ENVIRONMENTAL

ACCOUNTING
AN OVERVIEW
 What is Accounts?

 An account is a label used for recording and reporting

a quantity of almost anything.
 Accounting is the discipline of measuring,
communicating and interpreting financial activity.
 The purpose of accounting is to provide the
information that is needed for sound economic
decision making.
Environmental accounting
 Environmental Accounting (EA) can be considered either a
subset or superset of accounting proper.
 It focuses on the cost structure and environmental
performance of a company.
 It principally describes the preparation, presentation, and
communication of information related to an organisation’s
interaction with the natural environment.
 Although environmental accounting is most commonly
undertaken as voluntary self-reporting by companies, third-
party reports by government agencies, NGOs and other
bodies posit to pressure for environmental accountability.
Environmental accounting
 It aims to incorporate both economic and environmental
information.
 It can operate at the company level or at the level of the national
economy.
 Environmental Accounting is linked to the National Accounts of
countries that produce the estimates of Gross Domestic Product
(GDP).

 Environmental Accounting is a growing field that identifies resource

use, measures and communicates costs of a company or the national
economy actual or potential impact on the environment.
Environmental accounting
 Accounting for impacts on the environment may occur within a company’s financial statements,
relating to liabilities, commitments and contingencies for the remediation of contaminated lands or
other financial concerns arising from pollution. Such reporting essentially expresses financial
issues arising from environmental legislation. More typically, environmental accounting describes
the reporting of quantitative and detailed environmental data within the non-financial sections of
the annual report or in separate (including online) environmental reports. Such reports may account
for pollution emissions, resources used, or wildlife habitat damaged or re-established.
 In their reports, large companies commonly place primary emphasis on eco-efficiency, referring to
the reduction of resource and energy use and waste production per unit of product or service. A
complete picture which accounts for all inputs, outputs and wastes of the organisation, must not
necessarily emerge. Whilst companies can often demonstrate great success in eco-efficiency, their
ecological footprint, that is an estimate of total environmental impact, may move independently
following changes in output.
 Legislation for compulsory environmental reporting exists in some form e.g. in Denmark, 
Netherlands, Australia and Korea. The United Nations has been highly involved in the adoption of
environmental accounting practices, most notably in the United Nations Division for Sustainable
Development publication 
Environmental Management Accounting Procedures and Principles (2002)
Why do Environmental Accounting ?

 Environmental cost can be significantly reduced or

eliminated as a result of business decisions.
 Environmental costs may provide no added value
to a process, system or product (i.e. waste raw
material )
 Environmental costs may be obscured in general
overhead accounts and overlooked during the
decision making process.
Why do Environmental Accounting ?

 Understanding environmental costs can lead to

more accurate costing and pricing of products.
 Competitive advantage with customers is possible
where processes and products can be shown as
environmentally preferable.
Environmental Costs
 Environmental Costs can include costs to clean up or
remediate contaminated sites, environmental fines, penalties
and taxes, purchase of pollution prevention technologies and
waste management costs.

 Major challenge in application of environmental accounting

as a management tool is identifying relevant costs.
 Cost definition determined by intended use of data (i.e. cost
allocation, budgeting, product/process design or other
management decision support).
Environmental Costs
 Types of Environmental Costs
 Conventional: material, supplies, structure and capital costs
need to be examined for environmental impact on decisions.
 Potentially Hidden:
 Regulatory (fees, licenses, reporting, training, remediation)
 Upfront and back end (site prep, engineering, installation, closure and
disposal)
 Voluntary (training, audits, monitoring and reporting)
 Contingent: penalties/fines, property liability, legal)
 Image: Relationship with employees, customers, suppliers,
regulators and shareholders
Environmental accounting

 Environmental Accounting is often referred to as Green

Accounting which incorporates environmental assets and their
source and sink functions into national and corporate
accounts.

 It is the popular term for environment and natural resource

accounting.

