Corporate considerations for nature – the motivation behind environmental accounting

Seminar Paper 2013 23 Pages

Philosophy - Miscellaneous


Table of Contents

1. Introduction
1.1 Economics, business and externalities
1.2 Corporate considerations
1.3 Environmental accounting
1.4 Environmental management accounting

2. Business case PUMA
2.1 PUMA’s Environmental Profit & Loss account
2.2 PUMA’s environmental impacts and E P&L results
2.3 Critical review

3. Theoretical framework: The relationship between the corporation and society
3.1 Background theories
3.2 Legitimacy theory
3.3 Stakeholder theory
3.4 Critical review

4. Reflection



1. Introduction

1.1 Economics, business and externalities

The tendency to show environmental commitment in economic sciences has been growing during the last decades. Terms like green, ecological or environmental economics have been promoted, most famously in the first green wave, when the book “The Limits to Growth” in 1972 and the Brundtland Report “Our Common Future” in 1987, and more recently, when the Stern Review on the Economics of Climate Change in 2006 and the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) in 2013, were published.

But how come the business world started to care about the environment in the past,without any comprehensive standard forcing them to do so legally on a national orglobal level? It has been felt that the financial accounting framework was not adequateto provide the information required by various internal and external stakeholders onenvironmental costs and liabilities, and steps taken by companies to mitigate globalwarming (Idowu et al. 2013, p. 1035). The endeavour was that the complete costsincurred by an enterprise including external, environmental costs like consumption ofnon-renewable resources, damages to the environment and degradation of nature, oughtto be considered. These external costs, which are also called externalities or societalcosts, are caused by the impact of organizational activities, products and services onnatural environmental resources and society, but for which the organization doesn’tbear any financial liability. In other words, “external costs result from corporateactivities but are not internalized through regulations and prices. The boundaries ofthese costs are not static.” (ibid. p. 1035).

1.2 Corporate considerations

The scope of tools corporations can fall back upon to take environmental issues intoaccount, ranges from accounting over purchasing, human resources, R&D, production,marketing, sales to logistics. All of these entities and their processes may function andcan be designed in a sustainable way. But to start from scratch, accounting has theprivilege that it’s both, gathering data from all departments about the circular flow ofincome, and furthermore, that it’s planning business activities, thus playing a past- andfuture-oriented role as an information provider. The closely related department of controlling supports the comprehension of accounting as a discipline which keeps an overview over what the rest of the corporate body is doing and how to steer the single parts into a certain direction.

“The major disadvantage resulting from following the conventional accounting model (with hidden environmental information) is that the organization is deprived of many opportunities to increase profits, to use materials more efficiently, and to protect the environment.” (Idowu et al. 2013, p. 1037)

1.3 Environmental accounting

The most widespread notions like green, carbon, ecological, sustainable orenvironmental accounting, by and large cover the same idea. “Since various economicunits, from a national to an organizational level, began to focus on the environmentaldimension of their economic activities, environmental accounting has been widelyaccepted as an umbrella term that affects the accounting practices of these units.”(Idowu et al. 2013, p. 961) But first, we’ll have to clarify from which standpoint we’relooking at the topic.

On the one side, environmental accounting (EA) can be understood on a macroeconomiclevel, as global or national environmental accounting, for instance natural resourceaccounting, and on the other side, on a microeconomic level in the sense of businessmanagement, as corporate environmental accounting. Since we’re going to take a closerlook at the business environment, a further distinction on the company level isnecessary.

