Environmental Management Accounting (EMA)

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)
• 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
– 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
– This applies even to big, well-managed companies
Environmental Costs At A Refinery
(As a percentage of operating costs,
excluding crude oil input)
Actual Situation
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
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
– 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
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
– 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
• 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
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
$ 350,670
$ 911,240
4.2 years
1.6 years
$ 47,696
Financial Indicators:
Payback Period
Net Present Value
Internal Rate of Return
* Total Cost Assessment: Budgeting for Pollution Prevention, Tellus Institute, 1993
Financial Data for
Quality Control Camera Project
Capital Costs
Annual Savings 1-5 years
$ 38,463
$ 38,463
Costs and Savings:
Additional Savings Year 3
$ 55,000
Financial Indicators:
Payback Period
2.7 years
2.7 years
Net Present Value
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 Workbooks:
– Environmental Management Accounting Procedures
and Principles
– EMA-Links: Government, Management, and
– 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
EMA in North America
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
– Taiwan Environmental Management Association’s
EMA Training Project
– Thailand Environment Institute’s Workshop on EMA