Chapter 17

Sustainability and management accounting

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Outline
Sustainability for businesses Environmental management accounting Economic, environmental and social impacts Environmental costs Improving supply chain management through measuring environmental and social impacts Sustainability and performance measurement Strategic performance measurement systems (SPMS) and sustainability Environmental outcomes: capital expenditure analysis Climate change and management accounting
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Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Sustainability for businesses

Sustainable investments focus on achieving a sustainable economy, a sustainable environment and sustainable society Corporate social responsibility (CSR) involves organisations taking into account the social and environmental impact of corporate activity when making decisions
May increase profitability Determines long-term survival Demanded by stakeholders: customers, employees, investors

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Environmental management accounting (EMA)

Consists of environmentally-related management accounting systems and practices Life cycle costing, environmental cost accounting, environmental performance measures, assessment of environmental benefits, strategic planning for environmental management EMA techniques
Financially-oriented EMA Physically-oriented EMA

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Financially-oriented EMA
Environmental costs
Costs incurred to prevent, monitor and report environmental impacts and the cost of failing to comply with environmental regulations Cost of waste management systems, environmental training, legal activities and fines, record keeping and reporting, cost of remediation of environmental impacts

Environmental product costing

Involves tracing direct and indirect environmental costs to products The cost of waste management, permits and fees, recycling (cont.)
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Financially-oriented EMA (cont.)

Environmental performance indicators
Used to set targets, and monitor environmental performance

Environmentally-induced capital expenditure

Driven by the desire to improve the organisation's environmental impact, or to comply with environmental regulations

Environmentally-induced revenues
Arise from positive environmental actions Increased revenue from the sale of recycled materials, from higher selling prices for greener products, increased customer satisfaction, improved employee morale

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Physically-oriented EMA
Techniques that focus on supplying information to management that accounts for the organisations impact on the natural environment
Kilograms of noxious waste emissions, kilowatt hours of electricity used, decibels of noise Used for tactical decisions and capital expenditure decisions

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Environmental management systems (EMS) and EMA

EMSsystems that organisations put in place to manage their environmental performance
May include recycling systems, systems to monitor and control levels of liquids, material and atmospheric discharge and waste

ISO 14001 is an international standard for EMA and its audit EMS and adoption of ISO 14001 requires that environmental performance be measured against policies, objectives and targets
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Economic, environmental and social impacts

Economic and social impacts are difficult to identify and measure, but may be substantial Future ecological and social impacts are not yet known
Current work practices may have future environmental and social consequences which we cannot predict

Many costs and benefits are external to the organisation

Difficult to detect and assess

Many costs and benefits are difficult to measure in financial terms

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Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

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Environmental costs
The costs that an organisation incurs to prevent, monitor and report environmental impacts
May extend into the future

US EPA defines 5 tiers of environmental costs Private costs (tiers 1 to 4) and societal costs

(cont.)
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Environmental costs (cont.)

Environmental costs can be analysed using the same framework as used to analyse quality costs Prevention activities
Solve environmental problems before they occur, or turn problems into opportunities Costs of these activities are investments, as they reduce the future outlays and provide long-term benefits

Appraisal activities
Monitor the levels of environmental impact Measures damage, inspects processes and products, audits supplier performance (cont.)
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Environmental costs
Internal failure activities
To correct breakdowns discovered in appraisal activities Cost of cleaning the plant after spillage, cost of occupational health and safety claims by employees

External failure activities

Occur when resolution and remediation efforts fall outside of the organisations management Cost of cleaning up polluted sites, fines for environmental damage, lost profits associated with damage to reputation

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Improving supply chain management through measuring environmental and social impacts
Suppliers
An organisation may be willing to pay more where suppliers have reduced environmental and social impacts Organisations may work with suppliers to adopt more responsible environmental and societal practices; this can lead to cost reductions Formal supplier evaluation can include assessment of a range of environmental and social factors, as well as financial factors
(cont.)
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Improving supply chain management through measuring environmental and social impacts (cont.)
Customers
An organisation can work with customers to reduce the adverse environmental and social impact of products
Recycling and disposal programs Substitution of materials Cost savings

Sometimes customers may be willing to pay more for a more environmentally-friendly product Marketing and strategic considerations need to be considered in such pricing decisions
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Sustainability and performance measurement

Sustainability reportingformal reporting of information about corporate sustainability that describes the economic, environmental and social impact of the organisations activities
May also be called triple bottom line reporting, social reports, social audits, environmental reports

Inside-out approachmeasures developed within the business and then fed through to sustainability reports Outside-in approachreported measures of sustainability performance driven by external regulations or guidelines
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(cont.)
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Sustainability and performance measurement (cont.)

