Environmental management accounting (EMA)

Environmental Management
Accounting (EMA):
Putting the Right Numbers in
Sustainable Projects
By Maria Fatima Reyes, CPA, MBA
Environmental Management Accounting Network Asia Pacific (EMAN-AP)



About EMAN-AP
• Network of individuals and organizations working towards the
development and promotion of Environmental Management
Accounting (EMA) as an important sustainable development tool.
• The mission of EMAN-AP is to provide a link among developers,
providers, and users of EMA in order to assist businesses,
governments, and other organizations to make informed decisions
through the use of the EMA tool.
• EMAN-AP Secretariat is located at the IGES-Kansai Research
Center in Kobe, Japan.
• Next conference of EMAN-AP will be held in Seoul, Korea on
September 2002.


What is EMA?
• Environmental Management Accounting (EMA) is the
– identification, collection, estimation, analysis, internal
reporting, and use of...
– materials and energy flow information, environmental cost
information, and other cost information...
– for both conventional and environmental decision-making
within an organization.

• Although EMA is geared towards internal management
use, EMA data can also be used for external reporting
purposes.


Why was EMA Developed?
• EMA was conceived in recognition of some of the
limitations of conventional practices for informing
environmental management decisions
– “hiding” of costs in overhead accounts
– inaccurate allocation of overhead costs back to
processes, products, activities
– insufficient tracking of wasted materials and energy
– lack of data on future and less tangible costs in the
accounting records at all


Environmental Costs
Are Often Underestimated
• Research Findings:
– For every dollar of waste cost that companies actually
measure, another 2 to 3 dollars of cost are” hidden” in the
accounting records, or are not on the books at all
– Companies typically underestimate how much waste really
costs them, sometimes by several orders of magnitude
– This applies even to big, well-managed companies


Environmental Costs At A Refinery

(As a percentage of operating costs,
excluding crude oil input)
Original
Estimate
3%

Actual Situation
22%

97%

78%

Source: Green Ledgers: Case Studies in Corporate
Environmental Accounting. World Resources Institute, May, 1995.


The Cost of Waste Ink
at the Southwire Company
• The cost of a drum of hazardous waste ink was estimated
$50 - the average disposal cost per drum
• Upon closer inspection, the true cost of waste was discovered
to be $1300 per drum, including:
– $819 in lost raw materials (ink, thinner)
– $369 for corporate waste management activities
– $50 for disposal
– $47 for internal waste handling activities
– $16 to pay a hazardous waste tax

as

The Cost Iceberg
Environmental costs can be like an iceberg, with only a small part
of the cost visible

THE HIDDEN COST

Adapted from: Bierma, TJ., F.L. Waterstaraat, and J. Ostrosky. 1998. “Chapter 13: Shared Savings and
Environmental Management Accounting,” from The Green Bottom Line. Greenleaf Publishing:England.


EMA “End-uses”
EMA can provide the data needed for many
environmental management initiatives
– Cleaner Production/Pollution Prevention/Green
Productivity
– Design for Environment
– Environmentally Preferable Purchasing
– Environmental Supply Chain Management
– Extended Producer Responsibility
– Performance Meas. & Benchmarking
– Corporate Environmental Reporting
– etc.


EMA for Improved
Capital Budgeting
• Better identification, allocation, and analysis of
environmental costs improves the process by which the

profitability of potential investment projects are assessed.
• Such investments include any capital project that has the
major objective of controlling, reducing or preventing
pollution.


Profitability Assessments of
Proposed Sustainable Projects
EMA can illustrate the potential profitability of
projects that utilizes preventive management
strategies by doing a better job of profitability
assessment:
– Comprehensive inclusion of relevant and significant
costs and savings
– Improved cost estimation and allocation
– Longer analysis time horizons
– Multiple profitability indicators


Comprehensive Inclusion of
Relevant Costs and Savings
(conventional and less tangible costs…)
• The cost of lost manufacturing inputs
– lost materials, energy, labor, capital, etc.
• The cost of waste management
– waste handling, regulatory compliance, waste treatment &
disposal, etc.
• Less tangible costs
– reduced production throughput, reduced product quality,
negative company image, liability, etc.

