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@pacific.net.ph 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 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 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 Environmental Costs Are Often Underestimated • Research Findings: – For every dollar of waste cost that companies actually measure, another to 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 Environmental Costs At A Refinery (As a percentage of operating costs, excluding crude oil input) Original Estimate 3% Actual Situation 22% 97% 78% Source: Green Ledgers: Case Studies in Corporate Environmental Accounting World Resources Institute, May, 1995 The Cost of Waste Ink at the Southwire Company • The cost of a drum of hazardous waste ink was estimated $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 as 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 Publishing:England 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 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 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 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 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 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 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 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) Financial Data for White Water and Fiber Reuse Project Costs and Savings: company analysis improved analysis *TCA Capital Costs $1,469,404 $1,469,404 Annual Savings $ 350,670 $ 911,240 4.2 years 1.6 years $ 47,696 $2,073,607 Financial Indicators: Payback Period Net Present Value Internal Rate of Return 17% 46% * Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993 Financial Data for Quality Control Camera Project original analysis improved analysis Capital Costs $105,000 $105,000 Annual Savings 1-5 years $ 38,463 $ 38,463 Costs and Savings: Additional Savings Year $ 55,000 Financial Indicators: Payback Period 2.7 years 2.7 years Net Present Value -17,182 +18,981 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 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 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 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 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 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 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 [...]... 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 EMA Education Most initiatives to promote EMA around the world rely on voluntary adoption, with educational activities... 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 EMA... 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 ... 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 EMA Development • United Nations Division for Sustainable Development’s Consultative Working Group on EMA • EMA Workbooks: – Environmental. .. 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 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... 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 Benefits to Government of EMA Implementation by Industry • The more that industry is able to justify environmental investments on... 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 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 Multiple... 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...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