Course notes Greenwich

1. Environmental
Management
Accounting (EMA)
Note: There will be one
question in the exam
covering both topics of
EMA and benchmarking

2. 2
Environmental Management Accounting (EMA)
• Environmental management accounting (EMA) seeks to
ensure that companies are fully accounting for the
environmental costs of their actions.
• Greater awareness of environmental costs will equip
management to make more informed decisions. The ultimate
aim is to improve corporate environmental performance.

3. 3
Environmental Management Accounting (EMA)
• Modern businesses can no longer ignore environmental risks
and the potentially negative consequences that poor
environmental behaviour can have on their long term success.
• These costs have traditionally been under-represented or
ignored by conventional accounting practices.

4. Terminology
• There is a lot of new terminology for this topic.
• Researchers from different backgrounds and/or
different countries may use slightly different
terminology.
• This is normal for most management accounting
topics.

5. 5
EMA
• Globally, the pressure relating to environmental impact has
intensified and companies are facing pressure from
governments, pressure groups and consumers to demonstrate
commitment to responsible environmental practice.

6. 6
Big issues
• Climate change
• Depletion of non-renewable resources and sustainability
development
• Loss of natural habitats
• Environmental implications for business regarding
operations, products & services
• Risk management / stakeholder value

7. 7
Impacts
• Bhopal chemical leak [1984]
• Air pollution
• Water quality
• Single-use plastics
• Renewable energy
• And many more

8. 8
The impact of environmental behaviour on financial
performance.
• Businesses who pay insufficient attention to their
environmental behaviour may find this will adversely affect
their financial performance.
• Direct costs may increase as a result of wasteful resource
utilisation and additional clean-up costs.

9. 9
The impact of environmental behaviour on financial
performance.
• Revenue may suffer through reputational damage. Lost sales
and potential customer boycotts will have a negative impact
on sales income.
• Financial stability can be threatened as brand values
deteriorate, lending is unavailable and insurance cover may
be withdrawn/ prohibitively expensive.

10. 10
The impact of environmental behaviour on financial
performance.
• Further failure costs can take the form of fines, penalties and
potentially limitless law suit costs.

11. 11
Identifying Environmental Costs (CIMA)
• Environmental costs will include expenditure on recycling,
energy and the costs of dealing with waste.
• However, when accounting for total corporate
environmental costs this definition needs to be widened to
include other non-conventional or hidden/intangible
environmental costs that management should be made aware
of.

12. 12
Identifying Environmental Costs
• Environmental accounting seeks to include and increase
visibility of all relevant environmentally related costs and
costs savings so they can be fully accounted for within
management decision making.

13. 13
Examples
• Delivery and transport costs. By emphasising these costs, a
business may seek to reduce this type of expenditure and
lower their impact on the environment.
• Distribution methods could be redesigned and new policies
enforced relating to staff travel.

14. 14
Examples
• Product design costs should be considered in an effort to
reduce or avoid the future environmental costs - e.g. through
reducing the overall size/weight of the finished product
• There should be a positive impact on packaging and
distribution expenditure.

15. 15
Examples
• Staff training in matters such as correct handling and
disposal of waste.
• Research and Development expenditure relating to
environmental matters.
• Other costs such as the measuring, controlling and reporting
of environmental data such as pollution levels.

16. 16
Examples
Poor environmental behaviour result in:
• Fines
• Liability to environmental taxes
• Loss of land value
• Damaged to brand values, corporate image, and loss of sales
• Contingent liabilities & law suits

17. 17
Financial External Reporting
• Environmental disclosures are required in financial
statements/reports
• Separate environmental/ sustainability reports – of variable
relevance, accuracy and quality.

