Earth in the Balance Sheet

By Makower, Joel | Whole Earth, Spring 1998 | Go to article overview

Earth in the Balance Sheet


Makower, Joel, Whole Earth


If companies are going to measure and report their environmental performance in ways that are meaningful to the rest of us, it will take some new accounting tools. That means creating bottom-line, verifiable metrics on a diverse range of issues, and doing it in a standardized format to allow easy comparison among facilities, companies, and sectors.

Up until the early 1990s, most companies' environmental accounting efforts did not involve counting costs. They simply inventoried their emissions and wastes to account for what was leaving their plants via smokestacks and drain pipes. At most, companies were required to note in financial statements that sometime in the future they might incur some unspecified expenses associated with cleaning up the environmental problems they were creating. Most industrial companies still divulge this vague disclosure.

Financial accounting is highly standardized, governed by a set of generally accepted accounting principles, or GAAP, which are widely recognized by lenders, investors, regulators, and others. GAAP standards tell companies how and when to deduct expenses in the current fiscal year or to amortize them over several years. They describe how to assign "soft costs"--such as legal, consulting, and overhead--to each widget coming off an assembly line. But when it comes to accounting for the environment, GAAP has little to say.

Below are the best resources to the new field of putting out ledgers that include environmental costs and savings. Hopefully, we will begin to talk of direct out-of-pocket costs (raw materials, solvents, packaging materials), recharged manufacturing services (wastewater treatment, solvent recovery, direct labor), and overhead allocated to environmental duties. Companies don't always implement pollution prevention measures even though it is understood such measures will reduce waste and emissions and significantly cut costs. The National Resources Defense Council (NRDC) studied a Dow Chemical facility where they identified pollution-prevention strategies that could have saved the company more than one million dollars a year, approximately ten to twenty percent of its environmental expenditures. The changes also would have eliminated 500,000 pounds of waste and allowed the company to shut down a hazardous waste incinerator.

But the benefits weren't enough of an incentive to outweigh other corporate priorities, especially the potential loss of future business from shutting down the incinerator. Had the changes been required by law, the financial rate of return would have been irrelevant to Bow's decision-making. But because these were voluntary measures, they were considered in the same way as other business opportunities: they needed to be superior to other options for capital investment. …

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