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Chapter 17
Sustainability and management
accounting
Copyright  2009 McGraw-Hill Australia Pty Ltd
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Outline
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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
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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
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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
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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.)
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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
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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
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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 14001 is an international standard for EMA
and its audit
• EMS and adoption of ISO 14001 requires that
environmental performance be measured against
policies, objectives and targets
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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
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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
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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.)
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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
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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.)
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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
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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.)
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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.)
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Sustainability and performance
measurement (cont.)
• ISO 14031 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
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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
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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
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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
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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.)
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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.)
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PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
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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
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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.)
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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 14000 series and the
GRI guidelines
• Management accountants are well equipped to
produce a range of information that will help
businesses respond to climate change
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PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
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