When we talk about corporate accounting, the thereby mostly meant concepts refer togeneral or analytical accounting (Todea 2010, p. 213). They can be split up into financialaccounting (FA)1 and management or managerial accounting (MA)2. FA records flowsbetween the firm and other entities, e.g. bookkeeping, is published in pecuniarystatements, is subject to regulations and hence, provides standardized informationabout the financial performance of the enterprise to external stakeholders like creditors,investors and tax authorities (EPA 1995, p. 5). Belonging to a certain type of financialinformation are annual revenues and expenditures, represented by an income statement,also described as an “Income & Expenditure Account” or, a means PUMA adopted as we’re going to see in the following, the environmental “Profit & Loss Account” (IFA 2004, p. 11). Likewise, one subcategory of FA commonly cited is the Triple Bottom Line (TBLor 3BL) which acknowledges the threesome of economic, ecological and social aspects offinancial statements. Beside the classical bottom line of the corporate profit and lossaccount, there is a planet and a people account. It thus entails the three Ps profit, peopleand planet (Economist 2009). The GRI adduced in the Appendix is one realization of theTBL.

Contrarily, MA or controlling, is primarily an instrument for managers to oversee costs,to measure organizational performance and therefore, provide information for internaldecision making. “Management accounting is the application of the principles ofaccounting and financial management to create, protect, preserve and enhance valueand then to deliver that value to the stakeholders of profit and non-for-profit enterprises,both public and private.” (IFA 2004, p. 10) Apart from the circle of users, anotherdifference between the two concepts is that MA is not merely relying on monetaryinformation, but data about material flow, energy consumption and waste generation.Nevertheless, no laws regulate MA, but rather the organizational goals and culturedetermine its practices: While FA is governed by Generally Accepted AccountingPrinciples (GAAP), MA systems vary according to the needs of the businesses they serve(EPA 1995, p. 5). In contrast to the retrospective focus of FA, MA is oriented towards thefuture and towards budgeted amounts. The table in figure 1 reveals detailed differencesnot only between FA and MA, but also their environmentally directed versions,environmental financial accounting (EFA) and environmental management accounting(EMA).

“You cannot manage what you cannot measure”, Pavan Sukhdev3, an Indian economistand markets’ professional, summarizes a TED talk about the economic invisibility ofnature and how to value earth’s assets (2011). To measure environmental activities ofan organization and the consequential impact on business and the society, it is necessaryto account for a firm’s environmental costs, benefits, assets and liabilities (Idowu et al.2013, p. 1034). To get a better grasp of the necessity of EA, the term environmental costhas to be introduced, and can be divided into two classes: Environmental cost can either imply private costs, directly affecting a company’s bottom line, or it can involve thesocietal costs it causes, affecting individuals, society and the environment (EPA 1995, p. 1).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Organizational-level accounting and reporting (IFA 2005, p. 16)

An example of different external cost categories is listed in figure 2. Like previouslystated, this seminar paper is particularly dealing with the corporate externalities and the question, if they are accounted for and how they are factored in into internal dataprocessing. Theoretically, external costs can be reduced by a more efficient usage ofresources and the prevention of pollution, levered by input materials substitution,process and product re-design, optimized operation and maintenance practices (ibid. p. 2). Beside better stakeholder relations, the ultimate outcome entails an enlarged competitive advantage (Godschalk 2008, p. 254).

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Distinct environmental cost or expenditure categories (UNDSD 2001, p. 19)

To sum up the preliminaries, the kind of EA this seminar paper is investigating in detailis tied to the business context, relying on both financial information and other nonmonetary data, for example the physical flow of materials and energy, and consequently,will be called EMA. It is concerned with identifying environmental costs with theintention of cutting environmental expenses and improving environmental performance.


1 Externes Rechnungswesen

2 Internes Rechnungswesen

3 Formerly, he has been working as a Deutsche Bank analyst, but paused his work for a Germangovernmental study called “The Economics of Ecosystems and Biodiversity” (TEEB) in 2008, with theobjective of making the global economic benefits of biodiversity visible. In 2012, he published his book“Corporation 2020” which targets EA. Recently, a ZEIT interview with him drew attention to this issue.


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University of Bayreuth – Insititut für Philosophie
Philosophie Unternehmensethik Wirtschaftsethik Business Ethics Economic Ethics carbon accounting ecological accounting environmental accounting green accounting profit & loss acount PUMA corporation environmental management accounting financial accounting environmental financial accounting GRI tripple bottom line GAAP ICCP



Title: Corporate considerations for nature – the motivation behind environmental accounting