Environmentalism has arrived, and it's here to stay. And apparently the time to account for it has also come. The question is how.Many corporations have seen real, market-driven reasons to report on their environmental impact and sustainability. Consumers are paying attention. Investors are worried about what they're investing in and how environmental liabilities could impact their investments. In many countries, environmental regulation agencies are requiring some degree of reporting.

So far, however, reporting has been haphazard and unguided. Preparers of financial reports aren't sure what to report or how to present it; auditors find themselves working without standards to support their assessments; and boards of directors are unsure how accounting should figure into their financial statements.

Eleanor Bloxham, chief executive of the Value Alliance and the Corporate Governance Alliance, has been monitoring the increasing call for environmental management accounting.

"I would characterize the state of environmental management accounting as scattered, sporadic and not at all uniform," Bloxham said. "I think the recognition is there that this is important as an element of growing importance. We're beginning to recognize that good managers are able to manage the environment. In fact, we're seeing that environmental management accounting is a great way to measure the effectiveness of a management team."

In discussions with corporate governors, Bloxham cited a report issued by the U.K. Government Environmental Agency. The report found that, "There is a clear link between sound environmental governance policies, practices and performance and the financial performance of businesses ... and strong evidence of higher financial returns, business opportunity and competitive advantage, with differences in financial performance between environmental leaders and laggards being quite marked."

Other reports, she said, have found a correlation between process waste and corporate profit. The less the waste, she says, the more efficient the use of materials and thus the more efficient the process and production. That efficiency tends to result in better financial performance, and it's EMA that measures efficiency from that perspective.

Given that, she said, how responsible is it not to consider environmental records and liabilities on a fiduciary level?

Minimizing environmental impact depends on effective EMA, Bloxam said, and therein lies the latest challenge in standard-setting. "The trend I see happening is a movement of investors not to require that companies have this reporting rigor, but to reward those companies that start to bring environmental reporting out into the financial accounting world," she said. "This points not only to mechanisms and methodologies, but also to financial reporting in the public domain."

Creative chaos

Deborah Savage, founder of the Environmental Management Accounting Research & Information Center, sees EMA in a state of "creative chaos," in which companies are generating ideas and methodologies for their individual accounting systems, but have yet to develop comparable consistency.

"People are experimenting in different companies and countries, and they have different needs for this type of analysis and information, so they all approach it in different ways," Savage said. "This is normal and even useful. But if you have so many entities doing it so many different ways, the confusion gets out of hand. The field has been around just long enough for folks to see that we need to come to some kind of consensus."

Savage and Christine Jasch, of the Austrian Institute for Environmental Management & Economics, have co-authored a report for the International Federation of Accountants, "The International Guidance Document on Environmental Management Accounting," which surveyed the world's best practices in EMA, finding common and recommended philosophies and methodologies from a variety of companies, industries and government agencies.

While the guidance neither sets standards nor prescribes practices, it provides a general framework and a set of definitions that are comprehensive and consistent with the world's best practices. It provides a language, scheme and set of cost categories that are representative of the world's practices, and thus provide a bit of solid ground for future development.

IFAC technical director James Sylph emphasized that the guidance is not intended to serve as a standard, but noted that it could evolve in that direction. IFAC has no plans to continue work on the guidance, but that may depend on the world's reaction to it.

"As many countries develop the requirements for sustainability reporting, or triple-bottom-line reporting, [this guidance] will be a consistent core that will appear in a number of those countries, and by its activity will become a de facto standard," Sylph said.

Sylph suggested that the guidance of the report would elicit new kinds of information that could subsequently be used for internal decisions, as well as external reporting.

Environmental accounting began when the U.S. Environmental Protection Agency produced some initial guidance in the early 1990s. Neither the federal government nor the country's standard-setters have done much since then, however, and any new developments - and interest - have occurred outside the United States. When Savage sent the IFAC document to organizations around the world for comment, the only American accounting association to respond was the Florida Institute of CPAs.

Germany and Japan, she said, have been especially active in EMA, which has combined well with the detailed materials flow cost accounting common in those countries. The U.K. has just implemented new environmental information regulations. The Philippines had such success with an EMA educational program for professionals that it went on to require EMA content in college curricula, making it the first country to do so.

"The interest in the subject has really taken off exponentially overseas in the last five to eight years," Savage said. "That's why we wrote the guidance with a broad international audience in mind. It was very challenging to write."

The IFAC guidance can be downloaded at www.ifac.org.

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