Lecture 12 Environmental Management Accounting (EMA)

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Lecture 12Environmental Management Accounting
(EMA)
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Definition

• There are many alternative definitions, but
  broadly defined
• EMA is the identification, collection, analysis,
  and use of two types of information for internal
  decision-making
• Physical information on the use, flows, and fates
  of energy, water, and materials (including
  wastes)
• Monetary information on environment-related
  costs, earnings, and savings
• EMA Expert Working Group of the
• United Nations Division for Sustainable
  Development

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Definition

• EMA combines financial and physical data and
  calculates the environmental costs of companies
• Physical data on material and energy input,
  material flows, products, waste and emissions ?
  PEMA
• financial data on expenditures, costs, earnings,
  savings related to company activities with
  potential environmental aspects or impacts ? MEMA

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Why was EMA Developed?

• EMA was conceived in recognition of some of the
  limitations of conventional practices for
  informing environmental management decisions
• insufficient tracking of energy, materials, and
  wastes
• hiding of costs in overhead accounts and
  elsewhere in the accounting records
• lack of data on future and less tangible costs in
  the accounting records at all
• Insufficient communications between the
  accounting and other departments/staff, e.g.,
  production, environmental, research

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PHYSICAL INFORMATION

• Flow of energy, water, materials and waste (MEFA)
• Physical Information
• Materials Inputs
• Product Outputs
• Non-Product Outputs (Waste and Emissions)
• Materials/Mass Balances
• Physical Environmental Performance Indicators

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MONETARY INFORMATION

• ENVIRONMENT-RELATED COSTS AND EARNINGS
• Cost Categories
• Waste Emission Control Costs
• Prevention Other Environmental Management Costs
• Research Development Costs
• Materials Costs of Non-Product Outputs
• Materials Costs of Product Outputs
• Less Tangible Costs
• Monetary Environmental Performance Indicators
• Environment-related Earnings and Savings
• Distribution of Costs by Environmental Domain

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The Benefits of Ecoefficiency

• Ecoefficiency essentially maintains that
  organizations can produce more useful goods and
  services while simultaneously reducing negative
  environmental impacts, resource consumption, and
  costs.

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ECOEFFICENCY
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Environmental Quality Cost

• Environmental costs are costs that are incurred
  because poor environmental quality exists or may
  exist.

Environmental costs can be classified in four
categories prevention costs, detection costs,
internal failure costs, and external failure
costs.
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Environmental CostsAre Often Underestimated

• Research Findings
• For every dollar of waste cost that companies
  actually measure, another 2 to 3 dollars of cost
  are hidden in the accounting records, or are
  not on the books at all
• Companies typically underestimate how much waste
  really costs them, sometimes by several orders of
  magnitude
• This applies even to big, well-managed companies

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The Cost of Waste Inkat the Southwire Company

• The cost of a drum of hazardous waste ink was
  estimated as 50 - the average disposal
  cost per drum
• Upon closer inspection, the true cost of waste
  was discovered to be 1300 per drum, including
• 819 in lost raw materials (ink, thinner)
• 369 for corporate waste management activities
• 50 for disposal
• 47 for internal waste handling activities
• 16 to pay a hazardous waste tax

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Environmental Costs At A Refinery(As a
percentage of operating costs,excluding crude
oil input)
Original Estimate
Actual Situation

• Source Green Ledgers Case Studies in
  Corporate
• Environmental Accounting. World Resources
  Institute, May, 1995.

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The Cost Iceberg Environmental costs can be like
an iceberg, with only a small part of the cost
visible
THE HIDDEN COST
Adapted from Bierma, TJ., F.L. Waterstaraat, and
J. Ostrosky. 1998. Chapter 13 Shared Savings
and Environmental Management Accounting, from
The Green Bottom Line. Greenleaf
PublishingEngland.
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EMA End-uses

• EMA can provide the data needed for many
  environmental management initiatives
• Cleaner Production/Pollution Prevention/Green
  Productivity
• Design for Environment
• Environmentally Preferable Purchasing
• Environmental Supply Chain Management
• Extended Producer Responsibility
• Performance Meas. Benchmarking
• Corporate Environmental Reporting
• etc.

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EMA for Improved Capital Budgeting

• Better identification, allocation, and analysis
  of environmental costs improves the process by
  which the profitability of potential investment
  projects are assessed.
• Such investments include any capital project
  that has the major objective of controlling,
  reducing or preventing pollution.

