Environmental Performance Measurement

By Fisher, Kathryn; Eckel, Len et al. | CMA - the Management Accounting Magazine, March 1992 | Go to article overview

Environmental Performance Measurement


Fisher, Kathryn, Eckel, Len, Russell, Grant, CMA - the Management Accounting Magazine


Information concerning the environment must be an integral component of the management control system

The need for a dependable system of environmental performance measurement is rooted in the following realities:

* business activity has an ecological and social as well as an economic impact;

* business is increasingly held liable for environmental costs, as proven by the growing number of regulations, incentives and penalties;

* environmental management is good business, often resulting in improvements to the bottom line through direct cost reduction or indirect increases in goodwill;

* as lower levels of management become increasingly empowered, a reliable environmental reporting and performance measurement system is needed to provide information for making decisions and monitoring performance; and

* allocation of scarce corporate resources towards solving environmental problems requires persuasive evidence of the relative benefits of doing so. This means that the system must be able to provide information on the cost of risk reduction and measures of the reduction in risk.

Although a System for Environmental Performance Measurement (SEPM) must be integrated with and may rely on the accounting and reporting systems, it will function somewhat differently. It will gather information both externally and internally, and some of the information may be unusual in form and source. For example, information could be collected on pollution rates in parts per thousand, and the risk to the environment might be expressed in terms of attendance days at the beach.

The SEPM output may not conform to the GAAP requirements for objectivity, quantifiability, and the assignment of monetary values. Nevertheless, the environmental system will be expected to provide information regularly to satisfy the following emerging, external reporting requirements:

* the disclosure of environmental obligations and contingencies required by the CICA Handbook;

* the disclosure of environmental risks inherent in the organization's operations, increasingly expected by stakeholders;

* the disclosure of financial risk to the organization as required by the OSC's Management Discussion and Analysis;

* the separate disclosure of environmental expenditures (whether capitalized or expensed), increasingly requested by regulators, investors and analysts.

The environmental information system will be related to the organization's environmental policies and objectives, existing environmental regulation and society's perceptions of how an organization's activities affect the environment. In particular, businesses are expected to show a knowledge of and compliance with the relevant environmental standards, regulations and prohibition. For example, important amendments to Ontario's environmental legislation have increased fines significantly to ensure they represent effective deterents and not simply licence fees. An important defence against environmental liability is documented evidence that the relevant standards have been recognized and measures taken to ensure due diligence in complying with them.

Framework for performance measurement

Environmental performance measures are not developed independently of other corporate activities. They are developed as part of a dynamic planning and control process consisting of these key activities:

* developing corporate environmental policy, including broad general objectives; since the firm has some freedom in setting objectives for the relevant parts of the organization (e.g., processes, products, divisions, etc.);

* developing consistent performance measures, emphasizing measurable and quantifiable metrics;

* designing systems to collect and report information; and

* implementing the on-going monitoring program, and developing and implementing results, changes in measures, in legal and social requirements, etc. …

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