Enviromental Accounting

Master's Thesis 2005 86 Pages

Business economics - Accounting and Taxes



Enviromental accounting



Chapter 1: Introduction
1.1 What is environmental accounting?
1.2 Legalization
1.3 Why do companies and organizations do it?
1.4 Difficulties in carrying out
1.5 Nowadays Situation

Chapter2: Literature Review:
2.1 Usefulness of environmental accounting:
2.2 Influences brought by environmental accounting:
2.3 Environmental reporting
Life-cycle assessment
Ecological accounting

Chapter 3 Methodology
3.1 The “Global 100”
3.2 Reliability of the “global 100”
3.3 Ten companies from the “Global 100”

Chapter 4: Data Analysis
4.1 Retail industry
4.2 Food and soft drink manufacturing industry
4.3 Tobacco and Alcohol Beverage industry
4.4 Summary

Chapter 5: Conclusion and Recommendations
5.1 Benefits for the companies and organizations
5.2 Benefits for the public
5.3 Issues in carrying out environmental accounting
5.4 Recommendations


Web resources:


The Strategic Governance Assessment Criteria
The Human Capital Assessment Criteria
The Stakeholder Capital Assessment Criteria
The Environmental Assessment Criteria

Enviromental accounting


The growth in environmental accounting research and interest in the last few decades has experienced an optimistic time. Business is not an isolated island apart from the earth any more; the emergency of environmental accounting came from outside stakeholder at the end of 20th century. Following with the rising sense of environment conservation no matter from the public or the companies/organizations, environmental accounting has been pushed to a central stage of nowadays business. This paper firstly provides a brief view of the current development of environmental accounting. Addressed with some questions, it further gives a review of recent research in this area from other scholars and seeks to answer if environmental accounting benefits both the public and business, how to put it into practice for different industries by looking into ten successful companies from “the global 100 list”, which provides the first hundred most sustainable companies in the world wide. The ten companies that I pick up are mostly in the UK despite for one in Finland and another in the US and cover three main industries like the retail industry, food and soft drink manufacturing industry, and tobacco and alcohol industry. Finally the paper concludes with a positive view that it is really good a thing for both sides and also practical despite of the considerable cost. The companies/organizations could be benefit from improving their efficiency and getting better control. The public could get a better and more sustainable living circumstance. But the problem of environmental accounting is its expensive cost, which makes middle or small size companies/organizations not be able to do it. However, there is always something to expect that the improvement of environmental accounting in the future will hopefully solve this problem and cut the cost down.

Key words: environment conservation, life-cycle assessment, ecological accounting


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Chapter 1: Introduction

1.1 What is environmental accounting?

On the same basis as all accounting systems, environmental accounting presents an objective picture of the present situation and changes in the natural heritage, interactions between the economy and the environment, expenditure on preventive measures, environmental protection and the repair of environmental damage. “Environmental accounting aims at achieving sustainable development, maintaining a favorable relationship with the community, and pursuing effective and efficient environmental conservation activities.”(Caves, 1992, p.34) These accounting procedures allow a company or an organization to identify the cost of environmental conservation generated during the normal process of business, identify the benefit gained from such activities. It covers two different contexts. Environmental accounting can be used to provide insight on the interaction between the environment and a nation, or can be target to the activities of a company or an organization. This paper is mainly focus on the second realm. Environmental accounting is aimed to identify, measure and disclose the activities of a company or an organization based on its environmental conservation cost or economic benefit associated from environmental conservation activities and the company’s financial performance. The financial performance is supposed to be expressed in a monetary value. While environmental conservation benefits and organization’s environmental performance should be stated in physical units.

