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Perspectives in the Development and Application of Environmental Management Accounting 3 Developments in EMA research
This part of the report is a description of the development trends within EMA research. The chapter is based on the knowledge gathered in the international research network EMAN (Environmental Management Accounting Network). The first section on methodology will briefly describe why this approach was chosen. The rest of the chapter is divided into the research areas identified in the analysis. They include both methodology research and more applied research. Firstly, much research has focused on the environmental costs and the methodological apparatus associated with EMA. In particular, research has focused on defining environmental costs as well as methods to calculate them. This is described in section 3.2 Environmental Costs. Secondly, much research has focused on specific applications of EMA, exemplified in a number of case studies which are described in section 3.3. Focus on the use of EMA in practice is continued in the description of research into the development of EMA systems themselves in section 3.4. Finally, in section 3.5 Sustainability Management Accounting, the chapter describes the further development of EMA towards focus on sustainability, and section 3.6, Standards and Initiatives by the Authorities, describes initiatives to promote EMA. 3.1 MethodThe method used builds on a review of the literature presented at the four most recent EMAN conferences at Aarhus School of Business, the University of Gloucestershire in England, Erasmus University in Rotterdam, Holland and the Wuppertal Institute in Wuppertal, Austria. This literature has been published in four books by SIM and Kluwer Academic Publications. The review of the literature has aimed at revealing development trends and the current status of research within EMA. The following publications were reviewed:
The text and bibliography in chapter 6 refer to individual contributions to these publications. The reasons for choosing these publications to identify the research trends within EMA are:
Together, these mean that EMAN publications provide the necessary overview of the most important research within EMA in a relatively brief format. 3.2 Environmental costsAn important issue with EMA is environmental costs - how these can be defined, calculated and allocated, and how they behave in relation to other cost categories. Many contributions have therefore focused on this issue. There are usually two primary problems with environmental costs. The first is how to define them. Are they only the costs incurred by the enterprise to limit pollution, i.e. remediation technology, waste disposal etc.? Which costs arising from environmental investments should be included? What about the costs of operating environmental management systems etc.? Here, it cannot be said that we are approaching an unequivocal definition of what environmental costs are. Generally, the definitions of environmental costs are determined by the decisions to be made on the basis of the information (Rikhardsson et al 2004). As EMA is an internal decision-making tool, this is logical, but it will not be possible to use this in external reporting of these costs, where uniformity and standardisation are required. The second problem is about how to record and use these costs. Should data capture, collation and reporting be integrated in one information system? What about recording fixed costs? How should these be allocated to cost centres? 3.2.1 Definition of environmental costsEven though we neither can (nor should) elaborate an unequivocal definition of environmental costs, on the basis of the literature we can set up some categories in which environmental costs can be classified (Willequert et al 1999, Bouma et al 1999, Jasch 1999, Giraldi 1999, Kim 2002, Loew 2002; Burritt 2004; Wendisch & Heupel 2004):
For costs which are recorded in the financial system, focus is on cost categories which can ideally be identified by both the environment department and the finance department (Jasch 2004). Cooperation between these two departments is important with regard to EMA, as EMA cannot be carried out by the departments independently. The environment department has the environmental perspective and understanding of the environmental impacts of the enterprise, while the finance department has the financial perspective and understanding of the financial systems and procedures. The cost categories suggested as possibilities to unite these two perspectives are (Jasch 1999; 2004; Kokubu & Nashioka 2004):
3.2.2 Recording environmental costsOne development trend is that focus is shifting from the definition issue to the recording problem and financial systems. This is because the overall definitions of various types of environmental costs have now been established. With regard to calculation and recording in the individual enterprise, on the other hand, it can be difficult to establish generic definitions and cost categories. This is because different enterprises can have different types of environmental costs and maintenance costs etc. For environmental accounts available to the public, it is clearly important that there are unequivocal definitions, but for management accounting it is important that the information collected is relevant to decision-making and the management of the enterprise. Therefore, the literature increasingly focuses on:
