A Quiet Climate Crisis Superhero: (EMA) Accounting
The Need for Environmental Management Accounting (EMA)
The onlsaught of unnecessary human deaths and the destruction of the natural environment are yet more powerful opportunities to reconsider how we are conducting business.
The Bhopal gas tragedy, a chemical leak from a pesticide plant in India, exposed more than half a million people to a highly toxic gas, which killed thousands and injured hundreds of thousands(Acca, n.d.)(“Bhopal disaster,” 2005). One thousand three-hundred miles of coastline were contaminated by the 37,000 metric tonnes of crude oil released from the Exxon Valdez oil spill(“Exxon Valdez oil spill,” 2020). The worst nuclear disaster in history released radioactive contamination into the air from the Chernobyl nuclear power plant that stretched over Russia and Western Europe for two weeks. With the hundreds (if not thousands) of environmental catastrophes that have taken place in the past 200 years, individuals, IGOs, and NGOs have been placing increasing pressure on international, national, and local policy-makers to work towards establishing environmental accountability(“List of environm,” 2020).
"Recognition that our current way of life poses a threat to us and our planet, has led to global agreements on action to prevent future environmental damage(Acca, n.d.)."
Monumental events inspired by environmental calamities are on the rise. The Montreal and Kyoto Protocols, the Rio Declaration, the Aarhus Convention, and many more congregations of organizations and individuals have been working towards creating systems to mitigate, reduce, and restore the health of the world's ecosystems.
Not just individuals, but large and small businesses are becoming increasingly aware of the impacts and dependencies that they have on the health of the environment. Not only are the vast majority of businesses dependent on the ecosystem services provided by environments, but the impacts they have on those environments are significant. Failure to conduct business in an environmentally responsible fashion can result in operational, financial, legal, and reputational risks. For the aforementioned environmental disasters, billions and billions of dollars have been paid out in damages.
We are just starting to get a taste of the materiality for environmental management accounting. Let us also consider disasters that are not an immediate response to an impact but created as a long term result of an impact. In North America, we are not talking about millions or even billions of dollars in liabilities. In the United States alone, the last three decades of natural disasters have resulted in costs in the trillions of dollars (Quealy, 2017). Unfathomable consequences are a risk if we don't begin to take a more holistic accounting of the impacts and dependencies we have on our natural world.
By taking into account these environmental impacts and dependencies, we can more effectively manage them. Starting with a brief look at what EMA is composed of, we will then look at the uses and benefits of EMA, and then wrap up with challenges EMA faces and a practical example of a company utilizing EMA.
What is EMA and its Relationship to Environmental Accounting?
Falling under the larger umbrella of accounting proper, environmental accounting is a field that identifies resource use, measures, and communicates costs of a company's or national economic impact on the environment (“Environmental accounting,” 2019).
However, conventional financial management accounting methods are unable to adequately deal with environmental costs as they generally result in allocating them to general overhead accounts. Unfortunately, this leads to internal business strategy decisions to not be fully aware of the impacts on profit and loss accounts and the balance sheet impact of environment-related activities. To isolate, identify, and allocate environmental costs appropriately, we now have EMA(Acca, n.d.).
EMA is the generation and analysis of both financial and non-financial information in order to support internal environmental management processes. It is complementary to the conventional financial management accounting approach, with the aim to develop appropriate mechanisms that assist in the identification and allocation of environment-related costs (Bennett & James, 1998) (Frost & Wilmhurst, 2000).
Types of Information Included Under EMA
EMA's scope entails "..the identification, collection, analysis, and use of two types of information for internal decision making:
- [PEMA: physical EMA] Physical information on the use, flows, and fates of energy, water, and materials (including wastes)
- [MEMA: monetary EMA] Monetary information on environmentally related costs, earnings and savings ("Handbook of Nat,” 2011)”
Environment-related costs are applicable to:
- product pricing
- investment appraisal
- calculating costs
- savings of environmental projects or setting quantified performance targets.
In an effort to help further advance EMA in its effectiveness, “Burritt et al. developed a multi-dimensional framework. Their framework considers the distinctions between five dimensions:
- internal versus external
- physical versus monetary classifications
- past and future timeframes
- short and long terms, and
- ad hoc versus routine information gathering in the proposed framework for the application of EMA.
Within this framework, the different techniques of EMA – such as environmental lifecycle costing or environmental cost accounting – can be placed and assigned. The management of a company can choose appropriate tools on the basis of their information needs(Acca, n.d.).”
Now that we have an idea of what EMA is, let's take a look at some uses and benefits.
Uses & Benefits of EMA
EMA is applied in different ways and for various purposes. Some of the more common uses of EMA are:
- defining environmental costs
- environmental activity-based accounting
- life cycle assessment (LCA)
- environmental management as part of total quality management
- flow cost accounting
- total cost assessment (TCA)
- Environmental Balance Scorecard (EBS) / Sustainability Balance Scorecard (SBS)
- Greenhouse Gases (GHG AKA carbon) emissions accounting
(Acca, n.d.)(Wahyuni, 2009)
Of the notable benefits of EMA, we notice the ability to meet and outperform compliance regulations, increased operational and product eco-efficiency, cost reduction, innovation, increased shareholder value, and strategic market and risk position to be of great significance (Wahyuni, 2009).
