Environmental Management Accounting - Essay Example

Name: xxxxxxxxxxxxxxxx Course: xxxxxxxxxxxxxxxx Institution: xxxxxxxxxxxxxxxx Subject: Environmental Management Accounting Date: xxxxxxxxxxxxxxxx Environmental Management Accounting Introduction Charles Darwin argues that “It is not the strongest of the species that survive, or the most intelligent, but the one most responsive to change.” These sentiments hold profound truth especially in today’s business environment (Adizes 2004, p.5). Successful businesses are no longer about making profits. The existing business environment requires organizations to respond quickly to change and effectively to their environment. By so doing businesses can ensure their sustainability in the ever changing business environment. Nevertheless, one of the biggest challenges that most organizations face today, revolves around the need to be sustainable (Hitchcock & Willard 2009, p.5). It is therefore worth questioning what constitutes of business sustainability. Business sustainability can be considered as a process of change whereby resources are exploited, institutional changes are implemented, technological developments are instituted and investments are directed based on both the present and future needs (WECD 1987). In order to realise this, Environmental Management Accounting (EMA) is essential. EMA incorporates the measurement of economic and environmental performance through the use of management accounting practices and systems that involve monetary information on earning, savings and related costs and physical information on materials, water, wastes and flow of energy (IFAC 2005, p.19). This paper seeks to examine Darwin’s sentiments that “It is not the strongest of the species that survive, or the most intelligent, but the one most responsive to change” with reference to Environmental Management Accounting (EMA). Foremost, this paper will examine the current state of the environment and the concept of sustainable business. Subsequently, this paper will provide a brief explanation of EMA, its benefits and provide relevant examples of EMA. Moreover, it will examine traditional accounting and some of its limitations and outline the importance of strategic positioning as a strategy of responding to change in an environment that is resource constrained. The Environment and Sustainable business The current state of the environment is characterized by various risk factors that threaten the survival of natural resources and the human life. Most of these environmental issues were brought about by human activities in the environment. Human activities on the face of the earth have led to the contamination of the biological and physical components of the environment and as a result, environmental processes have been adversely affected (Kemp 1998). Among other environmental issues brought about by human activities on the face of the earth include; climate change, environmental degradation, Ozone depletion, pollution and resource depletion among many other factors. The current state of the environment is characterized by these environmental issues. For instance, climate change is a major concern in today’s environment, scientists agree that human activities have brought about irreversible changes in the environment. The increase of the level of CO2 emissions in the atmosphere from the combustion of fossil fuel, land use and deforestation are some of the key factors that have brought about adverse changes in the climate (Solomon et al 2009). Moreover, the current state of the environment is one that is faced with the depletion of resources. Mining activities, deforestation, farming and fishing are some of the factors that have contributed to the depletion of resources (Diederen 2010). Enforcing sustainability measures is one of the ways that can be used to address the environmental issues that have adversely affected the current state of the environment. Sustainability is solution to minimizing and averting the adverse effects of environmental issues. Scientific evidence shows that the enforcement of sustainability measures can lead the use of natural resources in the environment within the sustainable limit. Over the years, concerns over the state of the environment have prompted response from the government, the media political parties, Green parties and other non-governmental institutions (Millennium Ecosystem Assessment 2005). Moreover, sustainable business is paramount when it comes to promoting environmental sustainability. Consequently, the responsibility of managers in different organizations is becoming more complex since they are under pressure to increase profitability, reduce costs and at the same time prevent the adverse effects that their operations have on the natural resources in the environment. Business sustainability can be considered as a process of change whereby resources are exploited, institutional changes are implemented, technological developments are instituted and investments are directed based on both the present and future needs (WECD 1987). Accounting comes hand in hand with promoting sustainable business. Environmental Management Accounting (EMA) is essential since it helps facilitate sustainable business. The changes in the environment, requires businesses to respond to this changes effectively in order them to survive. Pressures are mounting from stakeholders, financial providers, the media, investors and the government for business to practice sustainable business. Environmental Management Accounting Environmental issues together with the related revenues, benefits and costs have over time becomes issues of concern in various countries. Furthermore, there is a growing consensus that traditional accounting does not effectively provide adequate information that can be used in environmental management. Therefore, there is need for change in order for business to survive in an environment that is resource constrained. In order to fill the environmental gap that traditional accounting overlooks, Environmental Management Accounting (EMA) has emerged as a new field that not only addresses economic issues but also environmental issues. EMA was first introduced by the United States Environmental Protection Agency in the 1990’s in a bid to promote business sustainability particularly with regards to the environment. Over the years, organizations in various countries have implemented and promoted EMA for various management initiatives revolving around the environment (UNDSD 2002). There is no definite definition for EMA nevertheless, according to IFAC’s statements, EMA incorporates the measurement of economic and environmental performance through the use of management accounting practices and systems that involve monetary information on earning, savings and related costs and physical information on materials, water, wastes and flow of energy (IFAC 2005, p.19). This may involve auditing and reporting in some companies however, in most cases EMA entails full-cost accounting, life-cycle costing, strategic planning and benefits assessment for environmental management. United Nations Expert Working Group defines EMA by highlighting both the physical and monetary aspects of EMA. According to the