When the whole world experiences a rapid growth of industry and economic, unfortunately, the natural environment is terribly damaged at the same time. Nowadays, with the increasing awareness of the importance of environment, accounting is no longer just for the economic aspect or financial aspect. For example, the Global Reporting Initiative Guidelines (GRIG) defined their framework for reporting on 3 parts: the economic, environmental and social performance of an organization. (www.env.go.jp/en/ssee/eag02) Similarly, it can be seen in Accountancy and Business journal (Stikich, 1997), in which high lights that there are three aspects of core values of a modern sustainable business, one of them is environmental responsibility. In fact, a number of companies begin to reflect on and revise their corporate environmental responsibilities, not only because of the pressure and activity coming from non-governmental organizations and the growing sense of environmental issues by the general population, but using it as a part of their management strategies to specify measures for dealing with environmental issues and to internally carry out environmental conservation activities.

Moreover, advocated by many organizations like the United Nations, the World Bank, the Organization for Economic Co-operation and Development (OECD) and the European Union, environmental accounting is widely recognized as an essential tool of a sustainable development, which does not harm the planet’s resources needed for the future generations and the development on the earth.

1.2 Legalization

Regulation of environmental issues is growing rapidly in all countries of the world and keeping up to date. And even national legislation is becoming a specialized field in itself. With specific reference to disclose environmental liabilities, accountants today are required to follow the guidance enacted by the Financial Accounting Standards Board (FASB). According to the accounting principle stated in FASB Statement of Financial Accounting Standards No. 5, “accounting for contingencies”, which is issued in 1975, the contingent liabilities “arising from environmental cleanup costs” are required to be accounted and disclosed. This statement requests that “provision for a loss contingency be accrued and a liability recognized on the face of the financial statements when both of the following conditions are met: It is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements; i.e., it is probable that a future event or events will occur confirming the fact of the loss; and the amount of the loss can be estimated reasonably.” It means that if the loss is reasonably possible and can be estimated reliably, the loss contingency must be reported, but only as a note to the financial statements. When there is only a tiny possibility of the occurrence of the future event, which might lead to loss; or the amount cannot be estimated reliably, there is no request of either an accrual or a note from FASB, but recommends a note in such circumstances. The FASB has also provided additional guidance regarding loss contingencies in FASB Interpretation No.14 “Reasonable Estimation of the Amount of a Loss”, in which it’s suggested that “the minimum amount of the range should be accrued, unless some amount within the range appears at the time to be a better estimate than any other amount within the range.”

Some countries have already set upthe legislations on environmental accounting and reporting, such as Denmark, New Zealand and the Netherlands.(www.cei.sund.ac.uk/envrep/reports.htm)Some organizations have given aReporting Guidelines, such as GRI. It mentioned, “Environmental reporting has traditionally been a voluntary method of communicating environmental performance to an organisations stakeholders.”

The Environmental Protection Agency (EPA) of USA identified more than 15,000 Protection Responsible Parties who should potentially responsible for the clean-up costs. A potentially responsible party is defined by EPA as any individual or company/organization who is potentially responsible for or contributed to the contamination problems at a Superfund site. It can include: “current owners or operators of facilities where hazardous substances have been deposited; owners or operators of facilities at the time hazardous substances were deposited; generators of hazardous substances deposited at facilities; transporters of hazardous substances to facilities; persons who arranged for disposal or treatment of hazardous substances at facilities.” (Jensen & Unger, 1991, p18)

The UK legislation involves such things as the EPA 1990, the Water Act 1990 and the Environment Act 1995. A new regime for Integrated Pollution Prevention and Control (Pollution Prevention and Control Act 1999) was implemented in 2000. As a result, companies are required to invest in pollution protection; invest in cleaner technologies; change processes and products; establish waste minimization programmes; review asset values; spend on waste treatment/disposal. Similarly, environmental legislation is supposed to be developed to support the policy of sustainable development, such as measures to reduce the emission of greenhouse gases. Wind the time back to the turn of the century, there were already some business implications like the nature of packaging was changing; packaging recovery/recycling schemes were needed; cost of waste treatment/disposal was rising; companies need to make more information available to the public; heavier industrial processes need to adopt environmental management practices. (Gray, R & J.Bebbington, 2001,p5)

1.3 Why do companies and organizations do it?

Considering the reasons for why companies and organizations carry out environmental accounting, there could be several causes, some of which are due to legislation, and some of which are voluntary simply because a company or organization wishes to improve it’s public image. These reasons are about to be discussed below.