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Profitability Assessments of Proposed Sustainable
Projects

• EMA can illustrate the potential profitability of
  projects that utilizes preventive management
  strategies by doing a better job of
  profitability assessment
• Comprehensive inclusion of relevant and
  significant costs and savings
• Improved cost estimation and allocation
• Longer analysis time horizons
• Multiple profitability indicators

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Comprehensive Inclusion of
Relevant Costs and Savings
(conventional and less tangible costs)

• The cost of lost manufacturing inputs
• lost materials, energy, labor, capital, etc.
• The cost of waste management
• waste handling, regulatory compliance, waste
  treatment disposal, etc.
• Less tangible costs
• reduced production throughput, reduced product
  quality, negative company image, liability, etc.

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Financial Data for White Water and Fiber
Reuse Project
company analysis
improved analysis TCA
Costs and Savings Capital Costs
1,469,404 1,469,404 Annual
Savings 350,670
911,240 Financial Indicators Payback Period
4.2 years 1.6 years Net
Present Value
47,696 2,073,607 Internal Rate of Return
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Total Cost Assessment Budgeting for
Pollution Prevention, Tellus Institute, 1993
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Financial Data for
Quality Control Camera Project
original analysis
improved analysis
Costs and Savings Capital
Costs 105,000 105,000 Annual
Savings 1-5 years 38,463
38,463 Additional Savings Year 3

55,000 Financial Indicators Payback Period
2.7 years 2.7 years Net Present
Value -17,182
18,981
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EMA as Driver of Sustainable Investment

• EMA helps companies recognize and achieve the
  multiple benefits of Sustainable Investments
• Reduced costs
• increased profit margins
• lower product prices
• increased market share
• Reduced liability
• improved company image
• increased market share
• increased access to financing and customers
  contracts

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Benefits of EMA to Industry

• The ability to more accurately track and manage
  the use and flows of energy and materials,
  including pollution/waste volumes, types and fate
• The ability to more accurately identify,
  estimate, allocate, and manage/reduce costs,
  particularly environmental types of costs
• More accurate and comprehensive information for
  the measurement of performance, thus improving
  company image with stakeholders such as
  customers, local communities, employees,
  government and financial providers

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Benefits to Government of EMA Implementation by
Industry

• The more that industry is able to justify
  environmental investments on the basis of
  financial self-interest, the lower the financial,
  political, and other burdens of environmental
  protection on government.
• Implementation of EMA by industry should
  strengthen the effectiveness of existing
  government policies/regulations by revealing to
  companies the true environmental costs and
  benefits resulting from government regulations.

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EMA Development

• United Nations Division for Sustainable
  Developments Consultative Working Group on EMA
• EMA Workbooks
• Environmental Management Accounting Procedures
  and Principles
• EMA-Links Government, Management, and
  Stakeholders
• Policy Pathways for Promoting Environmental
  Management Accounting

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UNDSD Expert Working Group on EMA

• UNDSD United Nations Division for Sustainable
  Development
• EMA Working Group established in 1999
• Core members are government representatives from
  30 countries
• Other members include invited representatives of
  accounting associations, academia, business, etc.
• Group has met 8 times, each time in a different
  country
• Group has discussed many international topics of
  debate surrounding EMA

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EMA Education...

• Most initiatives to promote EMA around the world
  rely on voluntary adoption, with educational
  activities a core component
• guidance documents
• case studies
• curriculum development training
• software

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EMA in North America and Europe

• Examples of initiatives in North America and
  Europe that promote EMA as a tool for many
  environmental programs
• US EPAs Environmental Accounting Project
• Environmental Canada-Quebec Regional Offices
  Private Sector P2 Initiative
• Graz (Austria) Department of Environmental
  Protections Eco Profit Initiative
• UK Environment Agencys EMA for Financial
  Accountants Project

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EMA in Asia

• Examples of EMA and EMA-related projects and
  activities in Asia
• Philippine Training Course on EMA and CP
  supported the US-Asia Environmental Partnership
  (USAEP)
• Environmental Accounting Guideline published by
  the Ministry of Environment in Japan
• UNEPs CP Finances Profiting from CP Course in
  Vietnam
• Taiwan Environmental Management Associations EMA
  Training Project
• Thailand Environment Institutes Workshop on EMA

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STOP GLOBAL WARMING
- The End -