The importance placed on environmental issues has increased during the last two decades. Businesses have become increasingly aware of the environmental implications on their operations, products, and services. Environmental risks may have serious consequences for the prospects of a company, with particular financial consequences. Businesses experience increased pressure from various stakeholders to report on environmental behaviour.
Smith and Lambell (1997) stated that the topic of environmental accounting is not new, because many companies already produce environmental statements within their annual reports. Traditional accounting techniques such as financial and management accounting are used to report on the environmental implications of a business.
Smith and Lambell (1997) also argued that companies should cease considering the environment as a given factor and take it into their accounts. This can be done by identifying the environmental costs of a product, service, or process. The environmental costs increased as a consequence of this, amongst other reasons. The existing conventional accounting systems are not able to deal with these environmental costs because they tend to attribute them to general overhead accounts. As result managers are often unaware of them and have no incentive to reduce them (UNDSD, 2003).
Environmental Management Accounting, a variant of environmental accounting, provides managers with knowledge about these environmental costs by extending conventional methods of accounting to capture them (Smith and Lambell, 1997).
Environmental Management Accounting (EMA) generates, analyses and uses financial and non-financial information to support internal management. It is a complementary management accounting approach to the financial accounting approach, according to Bennett and James (1998a). EMA helps to identify and allocate environment-related costs and aims to develop appropriate mechanisms for this (Frost and Wilmhurst, 2000). Key application fields for EMA are: assessment of annual environmental costs/expenditures, product pricing, budgeting, investment appraisal, calculating costs and savings of environmental projects, or setting quantified performance targets, to name only a few (Jasch, 2003). Frost and Wilmhurst (2000) stated that EMA practices have resulted in cost savings and competitive advantage. Its benefits to businesses are in demonstrating the income statement and/or balance sheet impact of environment-related activities, identifying cost reduction and other improvement opportunities, prioritising environmental actions, guiding product pricing, mix and development decisions, enhancing customer value, future-proofing investment and other decisions with long-term consequences, and assessing the eco-efficiency and/or sustainability of a company’s activities (Bennett and James, 1997).
There are a range of different perceptions and conceptions of EMA. Burritt et al. (2001) stated that “there is still no precision in the terminology associated with EMA” (p. 13). They distinguished EMA from environmental accounting, which is in distinction to conventional accounting concerned with environmentally induced impacts of companies measured in monetary units and company related impacts on environmental systems expressed in physical units. Environmental accounting is used for internal but also for external purposes. EMA can be seen as a part of this environmental accounting framework and is defined as using monetary and physical information for internal management use. Buritt et al. (2001) developed a framework of EMA with five dimensions (Appendix 1). Within this framework the different techniques of EMA such as environmental life cycle costing or environmental cost accounting can be placed and assigned. The management of a company can choose appropriate tools on the basis of their information needs (Burritt et al., 2001).
Bennett and James (1997) distinguished six domains (Appendix 1) of environmental accounting. EMA can encompass all six but is mainly concerned with energy and materials accounting and environment related financial management. It is a kind of management accounting which uses not only financial information but also a variety of non-financial (physical) information. Their definition of EMA is the
“…generation, analysis and use of financial and non-financial information in order to improve corporate environmental and economic performance.” (Bennett and James , 1997, p. 34)
EMA aims to make a better use of or to modify sources of information and management accounting techniques and to evaluate sustainability and/or environmental efficiency of a company. Its main focus is on provision of information for managerial decision-making. Thus, EMA has an internal rather than external focus.
Bennett and James (1998a) described the practice of EMA by using a pyramid model (Appendix 3). According to their definition, EMA is concerned with gathering date related to the environment (lowest levels), which are converted through techniques and processes (middle level) into information which is useful for managers (top). The key data are both non-financial data and financial data. Main management accounting techniques such as performance measurement, operational budgeting, costing or pricing are used for the transformation. Benett and James (1998a) stated that costing is perhaps the area of greatest activity, because environmental costs lack a standard definition. According to Verschoor and Reijnders (2001), who conducted a study about environmental monitoring, companies do not monitor all environmental costs, because of the lack of a clear definition. In the literature there are a range of various approaches to the definition of environmental costs. Some, definitions are quite similar, but others are totally different from others.
The US EPA (1998) argued that the definition of environmental costs depends on how a company intends to use the information, for example capital budgeting or product design. They introduced a terminology which distinguishes between conventional costs, potentially hidden costs, contingent costs, and image and relationship costs. Conventional costs are costs of raw material and energy with environmental relevance. Potentially hidden costs are those which are captured by accounting systems but then lost in overheads. Contingent costs may be incurred at a future date for example costs for cleaning up. They are also referred to as contingent liabilities. Image and relationship costs are intangible and include, for example, the costs of producing environmental reports.
Jasch (2003) described environmental costs as both internal and external costs incurred in relation to environmental damage and protection. EMA considers only corporate (internal) environmental costs, because of its internal focus. Environmental and social costs to the public are not incorporated into EMA because they occur outside the company. The UNDSD (2003) described total corporate environmental costs as environmental protection costs (emission treatment and pollution prevention) plus costs of wasted materials plus costs of wasted capital and labour. Waste in this context means production inefficiency (purchase value of non-material output). They stated that wasted materials account for 40% to 90% of environmental costs according to a survey. It is important to note that environmental costs are not a separate type of cost; rather they are part of money flowing throughout a corporation.