Clean Sheet: Why Would a Company Want to Go to All the Trouble of Producing External Environmental Cost Accounts? Rupert Howes States the Business Case and Explains the Basic Method. (How to Environmental Accounting)
Howes, Rupert, Financial Management (UK)
In 1998-99 CIMA funded a research project entitled "Accounting for environmentally sustainable profits". This investigated how businesses could develop more complete accounting systems that acknowledged the most significant environmental effects of their activities. The first part of the project developed a method that is now being used by firms such as Marks and Spencer, Bulmers and Wessex Water. The second part turned the experience into a CIMAbook on the subject *.
Leading businesses acknowledge that their long-term future is linked to their ability to minimise the environmental damage caused by their activities. What once were external costs can quickly become internalised as a result of regulations such as landfill tax, the climate-change levy and aggregates taxes. EU member states are committed to increasing their use of such policy instruments. Consequently, an awareness of a business's exposure to environmental risks can help managers in their strategic planning. When reported, environmental accounting can also help a business to boost its reputation, attract the best employees and differentiate itself from less proactive competitors.
Without proper systems to account for such costs, it is unlikely that companies can meet the future expectations of their customers, investors and the requirements of an increasingly stringent regulatory regime.
The method developed by the project aims to calculate the sustainability cost of a business--ie, the notional cost that it would incur to restore or prevent the major environmental damage caused by its activities over an accounting period.
Key stages in the process include:
* the identification of the most significant environmental consequences of the organisation's business operations;
* the estimation of what a sustainable level of emissions/impacts may be--ie, the determination of relevant sustainability targets;
* the valuation of these impacts;
* the development of accounts incorporating these values and the subsequent estimation of the company's sustainability cost and environmentally sustainable profits.
The key innovation is the linking of this monetarised environmental data to the financial accounts to arrive at a figure for what could be considered as the company's environmentally sustainable profits. The headings of the proforma accounts developed through the project (see "Proforma Consolidated Environmental Accounts for Company PLC for the Period to 30 April 2002", right) reflect the recommendations issued in the latest version of the Global Reporting Initiative guidelines. Only first-level impacts--ie, those for which the business is directly responsible and has the greatest ability to control--plus second-level impacts resulting from its fuel consumption have been taken into account.
Sustainability targets have been determined by referring to the latest scientific thinking on the various impacts. For example, when estimating the sustainability target for carbon emissions, a 60 per cent reduction target has been used. Both the Royal Commission on Environmental Pollution and the Intergovernmental Panel on Climate Change have suggested that cuts of this scale are required to prevent dangerous climate changes.
Targets for non-carbon-based transport emissions have been set according to estimates aimed at bringing urban air quality within guidelines set by the World Health Organisation. In reality, no one really knows what a sustainable level of emissions may be, so you must take a fairly pragmatic approach when setting targets.
Once the targets have been set, individual sustainability cost estimates are made on the basis of avoidance or restoration costs--ie, on what the business would spend either to prevent the damage in the first place or to restore the harm caused by its activities if they are unavoidable. Costs, as far as possible, are based on "real" or market-based prices. …