With regard to costs which are not recorded in the financial system, Howes (1999) for example has described how production companies can calculate the costs of their environmental externalities – i.e. the social costs caused by their environmental impacts. It has always been a matter for debate as to how externalities can be valued, and methods such as `willingness to pay' and `willingness to accept' have been applied. However, there is great methodological uncertainty in using these concepts. For example, how do you answer the question: “What must enterprise X pay you to discharge XX tonnes of substance Y?' On the other hand, Howes uses another method, which builds on calculating the costs an enterprise would have incurred if it had to remediate or avoid environmental impacts – e.g. total cleaning of waste water, or changing to renewable energy sources to minimise flue-gas emissions. All else being equal, this method is preferable as there are fewer methodological uncertainties and it could be a method to calculate externalities relevant for management. The problem with many of the experiments in calculating externalities (in physical or monetary terms), e.g. in connection with ISO 14031 work on performance indicators, is that the relevance for decision-making often disappears. Managers who have to take decisions immediately within a narrow financial framework can often not allow themselves the luxury of taking this information into account, if the environmental impacts of the enterprise are within legal limits and if such considerations cannot be used competitively. 3.3 Cases and practical problemsIn many studies questionnaires have been distributed to enterprises in order to find out their assessment of whether EMA creates value-added, the proportion of environmental costs, the relationship between production processes and environmental costs etc. (Bouma et al 1999). This type of study is good for providing an overview of the problem, but they often suffer from low response rates and uncertainty regarding the validity of replies. Questionnaires often reflect the `opinions', 'understanding', or 'perceptions' of the respondents, but there are not many specific examples of calculations of environmental costs, value assessments or recommendations for enterprises in relation to specific problems. In practice, case studies have played a central role in studies aiming to dig deeper than is possible in the other studies. Giraldi (1999) describes a project at an enterprise where monetary values were assigned to the waste streams. The project could, for example, document the relationship between the enterprise's production costs and costs of waste as well as lead focus towards initiatives in the supply chain at the enterprise in order to reduce generation of waste in different production stages. Thurm (2002) describes how Siemens introduced EMA in connection with their `Zero Waste' project, and how EMA has been integrated into the company's SAP R/3 application. Rikhardsson & Vedsø (2002) describe how EMA has been implemented at Post Danmark and DONG A/S. Montel (2002) describes the use of EMA at a pig farm in France in connection with implementing an environmental management system. Pohjola (2004) describes how EMA has been used at a transport company in Finland in connection with a software system. There has also been focus on small and medium-sized enterprises (SMEs), and a number of case studies describe the special problems in implementing EMA at SMEs. All else being equal, SMEs have fewer resources than larger enterprises, both financial and personnel. The case studies focussing on these enterprises conclude that implementing EMA at SMEs requires other techniques than at larger enterprises (Heupel & Wendisch 2003; Wendisch & Heupel 2004; Pilisi & Venturelli 2003; Venturelli & Pilisi 2003; 2004). Amongst other things, there was little initial motivation at many SMEs to start EMA projects, as the usefulness of such projects was considered limited. However, it became apparent that the SMEs that took the plunge with EMA witnessed many advantages as the project progressed. For example they could calculate their costs of waste more accurately, and this led to changes in the production processes. The 'softer' advantages included that management could communicate more easily with environmental personnel on environment-related costs and investments, for example. However, there are still no larger empirical studies which document the effects of EMA – i.e. the benefits for enterprises, whether decision-making processes have changed, whether systems have changed, how many use EMA and to what extent etc. That is, larger studies from which it is possible to draw some general conclusions, e.g. with regard to sector, size of enterprise, geographical area etc. However, some older publications, i.e. from 1999 do cover some empirical studies which attempt to draw some general conclusions on the use of EMA. The more recent EMAN publications from 2002, 2003 and 2004 mostly contain case studies and conceptual reports. 3.4 Development of EMA systems in practiceA topic in increasing focus is how an EMA system looks and how it can (or whether it should) be integrated into the enterprise's other management systems. Moreover there is much debate on how EMA is supported by information technology, and not least systems at enterprises (ERP systems). Bennett & James 1999 sets up figure 1 to describe the different types of EMA system.
Figure 1: Types of EMA system (Based on Bennett & James 1999 p. 61) The difference between the systems is partly based on whether they are decentralised, i.e. a system for each installation, or whether they are integrated, i.e. the same system covers the entire organisation. The other dimension is whether there is a proactive environment strategy, i.e. where the environment can be expected to play an important role in the activities of the enterprise and its competitiveness, or whether there is a reactive strategy, where the environment is not a particularly important decision parameter for the enterprise, other than, for example, upholding statutory environmental requirements. From a development perspective, two waves of EMA systems have been built up and implemented by enterprises in recent years (Bennett & James 1999; Loew 2003; Burritt 2004). These waves are not independent of each other, as the second wave builds extensively on the first. Neither will enterprises automatically implement the second wave of EMA systems. This depends on whether the environment is an important parameter, cf. table 1.