 Corporate environmental accounts have not yet found wide

application of these concepts.
Environmental accounting
 It measures the impact a company has on the
environment, but in physical units (e.g. kilograms
of waste produced, kilojoules of energy consumed)
rather than in monetary units. It is closely related to
sustainability.
 Sustainability
• It is a characteristic of a process or state that could be
afforded to be maintained at a certain level indefinitely.
• Often it is confused with “Sustained” which means
‘irreversible’ growth.
• Sustainability in its environmental usage, refers to the
potential longevity of vital human ecological support
systems, such as the planet's climatic system, systems of
agriculture, industry, forestry; and fisheries on the one hand;
and
• The increasing pressures by human communities, their
consumption patterns in general, and their impact on and the
various systems on which they depend, on the other hand.
 Rationale for environmental accounting

• There are several reasons why businesses may consider adopting

environmental accounting as part of their accounting system.
• Possible significant reduction or elimination of environmental costs
• Environmental costs and benefits may be overlooked or hidden in
overhead accounts
• Possible competitive advantages as customers may prefer
environmentally friendly products and services.
• Possible revenue generation may offset environmental costs (e.g.
transfer of pollution allowances).
• Improved environmental performance which may have a positive
impact on human health and business success may result in more
accurate costing or pricing of products and more environmentally
desired processes
Different environmental accounting disciplines

 Environmental accounting can be broken down in

to three disciplines:
 Corporate Environmental Accounting (CEA)
 Global Environmental Accounting (GEA)
 National Environmental Accounting (NEA)
Corporate Environmental Accounting

Corporate Environmental Accounting can be further

sub-divided into:
 Environmental Management Accounting;

 Environmental Financial Accounting;

 Environmental Audit;
Corporate Environmental Accounting

• At its simplest, corporate environmental accounting

is about making environment related costs more
transparent within corporate accounting systems
and reports.
• One of the major distinctions within the field is
whether the primary focus is to report environment
related costs within internal management accounts,
or external financial accounts or other public
reports
Benefits of CEA
 The benefit of undertaking a corporate
environmental accounting initiative is that the
identification and greater awareness of
environment related costs often provides the
opportunity to find ways to reduce or avoid these
costs, whilst also improving environmental
performance.
CEA a valuable tool
 With the pressure on business to improve
environmental performance, corporate
environmental accounting can provide a valuable
tool that enables business to respond to
environmental challenges whilst retaining a focus
on bottom-line imperatives.
CEA and emerging fields
• CEA initiatives are being undertaken by:
• United Nations Division for Sustainable
Development.
• National governments.
• Professional accounting bodies.
• Leading companies.
• Most of these initiatives have to date looked at the
area of Environmental Management Accounting.
Environmental Management Accounting