Global Reporting Initiative (GRI) Guidelines are regarded as the global standard for sustainability reporting
48 sets of core indicators + 31 additional indicators Includes unique indicators for certain industries

Dow Jones sustainability index (DJSI) compares the sustainability performance of the worlds largest companies Australian SAM Sustainability Index (AuSSI) assess the sustainability performance of Australian companies
(cont.)
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Sustainability and performance measurement (cont.)

ISO 14031 environmental performance indicators
Operational performance indicators include measures of waste levels and energy consumption relative to sales or some other activity Management performance indicators measure the efforts of management to improve the environmental performance of their organisation Environmental condition indicators measure the actual condition of the environment at a local, national or global level May be reported as absolute measures or as a percentage relative to a baseline
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Strategic performance measurement systems (SPMS) and sustainability

Adding sustainability to the balanced scorecard
Sustainability measures may be included within the four perspectives An environmental or social perspective may be added to the BSC A separate sustainable scorecard may be developed

Strategy maps may be developed to identify cause and effect relationships between objectives, strategies and to guide the selection of performance measures
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Environmental outcomes: capital expenditure analysis

Inclusion of environmental costs and benefits may make financially non-viable projects more attractive or financially viable projects less attractive Weighting given to environmental factors depends on the organisation's values and preferences Some capital expenditure analysis may be driven by the need to be environmentally responsible

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Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

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Climate change and management accounting

Climate change is the increase in temperature and changes in other climate characteristics which has been observed since the mid-1980s A result of the build up of gases (particularly carbon dioxide) which are trapped in the Earths atmosphere (the greenhouse effect) Actions to reduce greenhouse gas emissions are called mitigation, and actions to respond to climate change are called adaptation An emissions trading scheme (ETS) mitigates climate change and reduces the cost of emissions control
(cont.)
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Climate change and management accounting (cont.)

Implications for business
Many managers are yet to respond to climate change through adopting sustainability approaches The ETS will increase awareness Organisations that respond to climate change may not adopt broader sustainability agenda

Implications for management accounting

The five tier cost framework of the US EPA, may provide a useful way to identify, classify and measure costs associated with climate change

(cont.)
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Climate change and management accounting (cont.)

Organisations that participate in the ETS and wish to promote themselves as carbon neutral need to measure their greenhouse gas emissions
They will also need to understand their carbon footprint, the quantity of greenhouse gas emissions they produce

International protocol (WRI/WBCSD) outlines three levels of measurement

Scope 1 direct emissions controlled by the business Scope 2 indirect emissions from purchased electricity consumed by the business Scope 3 other indirect emissions caused by business activities, from sources outside of the business (cont.)
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Climate change and management accounting (cont.)

Management accountants can play a role by
Collecting and analysing non-financial information Gathering information from across the value chain Managing information systems and large data bases

For example
Estimate the cost of emissions produced by products, department and customers Identify carbon non-value-added activities Understand carbon drivers Supplier evaluation may include supplier emissions Quantity of emissions produced and causes of emissions may be measured
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Summary
Sustainability involves considering the economic, environmental and social impacts of an organisation's activities Environmental management accounting (EMA) consists of environmental-related management accounting systems and practices Environmental and social impacts can be difficult to recognise and to measure Environmental costs can be classified and managed using a five-tier framework
(cont.)
Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

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Summary (cont.)
Environmental and social costs can be input into management decision making, including capital expenditure analysis Performance measurement systems, including SPMS, can be adapted to include environmental and social measures
External frameworks include ISO 14000 series and the GRI guidelines

Management accountants are well equipped to produce a range of information that will help businesses respond to climate change
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