Table 1: First and second wave EMA systems Many authors have focussed on how EMA systems combine physical and monetary flows with a view to producing financial information which has not previously been visible (Burritt et al 2002; Jasch 2002; Strobel & Redman 2002). There is also focus on what EMA fundamentally involves, i.e. whether it is primarily physical or monetary indicators (Bennett et al 2002). Basically this is the same as the debate taking place within traditional management accounting, where in recent years focus has been moving away from exclusively financial performance indicators to include physical indicators. This means that management accounting is about enhancing the enterprise's performance using both physical and financial information. The debate within EMA on physical flows has usually focussed on flow cost accounting (FCA). FCA deals with calculating the enterprise's mass flows as both physical units and in monetary terms. FCA usually operates with the underlying value in the materials which 'flow' through the enterprise, the costs involved in processing these materials, as well as the other costs arising from, for example, transporting materials and administration. The point of FCA is that, for example, the material thrown out does not merely involve costs of disposal, but also losses because the material has a value. In addition, the material also absorbs costs on its way through the production process, for example machine hours, salaries, transport etc., and these should also be included in the total value of the material being thrown away (Strobel & Redman 2002). Most recently, the debate on EMA systems has extended to include the supply chain rather than just focusing on an individual site. This perspective focuses on material flows throughout the supply chain and financial statements in connection with these (Orbach & Liedtke 2002). Seuring (2003) looks at the stakeholder chain in the lifecycle of textiles; not only with regard to material flows, but also with regard to the information flows up and down a supply chain. Wolters & Danse (1999) looks at the possible performance indicators in the supply chain for supplying coffee from the Third World to Europe. This study is interesting as it focuses on sustainable development from the perspective of the supply chain – a sort of sustainable Supply Chain Management. To a certain extent, the supply chain perspective can be compared with the lifecycle perspective. The difference is that the lifecycle perspective focuses on a product, whereas the supply chain perspective focuses on a chain of enterprises and the material and information flows between these (Krasowski 2002). 3.5 Sustainability management accountingSustainability broadly includes much more than just the environmental aspect. It also covers economic sustainability and social sustainability. As EMA becomes more extensive and integrated, focus turns towards other aspects of sustainability, and how this can be integrated in EMA as a sort of sustainability management accounting. Van Heeren (1999), for example, focuses on this aspect in a supply chain supplying coffee from Costa Rica to the Dutch market. The coffee is sold as being cultivated sustainably and in this regard the Dutch importer needs management information about various parameters relating to the coffee quality, the farmers, intermediaries, composition of the workforce etc. in order to be able to document that the coffee meets the criteria for sustainable cultivation. The environment part of sustainability management accounting could be referred to as the `easy' part. Modern EMA has a number of well developed concepts and guidelines showing how this part can be managed. The more difficult part, however, is the social part. How can this be managed? With regard to the non-financial indicators, the Global Reporting Initiative (GRI 2002) for example, can provide help as this guideline contains a section on social indicators as part of Triple Bottom Line reporting. However, GRI primarily focuses on external stakeholders, and it is not certain that internal management has the same interests or needs. If the GRI framework is used as a basis, the financial effects will be related to the enterprise's social impacts. Table 2 shows the elements involved in GRI with regard to social performance areas:
Table 2: GRI framework and social impacts Traditional management accounting would focus on questions such as:
A criticism shared by all the approaches so far in efforts to incorporate social sustainability in EMA, is that there is a lack of focus on the decisions of the enterprise (e.g. Rubenstein 1999; Howes 1999; van Heeren 1999; Wolters & Danse 2002). Specifically, this means identifying which decisions are expected to require information on sustainability issues such as equality, cooperation with staff in the Third World, training etc. If reports on these aspects are merely to see whether there is something interesting which may be useful at some stage, there is a risk that they will not lead to much integration of these aspects in decision-making. There is a risk that they will often become one-off studies. An interesting tool that has been suggested is the Sustainability Balanced Scorecard (Figge et al 2002), where all aspects of sustainability are addressed using a scorecard model. The social effects are incorporated using a stakeholder perspective, where these are divided into direct and indirect stakeholders who the enterprise can influence. Next, these are divided into stakeholders in the enterprise's supply chain, in the local community, and in society as a whole. The logic is that the dependence of the enterprise on these stakeholders should form the basis for the indicators to be used in the final scorecard. 3.6 Standards and initiatives by the authoritiesThere has been a lot of focus on developing standards and guidelines for EMA, and this is exemplified in three of the books reviewed in this report about initiatives by authorities in relation to EMA. Over the years, many guidelines for EMA have been developed by researchers, enterprises and consultants. The significance of these standards and initiatives depends on the type of organisation issuing them. Lately, standards and guidelines from international organisations and authorities in different countries have been issued, and all else being equal, these are deemed to have greater significance than those issued by individual organisations or researchers. Examples of international standards are from the United Nations (Environmental Management Accounting: Procedures and Principles 2002) and the International Federation of Accountants (International Guidance Document on Environmental Management Accounting 2005 ). These guidelines contain recommendations on how environmental costs can be classified and calculated, examples of application, procedures for implementation and suggestions for integration with traditional accounting systems. Furthermore, a number of national authorities and organisations have published guidelines on EMA such as the US EPA, the Ministry of the Environment of Japan (Kokubu & Kurasaka 2002, Kokubu et al 2003, Kokubu & Nashioka 2004), the Institute of Chartered Accountants in Australia and its Philippine equivalent (Reyes 2002) and the Korean environmental authorities (Lee et al 2004). The Danish environmental authorities have also put focus on EMA by supporting the development of Danish guidelines and by gathering experience with the application of the UN guidelines in practice. 3.7 SummaryOverall, the review of developments in international research into the EMA area shows that there is now an established concept for defining environmental costs, as well as describing records and EMA systems. Furthermore, research and case studies have shown that enterprises benefit from applying the EMA concept, and it is used extensively. EMA is therefore maturing and being developed in several contexts. Organisational development of EMA can be seen in that there is no longer only focus on the individual enterprise, but EMA is also included in the whole supply chain. The topic as a whole is also seeing a development from only focusing on environmental aspects to looking more broadly at the concept of sustainability and developing definitions of `social costs'.
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