Abstract
The aim of this paper is to propose a model of the relationship between Environmental
Management Accounting (EMA) and firm performance through reviewing the related literature. One of
the more significant findings to emerge from this review is that the majority of previous studies in
environmental management area have only focused on non-monetary environmental management
practices such as EMSs, quality control systems, and ISO 14001; and very few empirical studies
focused particularly on accounting aspects of environmental management practices such as EMA.
Moreover, the experimental findings are quite controversial, and there is no universal agreement about
the actual impact of EMA on firm performance. This is because while the positive relationship between
EMA and firm performance has been obtained in most studies, some studies have still found a negative
or neutral relationship. The third obvious finding is that most studies on environmental management
practices have been carried out in developed countries based on European and US data. However, far
little attention has been paid to such studies in developing countries. Review of the related literature on
EMA and performance leads us to establish another conclusion, which is that the majority of studies
have focused only on the monetary aspects of firm performance as a measurement of overall
performance, and non-monetary aspects have been disregarded. Taken together, the lack of study on
EMA in developing countries, lack of a comprehensive approach to firm performance, and
inconclusiveness among findings create enough ground for future empirical study on EMA and firm
performance. Accordingly, based on the suggested association of these factors, this paper proposes a
model that links EMA to both financial and non-financial performance for the empirical research
which is carrying out by the authors in Malaysia as a developing country.
Key Words _ Environmental Management Accounting; Financial performance; Non-financial
performance.
1. Introduction
Since firm performance is widely considered a major organizational goal, environmental
management has become an issue of great concern for industry and administration. Much recent study
has attempted to examine the relationship between environmental management and firm performance
and while many found positive relationship [1-4], others did not [5-7].
From a different perspective, literature shows that while the majority of environmental management
practices have focused only on ethical and non-monetary aspects of environmental management such
as corporate social responsibility, disclosing environmental activities information, or different ISO
certifications [8-12], little attention has been paid to monetary or accounting aspects of environmental
management practices practically as well as academically.
Since the company's success in raising performance is based on correct strategic decisions, and
complete monetary and non-monetary information is the basis for correct decisions, it could be
concluded that the cost of incomplete information would reduce the quality of decision-making and
hence the firms performance evaluation [13]. Unfortunately, a main component of a firms total costs
are known as environmental costs and these have always remained hidden from managers eyes [14].
This may be explained by the fact that many firms as still using weak conventional management
accounting systems. These weaknesses have been largely focused on identifying the environmentrelated costs [15]; producing cost centres to allocate identified environmental costs to the right places;
1
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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian
and finally, weakness in establishing proper communication between accounting and other departments,
especially production departments [14].
Experience has shown that while environmental managers who have a great deal of knowledge
about the environmental impact of the organizations activities have no entry permits into the
companies financial subsystems. On the other hand, accountants or controllers who have a lot of top
down financial information on hand often have little knowledge about the actual physical flow of
materials and energy through production, the related environmental impacts and the environmental
relevance of corporate activities. Subsequently, key decision-makers are seldom able to link physical
information to monetary information properly in making decisions, often resulting in low quality
decisions [16]. Consequently, the outputs of these decisions based on incomplete cost information do
not have an effective impact on organizational performance.
Environmental Management Accounting (EMA) as a new tool in management accounting which
tries to overcome these limitations and weaknesses through merging environmental management
(physical) department with management accounting (monetary) departments [17]. In fact, EMA
incorporates cost accounting information with material flow balances data. This comprehensive
information provides decision makers with a clear picture of joint environmental and economic
outcomes of firms activities leading to more strategic and effective decisions [18, 19].
Therefore, managers in the area of environmental management should be advised and encouraged
to employ EMA. It is possible by providing them more additional experimental evidence of the
potential uses and benefits of EMA on firm performance. Until now, the majority of studies on EMA
have focused only on calculating the firms environmental cost at a given point in time as in case
studies [14, 20]; and only a few studies with inconclusive findings tried to link EMA to firm
performance [21, 22]. However, none of them adequately covered firm performance in detail. This is
because they considered only some limited dimensions of firm performance, unaware of the fact that
there is actually no strict dividing line between a firms financial and non-financial performance, and
measuring and improving overall firm performance should be based on both monetary and nonmonetary aspects of performance [23-25]. Accordingly, this study aims to fulfil the existing gap in
EMA studies through proposing a model which serves as a guide for future empirical investigation into
the relationship between EMA and firm performance in a developing country. It is worth noting that in
this model, firm performance is considered a combination of both financial and non-financial aspects.
31
A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian
that EMA provides policy makers with non-monetary as well as monetary information with which to
evaluate the companys environmental impact [28, 33, 35].
From a different view of point, Bennett et al. [36] insisted that EMA provides a secure connection
between environmental management and organization accounting. Is it through supplements to existing
environmental management, or supplements to conventional management accounting, through
reinvention of conventional management accounting and environmental management, or through the
introduction of a new system that reflects a change in management philosophy towards concern for the
environment as ongoing issues for business. Taken together, according to UNDSD [28] and Jasch [37],
the most important task of EMA is to make sure that all relevant and significant costs have been
considered when making business decisions.
Despite giving definitions of EMA, a few researches reported that environmental management
activities, coupled with EMA have an affirmative impact on company achievement. Nevertheless, there
are no noticeable similarities in researchers findings on this subject and this relationship is still open to
the question of whether environmental management practices improve the performance of the firm.
32
A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian
have produced different research findings. This is because some authors have reported a positive link,
while others did not suggest a positive association.
3.1.