United Nations Expert Working Group, EMA is the collection, identification, analysis and implementation of two kinds of information for the purpose of making internal decisions. In this case EMA incorporates the collection, identification, analysis and implementation of physical and monetary information. Physical information includes information on the use, destinies and flows of water, energy, wastes among many other materials. On the other hand, monetary information includes; costs, savings and earnings that are environment related (IFAC 2005, p.19). It is worth questioning why addressing environmental issues are important when it comes to promoting business sustainability and environmental sustainability. Over time, there has been a growing concern over the current state of the environment. Stakeholders are showing an increased interest in the performance of organizations particularly when it comes to addressing environmental issues. For examples, internal stakeholders may be concerned about how employees are affected by pollution in their work environment. On the other hand, external stakeholders such as investors, government regulators, customers, suppliers, environmental activities groups and the surrounding communities continue to put pressure on organizations to implement measures that promote environmental sustainability. Despite of the pressure on most organizations to increase profitability and minimize costs, their strategies and priorities have to change so as to incorporate measures that promote environmental sustainability or else they will loose their significance in their market (IFAC 2005, p.10). The changes in the environment and mounting pressure on organizations to promote environmental sustainability have forced a good number of organizations to initiate and implement new, cost-efficient and creative measures to reduce and manage environmental impacts. As a result, these organizations have gained a positive public image, this has in turn brought about positive financial outcomes and value to the company. Conversely, organizations that have failed to effectively respond to environmental changes and pressures from stakeholders, have succumbed to a negative public image that has in turn affected their significance in the market (Menz 2010).This confirms the sentiments of Darwin that, “It is not the strongest of the species that survive, or the most intelligent, but the one most responsive to change.” The benefits of EMA EMA is not only a tool that is used to promote environmental sustainability; rather it incorporates various sets of approaches and principles that provide essential information needed for the success of activities on environmental management and business sustainability. EMA is especially beneficial when it comes to the management of internal initiatives especially those that are centered on addressing environmental issues such as environmental management systems, supply chain management and “green” product and service design. Given the fact that the ranges of decisions made by companies are increasingly affected by environmental issues, EMA has become an essential for the management different aspects of management besides environmental issues. Furthermore, EMA not only entails the provision of information, management control and planning but it also ensures values creation and the effective use of resources. The benefits and specific applications of EMA are many, nevertheless, they can be categorized into three main areas. Foremost, the application of EMA ensures compliance since it facilitates environmental protection through cost-efficient compliance to environmental policies and regulation. Secondly, the application of EMA promotes eco-efficiency since it supports the reduction of environmental impacts and cost through the use of materials, energy and water efficiently. Lastly, EMA facilitates the strategic positioning of organizations. EMA promotes the assessment and implementation of environment programs that are cost effective and that ensure the strategic positioning of organizations in the long-term (IFAC 2005, pp.23-24). In an environment that is resources constrained, strategic position is imperative since enables an organization to sustain its supply of resources in future, it also promotes value creation and the effective use of resources. A good example of EMA application is evident in the United Kingdom whereby the UK Environment Agency promotes EMA principles as part of its overall efficiency program. The EMA program in the UK was launched in a bid to facilitate “green” accounting systems. This accounting initiative incorporate systems that track the expenses, progress and limitations of agencies on environmental issues and provides information for organizational processes such as accounting and planning among many other functions. Therefore, as compared to traditional accounting, EMA is more beneficial and effective. Traditional accounting makes it difficult to collect and assess environmental information effectively. These limitations can contribute to the management of an organization making decisions that inaccurate. Consequently, managers may not understand the negative financial implications that come as a result of poor environmental management. Another limitation of traditional accounting includes its lack of efficiency when it comes to tracking the use of materials, the flow and cost of information. In addition, investment decisions that are made based on traditional accounting are often on the basis of insufficient information (IFAC 2005, pp.27-29). It is therefore evident that organizations need respond appropriately to change by adopting EMA, failure to this they might lag behind. Hence, it is true that “It is not the strongest of the species that survive, or the most intelligent, but the one most responsive to change.” Conclusion Successful businesses are no longer about making profits. The existing business environment requires organizations to respond quickly to change and effectively to their environment. With the increase of environmental issues and pressure from stakeholders, business can ensure their sustainability by neglecting traditional concepts and employing EMA concepts. By so doing businesses can ensure their sustainability in the ever changing business environment. EMA is not only a tool that is used to promote environmental sustainability; rather it incorporates various sets of approaches and principles that provide essential information needed for the success of activities on environmental management and business sustainability (IFAC 2005, pp.23-24). It is therefore true to Darwin sentiments that “It is not the strongest of the species that survive, or the most intelligent, but the one most responsive to change.” Bibliography Adizes, I., 2004, Managing corporate lifecycles, The Adizes Institute Publishing, California, p.5. Diederen, A., 2010, Global resource depletion, Eburon Uitgeverij, New York Hitchcock, D. & Willard, M., 2009, The business guide to sustainability: practical strategies and tools for organizations, Earthscan, UK, p.5 International Federation of Accountants (IFAC), 2005, Environment Management Accounting, Retrieved on August 9, 2011 from Read More