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 decisionmaking 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 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

Environmental Costs At A Refinery

(As a percentage of operating costs, excluding crude oil input)
Original Estimate 3% Actual Situation 22%

78% 97%
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 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

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.

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

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: Capital Costs Annual Savings Financial Indicators: Payback Period Net Present Value Internal Rate of Return 4.2 years $ 47,696 17% 1.6 years $2,073,607 46% company analysis $1,469,404 $ 350,670 improved analysis
*TCA

$1,469,404 $ 911,240

* Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993

Financial Data for Quality Control Camera Project

original analysis Costs and Savings: Capital Costs Annual Savings 1-5 years Additional Savings Year 3 Financial Indicators: Payback Period Net Present Value 2.7 years -17,182 2.7 years +18,981 $105,000 $ 38,463 $105,000 $ 38,463 $ 55,000 improved analysis

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 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

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 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

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