ppt_ch17

Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith

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Chapter 17

Environmental and social management accounting


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Corporate social responsibility and external reporting• Involves taking into account the social and

environmental impact of corporate activity when making decisions

– May increase profitability– Determine long-term survival

• Communicated to stakeholders in annual reports, environment reports, stakeholder impact reports, social impact reports and social audit reports

continued


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Corporate social responsibility and external reporting

• Triple bottom line reporting– Focus on financial (economic), social and environmental

aspects of performance– Aimed at a broader range of stakeholders

• Social performance– Impact of an organisation's behaviour on society,

including the broader community, employees, customers and suppliers

• Environmental performance– Impact of an organisation's behaviour on the

environment, including natural systems of land, air and water, people and other living organisms


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Environmental management accounting (EMA)

• Consists of environmentally-related management accounting systems and practices

• Life cycle costing, environmental cost accounting, environmental performance measures, assessment of environmental benefits, strategic planning for environmental management

• EMA techniques– Financially-oriented EMA– Physically-oriented EMA


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Financially-oriented EMA

• Environmental costs– Incurred to prevent, monitor and report environmental

impacts– Cost of waste management systems, environmental

training, legal activities and fines, record keeping and reporting, cost of remediation of environmental impacts

• Environmental product costing– Involves tracing direct and indirect environmental costs to

products – The cost of waste management, permits and fees,

recycling

continued


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Financially-oriented EMA

• Environmentally-linked capital expenditure– Driven by the desire to improve the organisation's

environmental impact, or by the need to comply with environmental regulations

• Environmentally-induced revenues– Arise from positive environmental actions of the

organisation– Increased revenue from the sale of recycled materials,

from higher selling prices for greener products– Increased customer satisfaction, improved employee

morale, increase in future profits


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Physically-oriented EMA

• Physically-oriented EMA– Mechanisms that focus on supplying information that

accounts for the organisation’s impact on the natural environment

– Kilograms of noxious waste emissions, kilowatt hours of electricity used, decibels of noise

– Used for tactical decisions and capital expenditure decisions


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Environmental management systems (EMS) and EMA

• Systems that organisations put in place to manage their environmental performance

• Recycling systems, systems to monitor and control levels of liquids, material and atmospheric discharge and waste

• ISO 14001 is an international standard for EMA and its audit

• EMS and adoption of ISO 14001 requires that environmental performance be measured against policies, objectives and targets


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The benefits of recognising environmental and social impacts• There is an increasing awareness that recognising

environmental and societal impacts can have broad implications for an organisation

• Attracting highly skilled employees who wish to work for an environmentally-responsible organisation

• Enhancement of the organisation’s reputation as a responsible and caring organisation

• Identification of potential cost savings

continued


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The benefits of recognising environmental and social impacts

• Reduction of risk of current and future activities• More effective management of resources• Improvements in competitiveness

– Greater attractiveness to customers– Positive reputation


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Difficulties in recognising and measuring environmental and social impacts• Costs of environmental impacts are often hidden

or forgotten, even though they may be substantial• They may be difficult to recognise• Future ecological and social issues are not yet

known– Current work practices and operations may have future

environmental and social consequences which we cannot predict

• Many costs and benefits are external to the organisation

– Difficult to detect and assess continued


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Difficulties in recognising and measuring environmental and social impacts

• Many costs and benefits are difficult to measure in financial terms

– They relate to the future, and the size of the impact may be unknown

• Defining environmental costs– The costs that an organisation incurs to prevent, monitor

and report environmental impacts– US EPA defines 5 tiers of environmental costs– Private costs (tiers 1 to 4) and societal costs


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Analysing environmental costs

• Environmental costs can be analysed as relating to the following activities

• Prevention activities– Solve environmental problems before they occur, or turn

problems into opportunities– Costs of these activities are ‘investments’, as they reduce

the future outlays and provide long-term benefits

• Appraisal activities– Monitor the levels of environmental impact– Measuring damage, inspecting processes and products,

auditing supplier performance

continued


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Analysing environmental costs

• Internal failure activities– Correct breakdowns discovered in appraisal activities– Cost of cleaning the plant after spillage, cost of

occupational health and safety claims by employees

• External failure activities– Occur when resolution and remediation efforts fall outside

of the organisation’s management– Cost of cleaning up polluted sites, fines for environmental

damage, lost profits associated with damage to reputation


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Improving supply chain management through environmental and social accounting

• Suppliers– An organisation may be willing to pay more for supplies

that have reduced environmental and social impacts– Organisations working with suppliers to adopt more

responsible environmental and societal practices, can lead to cost reductions

– Formal supplier evaluation can include assessment of a range of environmental and social factors, as well as financial factors

continued


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Improving supply chain management through environmental and social accounting

• Customers– An organisation can work with customers to reduce the

adverse environmental and social impact of products Recycling and disposal programs Substitution of materials Cost savings

– Sometimes customers may be willing to pay more for a more environmentally-friendly product

– Marketing and strategic considerations need to be considered in such pricing decisions

continued


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Measuring environmental and social performance

• ISO 14031 environmental performance indicators– Operational performance indicators include measures

of waste levels and energy consumption relative to sales or some other activity

– Management performance indicators measure the efforts of management to improve environmental performance

– Environmental performance indicators measure the condition of the environment at a local, national or global level

continued


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Measuring environmental and social performance

• A socially balanced scorecard – Environmental or social dimensions may be added to the

balance scorecard

• Measuring and reporting social values– Some organisations include these measures in their

annual report to shareholders, in triple bottom line reports or in specialised reports to stakeholders


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Social audits

• A formal process where organisations measure and report the extent to which they have operated in accordance with their stated values and objectives

• Requires the involvement of many stakeholders• The outcomes of the audit are subject to external

verification• Problems may be highlighted and stakeholders

invited to assist with solutions• Helps managers understand stakeholders’

concerns


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Environmental outcomes: capital expenditure analysis

• Consideration of environmental cost and benefits– May make financially non-viable projects more attractive – May make financially viable projects less attractive

• The weighting given to environmental cost and benefits depends on the organisation's values and preferences

• Some capital expenditure analysis may be driven by the need to be environmentally responsible

– Compliance with environmental regulations

continued


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Environmental outcomes: capital expenditure analysis

• Some environmental costs and benefits can be included in the financial analysis

• Some factors are considered after the financial analysis, such as

– Benefits/losses to the environment– Impact on employee attitudes– Impact on community attitudes or concerns– Impact on the organisation’s reputation


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