Using product lifecycle costing and environmental activity-based accounting allows for a more nuanced understanding of costs being or at risk of being incurred. A more profound understanding of the costs of a company allows for enhanced financial maneuvers and management to manage risk and exploit opportunities.
The relationship between the eco-efficiency of a company's operations, its products, and its associated environmental costs are undeniable. Long term net benefits of increasing the environmental friendliness of their operations and products are reduced liabilities, eco-friendly reputation, reduced (hazardous) waste management costs, reduced energy bills, and higher net profits.
A company that is defining environmental costs and using environmental management as a part of total quality management is undergoing an in-depth and more holistic, self-analytical process. This process allows them to exploit, enhance, avoid, and mitigate various risks proactively, placing them in a stronger position to respond and act for compliance audits, market swings, and environmental disasters.
EMA has a variety of applications and benefits. Long term systems thinking helps us identify how the interconnectedness of many components has rippling effects. The effort put into understanding these relationships between systems and components is well invested for companies who value economic and environmental health and longevity.
Three big challenges of EMA are:
- assigning cost estimates
- defining scope (the company's sphere or boundaries of responsibility and influence)
- globally accepted standards and accounting authority
Assigning Cost Estimates
There's a saying in the environmental industry that a logger looks at a grove of trees and sees timber (raw material = $) when a forester, instead, sees a forest (ecosystem and ecosystem services).
One can ask both a logger and a forester to look at the same tree and determine its monetary value. However, the assessment process for both will be substantially different, and the results will reflect that. In isolation, a tree can be assigned a cost more easily. In isolation, it is stripped of its soil-food-web network; its resident animals, insects, and birds; its role in the local and regional hydrological cycles; its role in topsoil stabilization; its role in climate regulation; and much more. Would a logger try and determine the underlying costs of each of those ecosystem services a tree is providing? No, they would not. Would a forester be more inclined to consider the ecosystem services of a tree? Much more likely.
There's an issue with assigning environmental costs, and its the issue of claiming a determinate stance of knowing and claiming the now limited, yet entirely subjective value of a resource. The only species to have developed such a complex economic and imaginary currency system, humans, are slowly learning of its substantive limits. Environmental disasters could care less about how much value we proclaim our wads of paper and coins to be. If we do not begin to place monumentally higher values on our ecosystems, we will continue to "pay" higher and higher prices for the consequences of our actions.
Certainly we can find best practices and drafted protocols that offer suggestions as to how one can assign cost estimates; however, there is no formal or official authority to enforce quality or standads. Complicated and a wicked issue, assigning environmental costs places us at the welfare intersection of ethics, economics, and the environment.
Defining the Scope of EMA
How do we determine a definite value on the level of influence a company has? What is the precise correlation and association between a company's level of influence and its responsibility? Where does a company's responsibility boundary end? What, when, where, why, and how should things be taken into account?
Assuming responsibility for one's own product and efforts involved to create it are easily understood; however, responsibility boundaries become increasingly challenging to identify when considering supply chains and their tiers. Like roots or the branches of a tree, there are many parties and elements involved. How is responsibility assigned, and where does it begin and end? What are the costs associated with varying levels of responsibility, and how are they accounted for?
Protocols drafted by international organizations and other established institutions offers suggestions on how a company can define the scope of EMA. Unfortunately, there are no official authorities that have issued out a globally accepted standard. Again the muddy waters of ethics, morals, economics, and environment whirl in an unclear confusion of responsibility.
Globally Accepted Official Standards and Accounting Authority
I have not been successful in identifying a globally accepted, official standards document nor accounting authority to enforce "correct" EMA practices. In brief research, there are a plethora of articles sharing practices, frameworks, processes of EMA, and many of them tend to reference articles written only 45 years ago (1970's). However, I have yet to find an authority to officialize EMA standards and an enforcer to ensure quality-use and oppose greenwashing.
EMA: A Practical Example
A company we are all familiar with, Apple, can begin to give us some basic understanding of what EMA looks like. Apple is using EMA as a toolset to "...reduce our impact on climate change by using renewable energy sources and driving energy efficiency in our products, facilities, and supply chain... Conserve precious resources so we all can thrive...Pioneer the use of safer materials in our products and processes (“Environmental Responsibility Report,” 2018).”
Here is an example of how Apple is using carbon accounting to identify opportunities for improving their processes:
(Apple's “Environmental Responsibility Report,” 2018)
Apple is supporting the transition to renewable energy for its suppliers, and in doing so, "in 2017, our program implemented energy efficiency measures that saved a combined annualized $44.8 million. These measures helped save an annualized 320,000 metric tons of CO₂e from entering the atmosphere in 2017" (“Environmental Responsibility Report,” 2018).