External Costs
• Costs for which companies are not yet accountable or
which are of no material economic effect to business
financial condition.
• Examples include adverse health effects to community,
damage to personal properties or ecosystems owing to
business activities.


Cost Boundary Not Static
• Evolving regulations, public expectations and emerging
environmental management standards can “internalize”
external costs and make it a part of accepted capital
budgeting practices.


Improved Cost Allocation
• Proper cost allocation is very important to sound
investment profitability analysis;
• Lumping of environmental costs into overhead accounts
and improperly allocating them to departments, products or
processes distort the true financial benefits from projects
that improve efficiency and environmental performance.


Longer Time Horizon Analysis
• The use of longer time horizon will be able to capture
costs, savings, and revenues that occur well after the initial

investments is made


Multiple Financial Indicators
• Profitability indicators should be able to incorporate all
cash flows over the life of the project and should integrate
the time value of money through appropriate discounting
of future cash flows (e.g. net present value, internal rate of
return, and profitability index).


Financial Data for White Water and
Fiber Reuse Project
Costs and Savings:

company
analysis

improved
analysis
*TCA

Capital Costs

$1,469,404

$1,469,404

Annual Savings

$ 350,670

$ 911,240

4.2 years

1.6 years

$ 47,696

$2,073,607

Financial Indicators:
Payback Period
Net Present Value
Internal Rate of Return

17%

46%

* Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993


Financial Data for
Quality Control Camera Project
original
analysis

improved

analysis

Capital Costs

$105,000

$105,000

Annual Savings 1-5 years

$ 38,463

$ 38,463

Costs and Savings:

Additional Savings Year 3

$ 55,000

Financial Indicators:
Payback Period

2.7 years

2.7 years

Net Present Value

-17,182

+18,981


EMA as Driver of
Sustainable Investment
EMA helps companies recognize and achieve the
multiple benefits of Sustainable Investments
– Reduced costs
• increased profit margins
• lower product prices
• increased market share

– Reduced liability
• improved company image
• increased market share
• increased access to financing and customers contracts


Benefits of EMA to Industry
• The ability to more accurately track and manage the use
and flows of energy and materials, including
pollution/waste volumes, types and fate
• The ability to more accurately identify, estimate,
allocate, and manage/reduce costs, particularly
environmental types of costs
• More accurate and comprehensive information for the
measurement of performance, thus improving company
image with stakeholders such as customers, local
communities, employees, government and financial

providers


Benefits to Government of EMA
Implementation by Industry
• The more that industry is able to justify environmental
investments on the basis of financial self-interest, the
lower the financial, political, and other burdens of
environmental protection on government.
• Implementation of EMA by industry should strengthen
the effectiveness of existing government
policies/regulations by revealing to companies the true
environmental costs and benefits resulting from
government regulations.


EMA Development
• United Nations Division for Sustainable
Development’s Consultative Working Group on
EMA
• EMA Workbooks:
– Environmental Management Accounting Procedures
and Principles
– EMA-Links: Government, Management, and
Stakeholders
– Policy Pathways for Promoting Environmental
Management Accounting


EMA Education...

Most initiatives to promote EMA around the world rely on
voluntary adoption, with educational activities a core
component:
– guidance documents
– case studies
– curriculum development & training
– software


EMA in North America
and Europe
Examples of initiatives in North America and
Europe that promote EMA as a tool for many
environmental programs
– US EPA’s Environmental Accounting Project
– Environmental Canada-Quebec Regional Office’s
Private Sector P2 Initiative
– Graz (Austria) Department of Environmental
Protection’s EcoProfit Initiative
– UK Environment Agency’s EMA for Financial
Accountants Project