In terms of efficiency, which is divided to profitability and productivity, Burritt & Saka [22] claim
that EMA enables companies to shift manufacturing procedures and the utilization of products towards
durability. Jasch [14] also reports that EMA lessens environmental effects, the risk of firm activities
and increases environmental security. Burritt & Saka [22] discovered that eco-efficiency data is an
important indicator which should be incorporated into EMA applications as well as incorporate green
information. Likewise, Hart [56] found that preventing effluent could allow the company to save
control costs, input, and power usage. Preventing effluent can also allow companies to recycle unused
or waste materials in the process of manufacturing. In another study, Jasch [21] claimed that businesses
that implement EMA could reduce expenditure by yielding to demand pressures for more
manufacturing efficiency and lower excessive effluent, material, and energy utilization. In his analysis
of identifying, assessing and allocating environmental and material flow costs, Jasch [54] revealed that
by EMA managers are able to identify opportunities for cost savings.
In the measurement of inputs and outputs in physical terms such as kilograms, the focus is often
placed on practical procedures, which is referred to as productivity as it is another aspect of efficiency
[57]. Therefore, the creation of waste is seen as a symbol of inefficiency [58]. In his study, Jasch [14]
reported that EMA raises resource productivity. In another major study, Nishitani [59] found that
coupled with attaining green objectives, it is pertinent that environmental management practices
decrease expenditure through an enhancement of productivity, and increase sales through a rise in the
need of green friendly clients. However, through the adoption of a proactive green approach, in
particular EMA, companies could get rid of environmentally dangerous manufacturing procedures,
revamp current manufacturing systems to lower life cycle effects, and build fresh commodities with
lower life cycle expenses [55] and obtain higher levels of productivity. This view is supported by
Elsayed & Paton [60] who wrote that environmental management accounting practices have the
strongest effect on green policy in the maturity phase of the company life cycle. In a similar study by
Masanet-Llodra [61] increased efficiency in the use of raw materials, operating materials, and energy
in non-product output also constitute a main component of environmental costs.
In conclusion, eco-efficiency means manufacturing and supplying commodities while at the same
time lowering environmental effects, material use and reducing expenditure [22, 62]. In seeking to
achieve sustainable eco-efficiency, organisations have been advised to improve and develop new
products and manufacturing processes to reduce their use of resources and the environmental damage
caused by their activities.
3.2.
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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian
the researchers opinion that EMA adoption most often leads to the recognition of opportunities, such
as advancement in manufacturing procedures [35, 67, 68] and reduction of expenses of manufacturing
process [69].
In a complementary study, Chang [70] emphasized that environmental product innovation mediates
the positive interconnection between the firms environmental ethics and competitive edge. This view
is supported by Mario [71] who found that new products produced through innovation lead to
competitive edge. This is because the main aim of innovation is meeting consumer expectations, which
is the main interest of stakeholders and the main source of revenue for the organization. Therefore,
some scholars attempted to answer the question of whether the use of EMA actually leads to customer
satisfaction and to enhancement of the reputation of the organization
3.3.
Customer satisfaction is a measure of how products and services supplied by a company meet or
surpass customer expectations [72]. Many firms use satisfaction ratings as an important indicator of
performance evaluation [73]. Therefore, it could be claimed that higher levels of performance are
positively affected by higher levels of customer satisfaction [74, 75]. On the other hand, corporate
reputation is a reflection of the degree to which the public is satisfied that firms are meeting their
expectations with their products and services [76].
Since todays consumers demand more durable and eco-friendly commodities [42], firms have a
new reason to be concerned about their customers environmental demands and expectations. As
reported by Csutora & Palma [77], environmental expenditure uncovered by EMA has a positive
indirect linkage to increasing market share through innovating new environmentally friendly products
according to consumer desires. Another report by Staniskis & Stasiskiene [78] indicated that
businesses are supported through the adoption of EMA to lower production expenditure, charge
competitive rates with good quality brands and also to reduce the use of natural resources. Improved
pricing [42] and product superiority [79, 80] may lead to a higher degree of consumer satisfaction.
Thus, Schneider et al. [81] and Simon et al. [82] and Troilo et al. [83] emphasized that firms with
whose customers are satisfied with their ongoing efforts to offer better services and products have
higher levels of business and market efficiencies. Based on this evidence, therefore, it could be
concluded that organizations that offer better environmental ideas will most likely be seen as
possessing a high degree of environmental integrity on behalf of its customers [42, 84, 85]. The
increased integrity consequently results in better community endorsement and greater customer
authenticity through mediating environmental approach such as EMA [86]. Literature shows that it is
mostly accepted that customer satisfaction and reputation are the main components of competitive
advantage [87], especially in corporate environmental responsibility.
3.4.
Claver et al. [1] suggest that competitive edge comes from an improved product reputation and an
enhanced integrity in business association due to the implementation of eco-friendly administration
operations. This claim was supported by Lindell & Karagozoglu [88]; Yang et al. [89]; Ambec &
Lanoie [90]; Hart [91]; Porter & Vander [92]; and Trung and Kumar [93] who reported that obtained
improvement as a result of environmental management practices may lead to an enhancement in
competitive advantage and consequently, profitability.
Chang [70], Yang et al. [89], Dunk [42], Burritt et al. [94], and Wolters & Jasch [95] claimed that
if companies perceive EMA as an important tool that supports environmental managers in decision
making, they are likely to increase their competitive advantages. This is because EMA assists
businesses to match blueprint and features of their product output with the needs of the customers
which leads to reputation and finally to competitive advantage [42].
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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian
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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
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