2. Wiwik-2010 1 Lecture 12 Environmental Management Accounting (EMA)

3. Wiwik-2010 2 Definition There are many alternative definitions, but broadly defined… EMA is the identification, collection, analysis, and use of two types of information for internal decision- making :  Physical information on the use, flows, and fates of energy, water, and materials (including wastes)  Monetary information on environment-related costs, earnings, and savings EMA Expert Working Group of the United Nations Division for Sustainable Development

4. Wiwik-2010 3 Definition EMA combines financial and physical data and calculates the environmental costs of companies Physical data on material and energy input, material flows, products, waste and emissions  PEMA financial data on expenditures, costs, earnings, savings related to company activities with potential environmental aspects or impacts  MEMA

5. Wiwik-2010 4 Why was EMA Developed? EMA was conceived in recognition of some of the limitations of conventional practices for informing environmental management decisions –insufficient tracking of energy, materials, and wastes –“hiding” of costs in overhead accounts and elsewhere in the accounting records –lack of data on future and less tangible costs in the accounting records at all –Insufficient communications between the accounting and other departments/staff, e.g., production, environmental, research…

6. Wiwik-2010 5 PHYSICAL INFORMATION Flow of energy, water, materials and waste (MEFA) Physical Information  Materials Inputs  Product Outputs  Non-Product Outputs (Waste and Emissions) Materials/Mass Balances Physical Environmental Performance Indicators

7. Wiwik-2010 6 ENVIRONMENT-RELATED COSTS AND EARNINGS Cost Categories  Waste & Emission Control Costs  Prevention & Other Environmental Management Costs  Research & Development Costs  Materials Costs of Non-Product Outputs  Materials Costs of Product Outputs  Less Tangible Costs Monetary Environmental Performance Indicators Environment-related Earnings and Savings Distribution of Costs by Environmental Domain MONETARY INFORMATION

8. Wiwik-2010 7 Ecoefficiency essentially maintains that organizations can produce more useful goods and services while simultaneously reducing negative environmental impacts, resource consumption, and costs. The Benefits of Ecoefficiency

9. Wiwik-2010 8 Customer Demand For Cleaner Products Cost Reduction and Competitive Advantage Lower Cost of Capital and Lower Insurance Innovations and New Opportunities Better Employees and Greater Productivity ECOEFFICENCY Significant Special Benefits Leading to Improved Image

10. Wiwik-2010 9 Environmental Quality Cost Environmental costs are costs that are incurred because poor environmental quality exists or may exist. Environmental costs can be classified in four categories: prevention costs, detection costs, internal failure costs, and external failure costs.

11. Wiwik-2010 10 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

12. Wiwik-2010 11 The Cost of Waste Ink at the Southwire Company The cost of a drum of hazardous waste ink was estimated as $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

13. Wiwik-2010 12 Environmental Costs At A Refinery (As a percentage of operating costs, excluding crude oil input) Source: Green Ledgers: Case Studies in Corporate Environmental Accounting. World Resources Institute, May, 1995. Original Estimate Actual Situation

14. Wiwik-2010 13 THE HIDDEN COST The Cost Iceberg Environmental costs can be like an iceberg, with only a small part of the cost visible 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.

15. Wiwik-2010 14 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.

16. Wiwik-2010 15 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.

17. Wiwik-2010 16 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

18. Wiwik-2010 17 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.

19. Wiwik-2010 18 Costs and Savings: Capital Costs $1,469,404 $1,469,404 Annual Savings $ 350,670 $ 911,240 Financial Indicators: Payback Period 4.2 years 1.6 years Net Present Value $ 47,696 $2,073,607 Internal Rate of Return 17% 46% company analysis improved analysis *TCA Financial Data for White Water and Fiber Reuse Project * Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993

20. Wiwik-2010 19 Costs and Savings: Capital Costs$105,000 $105,000 Annual Savings 1-5 years $ 38,463 $ 38,463 Additional Savings Year 3 $ 55,000 Financial Indicators: Payback Period 2.7 years 2.7 years Net Present Value -17,182 +18,981 original analysis improved analysis Financial Data for Quality Control Camera Project

21. Wiwik-2010 20 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

22. Wiwik-2010 21 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

23. Wiwik-2010 22 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.

24. Wiwik-2010 23 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

25. Wiwik-2010 24 UNDSD Expert Working Group on EMA … UNDSD = United Nations Division for Sustainable Development  EMA Working Group established in 1999  Core members are government representatives from 30+ countries  Other members include invited representatives of accounting associations, academia, business, etc.  Group has met 8 times, each time in a different country  Group has discussed many international topics of debate surrounding EMA

26. Wiwik-2010 25 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

27. Wiwik-2010 26 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 Eco Profit Initiative –UK Environment Agency’s EMA for Financial Accountants Project

28. Wiwik-2010 27 EMA in Asia Examples of EMA and EMA-related projects and activities in Asia –Philippine Training Course on EMA and CP supported the US-Asia Environmental Partnership (USAEP) –Environmental Accounting Guideline published by the Ministry of Environment in Japan –UNEP’s CP Finance’s Profiting from CP Course in Vietnam –Taiwan Environmental Management Association’s EMA Training Project –Thailand Environment Institute’s Workshop on EMA

29. Wiwik-2010 28 STOP GLOBAL WARMING - The End -