Chapter 17

Environmental and social management accounting

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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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

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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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 organisations 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

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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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
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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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 organisations reputation as a responsible and caring organisation Identification of potential cost savings
continued
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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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

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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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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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

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
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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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 organisations management Cost of cleaning up polluted sites, fines for environmental damage, lost profits associated with damage to reputation

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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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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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

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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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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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
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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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
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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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
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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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
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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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 organisations reputation

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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