1.3.1 External requirement: Legislation and accounting standards

As Professor Rob Gray said, “As well as generating consequences which may be interpreted as largely `positive', accounting is also implicated in many of the `negative' aspects of organisational life. For example, environmental damage can be shown to be inevitable given current accounting orthodoxy.” (www.sussex.ac.uk/Units/gec/pubs/briefing/brf-gray.htm) The public and the government have the willing to be informed not only the positive side but also the negative side. In order to meet the needs of them, environment accounting is an inevitable trend. There is a discussion can be found from ACCA in appendix 1.

In addition, companies and some other organizations are required to have responsibility to stakeholders, such as consumers, business partners, investors and employees, when making use of environmental resources, i.e. public goods, for their business activities. Therefore, it’s a key process to disclose environmental accounting information to perform their responsibility to the stakeholders.

1.3.2 Internal need: Benefit from doing environmental accounting

In carrying out environmental conservation activities, a company or other organizations can accurately identify and measure investments and costs that related to environmental conservation activities, therefore can prepare and analyze this data. The company cannot have a better acknowledgement of the potential benefit of these investments and costs, by only improving the efficiency of its activities, but environmental accounting also plays a very important role in supporting companies to make sensible decision. Consequently, environmental accounting helps companies and other organizations build their public trust and reputation and receive a fair assessment. It is mentioned in ACCA “companies should identify and communicate with their stakeholders, consider and act on their needs and involve them fully in corporate business”. Therefore, if a company wants to be more sustainable, it should consider to be more responsible to its stakeholders, such as show its environmental responsibility to them.

For example, the Body Shop strongly recommends its products from the view of environment protection. They emphasize the power that they are using to produce is “Ecotricity” which generated electricity from wind and solar power. And they are building new green energy sources to replace the conventional polluting kind of electricity that causes global warming. By switching to Ecotricity, the customers can use their electricity bill to help fight global warming. Body Shop successfully wins the popularity of the public by building their business on the basis of being environmental friendly. (http://www.uk.thebodyshop.com/web/tbsuk/values_pop.jsp)

1.4 Difficulties in carrying out

A big headache to practice environmental accounting is that it’s very expensive for companies and organizations to measure and report environmental items. Since it’s hard to measure environmental cost or benefit in monetary value. Moreover, from the Report of the Committee on the Environment Document 10071 announced 2004,it can be seen “An organization is exposed to reputation risk if it selectively chooses to publish only good news in its annual environmental report and appears to systematically exclude bad or neutral performance”(www.evcp.chance.berkeley.edu/documents/Reports/documents/EnvCmteReport040427.pdf) It means that companies and organizations cannot only show the good news in their environmental report, but also have to expose the bad ones. Otherwise they may probably face a reputation risk. One the other hand, if they do disclose all the bad news in the environmental report, they might also be censured by public. For example Shell disclosed in its annual report in 2002 that after a slight decrease of emission to the air in 1998 and 1999, the number goes up again since 2000. (Appendix 2) And for some industry that has certain large negative impact on environment, like BT, one of thelargest single purchasers of electricity in UK, buys 1.8% of the nation’s industrial energy and produces 100,000 tonnes of waste a year. (Rubenstein, D. B, 2005)Even though BT has taken some actions to deal with the problems, the negative impact on environment is still significant. However, under the current IT technology, in order to provide good communication service to public, the negative impact is unavoidable. There might be a problem comes out: these companies are doing a “good” thing, but get a “bad” result.



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Leeds Metropolitan University
Enviromental Accounting



Title: Enviromental Accounting