1. Chapter 17 Sustainability and management accounting
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

2. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

3. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

4. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

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

6. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

7. Physically-oriented EMA
Techniques that focus on supplying information to management that accounts for the organisation’s 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

8. Environmental management systems (EMS) and EMA
EMS—systems 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 is an international standard for EMA and its audit
EMS and adoption of ISO requires that environmental performance be measured against policies, objectives and targets
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

9. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

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

11. 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.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

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

13. 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.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

14. 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 organisation’s management
Cost of cleaning up polluted sites, fines for environmental damage, lost profits associated with damage to reputation
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

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

16. 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.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

17. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

18. Sustainability and performance measurement
Sustainability reporting–formal reporting of information about corporate sustainability that describes the economic, environmental and social impact of the organisation’s activities
May also be called triple bottom line reporting, social reports, social audits, environmental reports
Inside-out approach–measures developed within the business and then fed through to sustainability reports
Outside-in approach–reported measures of sustainability performance driven by external regulations or guidelines
(cont.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

19. 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 world’s largest companies
Australian SAM Sustainability Index (AuSSI) assess the sustainability performance of Australian companies
(cont.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

20. Sustainability and performance measurement (cont.)
ISO 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

21. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

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

23. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

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

25. 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 Earth’s 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.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

26. 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.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

27. 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.)
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

28. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith

29. 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

30. 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 series and the GRI guidelines
Management accountants are well equipped to produce a range of information that will help businesses respond to climate change
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith