Wiwik-2010 1

Lecture 12

Environmental Management Accounting

(EMA)

Wiwik-2010 2

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

Wiwik-2010 3

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

Wiwik-2010 4

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…

Wiwik-2010 5

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

Wiwik-2010 6

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

MONETARY INFORMATION

Wiwik-2010 7

•Ecoefficiency essentially maintains that organizations can produce more useful goods and services while simultaneously reducing

negative environmental impacts, resource consumption, and costs.

The Benefits of Ecoefficiency

Wiwik-2010 8

Customer DemandCustomer DemandFor Cleaner ProductsFor Cleaner Products

Cost Reduction and Cost Reduction and Competitive Competitive AdvantageAdvantage

Lower Cost of Lower Cost of Capital and Lower Capital and Lower

InsuranceInsurance

Innovations and Innovations and New OpportunitiesNew Opportunities

Better Employees Better Employees and Greater and Greater ProductivityProductivity

ECOEFFICENCY

Significant Special Benefits Significant Special Benefits Leading to Improved ImageLeading to Improved Image

Wiwik-2010 9

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.

Environmental costs can be classified in four categories: prevention costs,

detection costs, internal failure costs, and external failure costs.

Wiwik-2010 10

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

Wiwik-2010 11

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

Wiwik-2010 12

Environmental Costs At A Refinery(As a percentage of operating costs,

excluding crude oil input)

Environmental Costs At A Refinery(As a percentage of operating costs,

excluding crude oil input)

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

Original Estimate

Actual Situation

97%

3%

78%

22%

Wiwik-2010 13

THE HIDDEN COST

The Cost IcebergEnvironmental costs can be like an iceberg, with only a small part

of the cost visible

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 Publishing:England.

Wiwik-2010 14

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.

Wiwik-2010 15

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.

Wiwik-2010 16

Profitability Assessments of Proposed Sustainable Projects

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

Wiwik-2010 17

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.

Wiwik-2010 18

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 17% 46%

company analysis

improved analysis

*TCA

Financial Data for White Water and Fiber Reuse Project

* Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993

Wiwik-2010 19

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

original analysis

improved analysis

Financial Data for Quality Control Camera Project

Wiwik-2010 20

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

Wiwik-2010 21

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

Wiwik-2010 22

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.

Wiwik-2010 23

EMA Development• United Nations Division for

Sustainable Development’s 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

Wiwik-2010 24

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

Wiwik-2010 25

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

Wiwik-2010 26

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 EPA’s Environmental Accounting Project

– Environmental Canada-Quebec Regional Office’s Private Sector P2 Initiative

– Graz (Austria) Department of Environmental Protection’s Eco Profit Initiative

– UK Environment Agency’s EMA for Financial Accountants Project

Wiwik-2010 27

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

– UNEP’s CP Finance’s Profiting from CP Course in Vietnam

– Taiwan Environmental Management Association’s EMA Training Project

– Thailand Environment Institute’s Workshop on EMA

Wiwik-2010 28

STOP GLOBAL WARMING

- The End -