 There are various definitions of Environmental

Management Accounting (EMA), but essentially it
involves refining a management accounting system
so that it more tightly and rigorously accounts for
environment related costs.
Purpose of EMA
 The intention is to identify environmental costs in
order to enable more informed decisions about how
these costs can be better managed and integrated
into operational and strategic decision-making.
Drivers of EMA
• The drivers behind why an organisation might
consider undertaking an EMA initiative include a
mix of external and internal environmental and
financial pressures.
• These could include increasing community,
government and market expectations as to how a
business manages its environmental impacts, as
well as an organisation seeking out new
opportunities to reduce costs.
Benefits of EMA
 Identifying cost saving opportunities;
 better decisions with regard to product mix and
pricing;
 avoiding future costs through better investment
decisions;
 financial justification for environmental initiatives.
Transparent accounting
• EMA involves the more transparent accounting of
environment related costs within an organization’s
management accounting system. Management accounting
systems have the purpose of providing cost information for
internal management use in decisions such as cost
management, product pricing and investment appraisal.
• EMA mainly focuses on identifying the private
environmental costs that would normally be captured
within an organisations accounting system. Often these
environmental costs are lost in general overhead accounts
and therefore not focused on by management.
Transparent accounting
 EMA is an emerging and dynamic field .The
environmental costs looked at through EMA would
include costs such as those relating to waste
management, energy consumption and water usage.
 The United Nations Division for Sustainable
Development publication “Environmental
Management Accounting Procedures and Principles
(2001)” provides a checklist of possible costs to
consider when undertaking an EMA initiative.
Transparent accounting
 Underestimates Interest in EMA is being generated
by the growing appreciation of the lack of
awareness and understanding that people within an
organisation generally have with respect to the
magnitude of the environmental costs being
generated by their organisation. This in turn can
mean that many opportunities for cost savings and
environmental improvement are being lost.
Main objectives
 One of the main objectives with EMA is to get over
the situation whereby conventional management
accounting systems have attributed many
environmental costs to general overhead accounts.
This results in the situation where environmental
costs remain hidden from the attention of
management.
HIDDEN COSTS
 Whilst many environmental costs can be
considered hidden, they are also often found to be
under-estimated. For example, waste costs are often
simply identified as the costs associated with the
actual disposal, rather than also including the cost
of lost raw materials, licence fees etc.
EMA
• Reporting true value Central to many approaches to EMA
are the concepts of material tracking, activity based
costing (ABC) and full-cost accounting. These concepts
all aim to more accurately identify where environmental
costs are being incurred as well as report their true value
within the accounts.
• As a result, undertaking an EMA initiative often not only
leads to a better understanding of environmental costs, but
also a much better understanding of the physical process
and environmental impacts generated by an organisation
 Life Cycle Assessment
 A life cycle assessment ('LCA', also known as life cycle analysis, life cycle costing, eco-
balance, cradle-to-grave-analysis, well-to-wheel analysis, and dust-to-dust energy cost) is the
assessment of the environmental impact of a given product or service throughout its lifespan.
 Embodied Energy The goal of LCA is to compare the environmental performance of products
and services, to be able to choose the least burdensome one. The term 'life cycle' refers to the
notion that a fair, holistic assessment requires the assessment of raw material production,
manufacture, distribution, use and disposal including all intervening transportation steps.
 Life Cycle Of The Product This is the life cycle of the product. The concept also can be used
to optimize the environmental performance of a single product or to optimize the
environmental performance of a company. The term 'emergy' is often used as an analysis tool
to determine embodied energy.
 Emergy Embodied Energy refers to the quantity of energy required to manufacture, and
supply to the point of use, a product, material or service. Traditionally considered, embodied
energy is an accounting methodology which aims to find the sum total of the energy necessary
from the raw material extraction, to transport, manufacturing, assembly, installation as well as
the capital and other costs of a specific material - to produce a service or product and finally
its disassembly, deconstruction and/or decompostion.
Environmental financial
accounting
 Environmental financial accounting is used to
provide information needed by external
stakeholders on a company’s financial status. This
type of accounting allows companies to prepare
financial reports for investors, lenders and other
interested parties.
Environmental Audit
 The financial benefits and improved efficiencies from adopting cleaner production and eco-
efficiency encourage firms to undertake audits. But EA can also be an effective risk management
tool. By compliance with environmental legislation companies avoid the risk of prosecution and
fines arising from potential environmental breaches.
 Components of an Audit A good audit will include a number of components, some of which are
listed below. Data Collection: to identify and measure all inputs and outputs from the production
process and provide a baseline for comparison against targets and a background for improvement.
 Components of an Audit Compliance: to review and compare a company's activities and business
targets against all relevant regulations, codes of conduct and government policies to assess
compliance.
 Components of an Audit Documentation: to document all aspects of audit to assess progress at a
further date and to verify environmental performance to staff, regulators and the general
community.
 Components of an Audit Periodic Audits: to assess the impacts of new or changed legislation on
operations and to assess whether internal targets for environmental efficiency are being met.
Benefits of Environmental Accouting

 An environmental audit can be modified according

to the size and complexity of a business. For
example, a small business may simply concentrate
on such things as paper usage and water and energy
consumed, whereas a large organisation may have a
broader range of inputs and outputs to be measured.
 Finally An environmental audit can give a company
a much clearer understanding of its operations and
impacts, and ultimately, provides a starting point for
other environmental initiatives
Global environmental accounting
 Global environmental accounting is an accounting
methodology that deals with energetics, ecology
and economics at a global scale. The earth is the
system of interest with the input, sequestration, and
dissipation of solar energy - which constitute its
energy budget 
National Environmental Accounting

 National environmental accounting is an

accounting approach that deals with economics on
a national level. National environmental accounting
is a macroeconomic measure that looks at the use
of natural resources and the impacts of national
policies on the environment.
SEEA
 Internationally environmental accounting has been
formalized into the System of Integrated Environmental
and Economic Accounting, known as SEEA. SEEA
grows out of the System of National Accounts.
 The SEEA records the flows of raw materials (water,
energy, minerals, wood, etc.) from the environment to
the economy, the exchanges of these materials within the
economy and the returns of wastes and pollutants to the
environment. SEEA is used by 49 countries around the
world.
Questions??
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