Environmental accounting considers the impact of an organisation’s environmental activities on its financial accounts, exploring how a company’s engagement with activities to minimise its environmental footprint can and does affect the bottom line. Environmental accounting activity, such as audits and compiling reports for stakeholders, can inform strategy and help executive teams identify the cost savings that are achievable from such environmentally conscious activity. A seemingly win-win situation, Dr Mukonoweshuro explains how some of these approaches work.
Too good to waste
I recently conducted an audit with the NHS to identify cost savings. It involved getting my hands dirty (quite literally) looking at their waste management practices. We opened waste bins, sorted through them and recorded their contents. Twenty to forty percent of the waste generated by one hospital was used paper towels! These and other items, like disposable coffee cups, were considered clinical waste, even though they could readily be recycled. Gathering this information helped us make recommendations for cost savings.
Having established what kind of waste could be recycled we looked at the operational costs for waste disposal and energy usage. Audits can be helpful in identifying red flags and areas for improvement. We realised that a change in waste management practices could have a positive impact; the bill to the NHS for discarding waste in this way was considerable.
We used our findings to demonstrate how sorting the waste into items to be treated as clinical waste and those which were recyclable could help reduce, not only the financial costs, but the environmental ones too. Ultimately, there would be less waste going to landfill.
Haste makes waste
We built our understanding of the behavioural drivers behind this approach to waste management and proposed training people so that separating out waste became second nature. We also engaged with dental practices to see what cost saving measures could be implemented through changes to waste management, persuading them that some modest capital investments in additional bins now could save costs over the long term. Whilst an audit shows what is happening in practice, we used the evidence it provided to demonstrate what could be gained by planning and thinking ahead, by training staff now and investing in more bins, there would be lower costs and less environmental impact.
Reaping the rewards of reporting
My research has explored how organisations’ environmental reporting influences financial reporting. The Government has issued guidance to the Stock Exchange on how companies can report their environmental performance. Whilst this reporting is currently voluntary, it is interesting to study how organisations engage with it. What types of organisations invest in this kind of environmental reporting? Is it only large organisations and how seriously do they consider it? Does reporting on environmental performance impact corporate governance structures? We are keen to establish whether specific sectors engage with it more and, if so, why? What leads some companies to focus on how they are fulfilling their environmental obligations to society? Comparing organisations’ reports before and after the guidance was released, we concluded that the process of accounting for environmental performance impacts on an organisation’s general financial reporting, with many financial reports becoming more comprehensive.
Organisations that are reporting extensively on their environmental performance can limit their exposure to public criticism. There can be sound reputational reasons for companies to report their progress towards reaching environmental goals.
It embellishes their Corporate Social Responsibility agenda and demonstrates their commitment to good social accountability. They can position themselves as forward thinking, working towards compliance with new demands, aspiring to operate in line with best practice. It can also help management with formulating policies and inform strategy development. We have observed that, once organisations engage with and monitor their environmental performance, the intelligence gathered feeds into their strategy development.
Organisations which do not report on their environmental performance will struggle to know what progress they are making. Reports give organisations a snapshot of the progress they are making in reducing their environmental footprint. It can help identify cost savings – as in the NHS example - and increase organisational profitability. It is not unusual for organisations to find that once they engage with solutions and technology to minimise the environmental impact of their operations, efficiency improvements follow.
Managing and mitigating risk
Looking at financial management costing savings as well as accounting reporting systems and conducting environmental audits can help us evaluate risk assessment processes within an organisation. These can detect and estimate how to minimise environmental risks. We can identify which organisations create provisions for environmental risk and also consider contingent liabilities e.g. some uncertain future event that could cause future liabilities. We can advise on managing the financial consequences of these organisation’s activities which helps in planning and building organisational resilience.
When carrying out environmental audit processes we also conduct risk assessments to see what future operational changes may need to be made. Money can then be put aside to make provision for managing the consequences from those risks should they become reality. Organisations can be proactive now and plan how to financially manage future liabilities. These are all supplementary benefits from engaging in this kind of reporting.
Turn to good account
Environmental reporting is topical right now. Organisations can benefit hugely from this kind of analysis. Rather than relating to the guidance as a hindrance, forward-looking organisations consider the potential benefits it could bring to organisations’ operations. Capturing and emphasising environmental credentials can be an effective way to identify how to improve the bottom line and boost reputation, whilst minimising the environmental footprint.
There can be other incentives for organisations to undertake environmental reporting. There are two ways through which we can measure assets: either through historical costing (i.e. what the asset cost when it was purchased) or fair value accounting which is used under International Accounting Standards. The problem with historical costing is that it can greatly undervalue assets if their price has increased significantly. Consider how house prices have risen in the UK; people do not consider the value of their house to be what it was when purchased twenty years ago but the market value of the property now.