lanka but around the globe. However, the objective of this article is not to look at various environmental management strategies in the hotel sector but to identify the accounting that supports those strategies. In order to support various environmen- 49 tal management strategies a body of accounting practices has emerged/ developed as Environmental Management Accounting (EMA). The primary objective of EMA is to act as an interface between internal reporting oriented management accounting and environmental management strategies. Thus, it is a supporting tool that facilitates environmental strategies of an organization. Demystifying Environmental Management Accounting According to United Nations division of Sustainable Development (UNDSD) (2001) EMA is broadly defined to be the identification, collection, analysis and use of two types of information for internal decision making, physical information, on the use, flows and destinies of energy, water and materials (including wastes) and monetary information on environment-related costs, earnings and savings. It is obvious that EMA can take place in physical measures and monetary values. The physical side of EMA can take place in kilograms, litres, 50 When a hotel purchases a solar panel system the financial viability is usually assessed. It is a good example of how EMA takes place. Usually a hotel calculates the electricity cost saved due to the installation of these solar panels. These electricity cost savings in units is the PEMA. When these units are valued at the existing electricity tariff the total cost savings can be identified and it is the MEMA. cubic metres, joules, etc and it is called as physical environmental management accounting (PEMA). Impacts of corporate activities on environmental systems are reflected in PEMA. These impacts are created through the use of water, energy, materials and generation of waste and emissions. The physical information mentioned herein is, therefore, the key to the development of many environment-related costs. The monetary aspect of EMA, mostly, takes place when a financial value is assigned for the PEMA. It is then called as monetary environmental management accounting (MEMA). MEMA can also be created without any relation to physical information and license fee, environmental fines In the previous solar panel system installation situation, when the payback period for the system is calculated it is ad hoc future oriented long term MEMA information. On a daily basis the kilowatts of electricity saved is calculated to include into the green book for internal management reporting, it is routine, present/past oriented physical information. are some examples. Thus, it is clear that impacts of corporate activities on economic systems are reflected through MEMA. MEMA and PEMA information can be further emphasized in three dimensions: anced scorecard, environmental impact assessment, capital budgeting, etc. Due to the innovative nature of EMA, many practices are developed or existing practices are adopted day-by-day. ¾ Time frame - the period being addressed by different tools (past, current or future); Benefits of Environmental Management Accounting ¾ Length of time frame - the duration of the period being addressed by the tool (tools addressing the short term vs long term); and ¾ Routineness of information - ad hoc vs routine gathering of information. EMA has been suggested as an innovative managerial technology. However, it is not merely an environmental management tool among many but is a broad set of principles and approaches that provides the information for the successful implementation of many other environmental strategies. EMA includes a wide array of accounting practices such as accounting for material, energy and water, material flow cost accounting, life cycle analysis, activity based costing, sustainability bal- The adoption of EMA practices and tools offers numerous benefits. They can be categorized under three broad headings. It should also be noted that these benefits are overlapping as it is difficult to clearly demarcate the boundaries of the benefits of EMA. Ensuring compliance EMA will ensure that an organization complies with environmental regulations and self imposed environmental policies. Supporting eco-efficiency EMA supports the efficient use of water, material, energy while reducing the environmentally harmful impacts such as waste, emissions, pollutants, etc. This improves the A hotel may install a waste water treatment plant mainly to comply with the environmental law. However, the treated water is used for gardening purposes which derives economic benefits. Further, the hotel can use this as a marketing tool to generate a favorable public image as a green hotel mainly in the eyes of guests. efficiency at which the resources are used resulting in cost savings. This advantage has been further highlighted as the business case of EMA. Gaining competitive position EMA will enable an organization to establish and strengthen its position as a green organization through cost effective and environmentally sensitive programmes. Challenges to Environmental Management Accounting There are many challenges that will deter the aforementioned benefits of EMA. Among them the main challenge comes from the conventional management accounting practices. Non-collection of environmentally related costs, treatment of environmental costs as general overheads, and ignorance of environmental costs in accounting are some of the issues inherent in conventional management accounting. Further, underdeveloped communications links between the accounting and other functions can act as a barrier for better adoption of EMA. This is 51 mainly due to the fact that many of the environmental related information is usually collected outside the accounting department. For example, the use of gas is collected by the kitchen staff and the use of water is collected by the engineer in a typical Sri Lankan hotel. But the insufficient or lack of communication between the accounting and the departments that collect the information can hinder the application of EMA. Furthermore, in the Sri Lankan context the lack of knowledge on the subject, i.e. EMA, can be regarded as another barrier. The way forward In order to derive the benefits of EMA while overcoming the challenges, a carefully designed programme for EMA is needed. The programme will be dependant/contingent on many external and internal factors such as the market of the product/ service, intensity of regulations, nature of the operations, organizational structure, history and ownership, nature of the environmental challenges faced, availability of resources, etc. A common broad framework for the successful adoption of EMA can be presented as follows (refer Figure 1). 52 As mentioned previously, the environmental management strategies pursued by an organization should be well supported through EMA practices. In essence, EMA and environmental management strategies should be well interwoven. The integration of EMA with environmental management strategies should take place on a daily basis. In other words, it has to be a part of day-today decision making process of an organisation. As given in Figure 2, these EMA and environmental management practices should be well supported by the various stakeholders of the organization such as management, employees, customers, suppliers, regulators and even public/community. Without the support of the stakeholders on a continuous basis, the sustenance of these practices can’t be guaranteed. When EMA and environmental management practices are well integrated with the support of various stakeholders the benefit can be derived in terms of compliance, eco-efficiency and strategic position as mentioned previously. Thus, an organization should devise its own clear strategy based on its contextual factors for the successful adoption of EMA. References Burritt, R., Hahn, T. & Schaltegger, S. (2002). Towards a comprehensive framework for environmental management accounting: links between business actors and environmental management accounting tools. Australian Accounting Review, 12, 2, 39–50. Ministry of Economic Development (MEDSL). (2011). Tourism Development Strategy 2011 – 2016, MEDSL, Sri Lanka. United Nations Division for Sustainable Development (UNDSD). (2001). Environmental Management Accounting, Procedures and Principles, New York and Geneva: United Nations Publications.