1. 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)

2. 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.

3. 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.

4. 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

5. 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
Main Point:
This estimate of 2-3 dollars of hidden costs for every dollar of measured cost is a U.S. estimate, but the point is valid for Filipino companies also. We don’t have a Filipino estimate because no study on this topic has been done here.
Other Notes:

6. Environmental Costs At A Refinery (As a percentage of operating costs, excluding crude oil input)
Original Estimate
Actual Situation
Main Point:
The environmental staff and upper management at this refinery were asked to estimate what percentage of their annual operating costs were environmental costs. They guessed 3%. Then they did a study and found out that environmental costs were really much higher, approximately 22% of annual operating costs! Needless to say, they were surprised (and not too happy!).
Other notes:
The cost of raw crude oil was excluded from “annual operating costs” because of the price fluctuations of crude on the market
This is a U.S. company. Again, no examples of this type are available in the Philippines (although maybe you can go back to your facilities and generate such an example!)
Source: Green Ledgers: Case Studies in Corporate
Environmental Accounting. World Resources Institute, May, 1995.

7. 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
Main Point:
This slide gives you a concrete example of how a company can underestimate the Cost of Waste quite significantly. This company originally defined the “Cost of Waste” for a drum of hazardous waste ink as equivalent to the disposal cost alone. But the true Cost of Waste was 26 times higher than that!
Other Notes:
Again, this is a U.S. company - because there were no examples of this type in available in the Philippines. However, I’m sure you can think of some Filipino companies (maybe even yours) who have underestimated the Cost of Waste at their facilities!

8. The Cost Iceberg
Environmental costs can be like an iceberg, with only a small part of the cost visible
THE HIDDEN COST
Main Point:
Remember the Titanic? It didn’t see the iceberg coming until it was too late. In this era of increasing worldwide competitiveness, you don’t want any hidden costs to “sink” your company’s “ship”.
Other Notes:
Adapted from: Bierma, TJ., F.L. Waterstaraat, and J. Ostrosky “Chapter 13: Shared Savings and Environmental Management Accounting,” from The Green Bottom Line. Greenleaf Publishing:England.

9. 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.

10. 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.

11. 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
Main Point:
Doing a really good job of CP profitability assessment can help overcome the poor reputation of “environmental” projects.
Comprehensive inclusion of costs/savings - we discussed this in the section on the Cost of Waste this morning
Improved cost estimation & allocation - we discussed that this afternoon
Longer analysis time horizons - we will discuss shortly
Multiple profitability indicators - we will discuss shortly
Other Notes:

12. 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.
Main Point:
Dividing all of the various components of the Cost of Waste into the three categories given above makes it easier to remember what is actually happening:
Waste = inefficient use of raw materials and other manufacturing inputs
Waste leads to the generation of unwanted waste management costs
Waste leads to the generation of many less tangible costs that can be quite important, even if they are potentially difficult to quantify.
Other Notes:
Which category of the Cost of Waste is the most important (i.e., the biggest) will vary between company’s, between different manufacturing steps in the same facility, and between different waste streams.

13. 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.

14. 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.

15. 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.

16. 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

17. 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).

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

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

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 access to financing and customers contracts

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

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.

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

24. 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

25. 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

26. 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