Environmental Management Accounting EMA:

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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)
mfreyes_at_pacific.net.ph
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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.

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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.

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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

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Environmental CostsAre 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

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Environmental Costs At A Refinery(As a
percentage of operating costs,excluding crude
oil input)
Original Estimate
Actual Situation

• Source Green Ledgers Case Studies in
  Corporate
• Environmental Accounting. World Resources
  Institute, May, 1995.

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The Cost of Waste Inkat 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

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

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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.

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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

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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.

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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.

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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.

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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.

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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

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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).

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Financial Data for White Water and Fiber
Reuse Project
company analysis
improved analysis TCA
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
Total Cost Assessment Budgeting for
Pollution Prevention, Tellus Institute, 1993
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Financial Data for
Quality Control Camera Project
original analysis
improved analysis
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
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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

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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

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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.

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EMA Development

• United Nations Division for Sustainable
  Developments 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

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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

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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 EPAs Environmental Accounting Project
• Environmental Canada-Quebec Regional Offices
  Private Sector P2 Initiative
• Graz (Austria) Department of Environmental
  Protections EcoProfit Initiative
• UK Environment Agencys EMA for Financial
  Accountants Project

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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
• UNEPs CP Finances Profiting from CP Course in
  Vietnam
• Taiwan Environmental Management Associations EMA
  Training Project
• Thailand Environment Institutes Workshop on EMA