Some success stories are further highlighted in a more recent report, where we can see the results of energy audits on their products, facilities, and supply chain, as well as product lifecycle assessments:
We've significantly reduced our carbon emissions: by 64% since 2011 for Apple's direct operations (Scope 1 and 2 emissions) and by 35% for Apple's entire footprint since it peaked in 2015.
Supplier clean energy
44 Apple suppliers have committed to power all of their Apple production with 100% renewable energy. With these pledges, we are on track to far exceed our 2020 goal to bring 4 gigawatts of new clean energy into our supply chain.
Component reductions In the last year, we've reduced emissions from aluminum in our products by 45%.
Product energy efficiency
In 10 years, we've reduced average product energy use by 70%.
100% renewable energy
We're sourcing 100% renewable energy for all the electricity used at our facilities in 43 countries around the world. Two-thirds of this renewable energy comes from Apple-created projects.
Facilities energy efficiency
We saved 41.5 million kilowatt-hours (kWh) through energy efficiency initiatives at our global facilities.
(“Environmental Responsibility Report,” 2019)
As climate chaos ensues, it continues its unintended effectiveness of awakening the global population to the fact that our economies and lifestyles have a significant impact on our welfare and that of our planet's ecosystems. Our impacts and dependencies continue to become more evident each year as ecological collapses increase, and Earth's sixth mass extinction advances. The stakeholder count of those demanding more comprehensive environmental accountability from businesses and governments is rapidly increasing, as we see climate strikes becoming increasingly popular, happening from once a year to every week now. EMA can serve as a stepping stone in the right direction, taking into account available physical and monetary information.
EMA is not without its challenges. How can we place a price on nature, a tree, or a child? Where does the scope of a company's environmental responsibility begin and end? Who will officialize standards for EMA and enforce them?
We saw how Apple had leveraged its new-found knowledge through EMA to implement massive projects, resulting in significant returns and promise of returns on investments. The increasing transparency offered by EMA creates trust, thus building greater stakeholder relationships. It enhances the ability to meet and outperform compliance regulations, increases operational and product eco-efficiency, reduces cost, inspires innovation, increases shareholder value, and places organizations in more favorable market and risk positions.
More than ever before, it's time to take ourselves, our way of conducting business, into greater account for the sake of our environment. EMA is a silent, evolving, and arduous process that can yield promising results.
How/does your business or employer use EMA?
Acca. (n.d.). Environmental management accounting. Retrieved March 25, 2020, from https://www.accaglobal.com/ca/en/student/exam-support-resources/professional-exams-study-resources/p5/technical-articles/environmenta-management.html
Bennett, M and James, P life Cycle Costing and Packaging at Xerox Ltd, in: Bennett, M and James, P (Eds) The Green Bottom line – Environmental Accounting for Management: Current Practice and Future Trends (Greenleaf Publishing, Sheffield, 1998b)
Bhopal disaster. (2020, March 17). Retrieved March 25, 2020, from https://en.wikipedia.org/wiki/Bhopal_disaster
Environmental accounting. (2019, December 9). Retrieved March 25, 2020, from https://en.wikipedia.org/wiki/Environmental_accounting
Environmental Responsibility Report 2018 Progress Report, Covering Fiscal Year 2017 . (2018). Retrieved March 27, 2020, from https://www.apple.com/environment/pdf/Apple_Environmental_Responsibility_Report_2018.pdf
Environmental Responsibility Report 2019 Progress Report, covering fiscal year 2018. (2019). Retrieved March 27, 2020, from https://www.apple.com/environment/pdf/Apple_Environmental_Responsibility_Report_2019.pdf
Exxon Valdez oil spill. (2020, March 22). Retrieved March 25, 2020, from https://en.wikipedia.org/wiki/Exxon_Valdez_oil_spill
Frost, G R and Wilmshurst, T D The adoption of environment-related management accounting: an analysis of corporate environmental sensitivity (Accounting Forum Vol 24, No 4, pp 344-365, Business Source Premier, 2000)
"Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003” (PDF). United Nations, European Commission, International Monetary Fund, Organistation for Economic Co-operation and Development and World Bank. Archived from the original (PDF) on 2011-06-01. Retrieved 2020-03-25.
List of environmental disasters. (2020, February 15). Retrieved March 25, 2020, from https://en.wikipedia.org/wiki/List_of_environmental_disasters
Quealy, K. (2017, September 1). The Cost of Hurricane Harvey: Only One Recent Storm Comes Close. Retrieved March 25, 2020, from https://www.nytimes.com/interactive/2017/09/01/upshot/cost-of-hurricane-harvey-only-one-storm-comes-close.html
United Nations Division for Sustainable Development (2001), Environmental Management Accounting Procedures and Principles, Prepared for the Expert Working Group on “Improving the role of government in the promotion of environmental management accounting”, New York
- Wahyuni, Dina. (2009). Environmental Management Accounting: Techniques and Benefits. Retrieved March 25, 2020, from https://www.researchgate.net/publication/228242804_Environmental_Management_Accounting_Techniques_and_Benefits