18. 18
Conventional management accounting
• When, and if, environmental costs are identified, they are
simply attributed to general overheads.
• It is easy to underestimate the real cost of poor environmental
behaviour
• It is easy to overestimate the cost and underestimate the
benefits of improving environmental practices

19. 19
Mistaken assumptions
• Environmental costs are relatively unimportant
• Externalities will remain external
• Internal environmental costs need not be separated from
general business costs
• Environmental management accounting can have no
significant impact on business decisions

20. 20
Consequences
Senior management:
• Unaware of environmental costs
• Inadequate information on which to manage the costs
• Therefore no incentive to reduce them.
Examples:
Energy usage, packaging

21. 21
More consequences
• Make incorrect pricing, product mix and development
decisions
• Not maximise ‘added value’
• Increase ‘risk profile’ of investment decisions

22. 22
Externalities
Govt. regulation:
• Waste to landfill sites
• Energy consumption
• Urban congestion
• Healthcare related costs
• Product take back and recycling

23. 23
Where is management accounting applied?
• Determining strategy (part of strategic management
accounting)
• Setting of performance targets
• Assessing annual environmental costs /expenditures
• Product pricing
• Budgeting
• Investment appraisal
• Calculating costs

24. 24
EMA: Redefining costs
• Conventional costs (raw materials, energy)
• Potentially hidden costs (absorbed into general overheads)
• Contingent costs (future)
• Brand image & relationship costs
• Irresponsible behaviour costs

25. 25
Hidden costs
Identified as:
• Regulatory
• Up front
• Back – end
• Voluntary (beyond compliance)

26. 26
Regulatory
Include:
• Record keeping, monitoring, testing, reporting
• Inspections and quality control
• Training
• Protective equipment
• Insurance & damage response
• Waste management

27. 27
Voluntary
Include:
• Feasibility / impact studies
• Recycling
• Landscaping & habitat protection
• Community relations / projects / grants

28. 28
Contingent
Include:
• Future compliance costs, penalties, fines
• Legal expenses, property & personal injury damages
• Natural resource / economic loss damages

29. 29
Benefits of EMA
• More informed decision making
• Revenue opportunities from recycling & waste management
activities
• Improved product pricing
• Increased competitive advantage
• Improved reputation
• Staff retention and development

30. 30
Benefits of EMA
“Over the years a proactive environmental
programme is cost effective.
The benefits recover on average 80% of the
costs of environment programme.
Whilst savings from cost avoidance amount to
over £100 million over a 7 year period.”
An international steel company

31. 31
Environmental ABC
• ABC allocates all internal costs to the cost centres and cost
drivers on the basis of activities that caused the costs.
• Environment related costs attribute to joint environmental
costs centres e.g. sewage plants / incinerators
• Environment – driven costs

32. 32
Environmental ABC
4 main drivers:
1. Volume of emissions or waste
2. Toxicity of emission and waste treated
3. Environmental impact of treated emissions
4. Relative costs of treating different kinds of emissions

33. 33
Benefits of environmental ABC
• Environmental costs are removed from general overheads and
traced to the products and services.
• Reduces cross-subsidisation of dirty or environmentally
damaging products, processes and sites and therefore more
accuracy in product costings

34. 34
Different methods of accounting for environmental
costs
• There are four methods that have been suggested as ways of
accounting for environmental costs.

35. 35
Input / Output analysis (Not in exam)
This approach balances the quantity of resources that are input
with the quantity that is
output either as production or waste. Reconciling inputs with
their physical output
quantities in terms of volume and also in monetary terms,
forces the business to
account for all wastage and full environment impact of their
product.

36. 36
Flow cost accounting (Not in exam)
• Material: the resources used in production and storing of raw
materials.
• System: the resources used in (for example) in systems such as
production and quality control
• Delivery and disposal: resources used in delivering to the
customer and in disposing of any waste.
• As with input/output the ultimate aim in recording these
movements is to reduce the amount of materials consumed by
each flow. This will reduce the environmental impact of the
product in addition to decreasing total costs overall.

37. 37
Lifecycle costing (Maybe in exam)
• This type of costing aims to account for the total cost of a
product during its whole life span.
• This includes costs incurred at the research and development
stage up until the period after product is withdrawn from sale.
• The relevance to EMA is that some of these costs will be
environmentally related.
• These can be particularly significant at the end of a product’s
life when expenditure such as site clearance and disposal of
unwanted inventory may be incurred.

38. 38
Environmental Activity Based Costing (Maybe in exam)
Activity Based Costing has been discussed in an earlier
chapter. It can be applied to
environmental costs and therefore environmental cost drivers
can be identified. Once
established –these costs can be better assigned to the activities
which cause them.
Then the process of cost reduction and better control can
begin..