Environmental management accounting (EMA)

What is EMA?• Environmental Management Accounting EMA is the – identification, collection, estimation, analysis, internal reporting, and use of.... Why was EMA Developed?• EMA was conc

Environmental Management

Accounting (EMA):

Putting the Right Numbers in

Sustainable Projects

By Maria Fatima Reyes, CPA, MBA

Environmental Management Accounting Network -

Asia Pacific (EMAN-AP)

mfreyes@pacific.net.ph

About EMAN-AP

• Network of individuals and organizations working towards the development and promotion of Environmental Management

Accounting (EMA) as an important sustainable development tool

• The mission of EMAN-AP is to provide a link among developers, providers, and users of EMA in order to assist businesses,

governments, and other organizations to make informed decisions through the use of the EMA tool

• EMAN-AP Secretariat is located at the IGES-Kansai Research Center in Kobe, Japan

• Next conference of EMAN-AP will be held in Seoul, Korea on September 2002

What is EMA?

• Environmental Management Accounting (EMA) is the

– identification, collection, estimation, analysis, internal

reporting, and use of

– materials and energy flow information, environmental cost information, and other cost information

– for both conventional and environmental decision-making

within an organization

• Although EMA is geared towards internal management use, EMA data can also be used for external reporting purposes.

Why was EMA Developed?

• EMA was conceived in recognition of some of the limitations of conventional practices for informing environmental management decisions

– “hiding” of costs in overhead accounts

– inaccurate allocation of overhead costs back to

processes, products, activities

– insufficient tracking of wasted materials and energy

– lack of data on future and less tangible costs in the

accounting records at all

Environmental Costs Are Often Underestimated

• Research Findings:

– For every dollar of waste cost that companies actually

measure, another 2 to 3 dollars of cost are” hidden” in the

accounting records, or are not on the books at all

– Companies typically underestimate how much waste really costs them, sometimes by several orders of magnitude

– This applies even to big, well-managed companies

Environmental Costs At A Refinery

(As a percentage of operating costs,

excluding crude oil input)

Source: Green Ledgers: Case Studies in Corporate

Environmental Accounting World Resources Institute, May, 1995.

The Cost of Waste Ink

at the Southwire Company

• The cost of a drum of hazardous waste ink was estimated as

$50 - the average disposal cost per drum

• Upon closer inspection, the true cost of waste was discovered

to be $1300 per drum, including:

– $819 in lost raw materials (ink, thinner)

– $369 for corporate waste management activities

– $50 for disposal

– $47 for internal waste handling activities

– $16 to pay a hazardous waste tax

THE HIDDEN COST

The Cost Iceberg

Environmental costs can be like an iceberg, with only a small part

of the cost visible

Adapted from: Bierma, TJ., F.L Waterstaraat, and J Ostrosky 1998 “Chapter 13: Shared Savings and

Environmental Management Accounting,” from The Green Bottom Line Greenleaf Publishing:England.

– Design for Environment

– Environmentally Preferable Purchasing

– Environmental Supply Chain Management

– Extended Producer Responsibility

– Performance Meas & Benchmarking

– Corporate Environmental Reporting

– etc

EMA for Improved Capital Budgeting

• Better identification, allocation, and analysis of

environmental costs improves the process by which the profitability of potential investment projects are assessed

• Such investments include any capital project that has the major objective of controlling, reducing or preventing

pollution

Profitability Assessments of Proposed Sustainable Projects

EMA can illustrate the potential profitability of projects that utilizes preventive management

strategies by doing a better job of profitability

assessment:

– Comprehensive inclusion of relevant and significant costs and savings

– Improved cost estimation and allocation

– Longer analysis time horizons

– Multiple profitability indicators

Comprehensive Inclusion of Relevant Costs and Savings

(conventional and less tangible costs…)

• The cost of lost manufacturing inputs

– lost materials, energy, labor, capital, etc

• The cost of waste management

– waste handling, regulatory compliance, waste treatment & disposal, etc

• Less tangible costs

– reduced production throughput, reduced product quality, negative company image, liability, etc

External Costs

• Costs for which companies are not yet accountable or which are of no material economic effect to business financial condition

• Examples include adverse health effects to community, damage to personal properties or ecosystems owing to business activities

Cost Boundary Not Static

• Evolving regulations, public expectations and emerging environmental management standards can “internalize” external costs and make it a part of accepted capital

budgeting practices

Improved Cost Allocation

• Proper cost allocation is very important to sound

investment profitability analysis;

• Lumping of environmental costs into overhead accounts and improperly allocating them to departments, products or processes distort the true financial benefits from projects that improve efficiency and environmental performance

Longer Time Horizon Analysis

• The use of longer time horizon will be able to capture

costs, savings, and revenues that occur well after the initial investments is made

Multiple Financial Indicators

• Profitability indicators should be able to incorporate all cash flows over the life of the project and should integrate the time value of money through appropriate discounting

of future cash flows (e.g net present value, internal rate of return, and profitability index)

Net Present Value $ 47,696 $2,073,607Internal Rate of Return 17% 46%

company analysis

improved analysis

*TCA

Financial Data for White Water and

Fiber Reuse Project

* Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993

Net Present Value -17,182 +18,981

original analysis

improved analysis

Financial Data for

Quality Control Camera Project

EMA as Driver of Sustainable Investment

EMA helps companies recognize and achieve the multiple benefits of Sustainable Investments

– Reduced costs

• increased profit margins

• lower product prices

• increased market share

– Reduced liability

• improved company image

• increased market share

• increased access to financing and customers contracts

Benefits of EMA to Industry

• The ability to more accurately track and manage the use and flows of energy and materials, including

pollution/waste volumes, types and fate

• The ability to more accurately identify, estimate,

allocate, and manage/reduce costs, particularly

environmental types of costs

• More accurate and comprehensive information for the measurement of performance, thus improving company image with stakeholders such as customers, local

communities, employees, government and financial

providers

Benefits to Government of EMA

Implementation by Industry

• The more that industry is able to justify environmental investments on the basis of financial self-interest, the lower the financial, political, and other burdens of

environmental protection on government.

• Implementation of EMA by industry should strengthen the effectiveness of existing government

policies/regulations by revealing to companies the true environmental costs and benefits resulting from

government regulations.

EMA Development

• United Nations Division for Sustainable

Development’s Consultative Working Group on EMA

EMA Education

Most initiatives to promote EMA around the world rely on voluntary adoption, with educational activities a core component:

– guidance documents

– case studies

– curriculum development & training

– software

EMA in North America

and Europe

Examples of initiatives in North America and

Europe that promote EMA as a tool for many

environmental programs

– US EPA’s Environmental Accounting Project

– Environmental Canada-Quebec Regional Office’s Private Sector P2 Initiative

– Graz (Austria) Department of Environmental

Protection’s EcoProfit Initiative

– UK Environment Agency’s EMA for Financial

Accountants Project