Management Accounting for Cost of Green - Coursework Example

Topic: Firm’s Costs of Going Green Student’s name Course name Lecturer’s name 30th October 2011 Introduction The main objective of the company’s manager is to maximise the wealth of the shareholders by increasing the profitability of the company. In the contemporary business environment characterised by cut-throat competition business managers concentrate their efforts and resources in searching for ways and methods for increasing the profitability of the organizations they head (Cormier, Magnan & Morard, 2003). However, over-concentration in profit generations has left the social and environmental aspects unattended to even as the world cries out for repair and social inequalities continue to characterise the face of the society. It is estimated that more than 20 million people in the world are slaves while more than 30 million people are faced with critical illnesses and diseases such as HIV/AIDS, heart diseases, diabetes and cancer which have continued to claim thousands of lives every year (Cormier, Magnan & Morard, 2003). In addition, environmental degradation has also been regarded as one of the worst enemies of people’s health. Global warming has been associated with unpredictable weather patterns which have caused famine and hunger in most parts of the world and particularly in the Sub-Saharan Africa. In the face of these and many other deep-seated problems that have caused human misery in the world, calls have gone out for companies to help in solving these problems. In light of the above issues, companies are seriously weighing the costs of going green in order to reduce pollution. This paper will seek to affirm the position that reducing emissions increases efficiency and saves money thus giving firms cost advantage. Reducing emissions increases efficiency and saves money Sustainable performance has seen its way into corporate offices across the world. This is true even as companies regard sustainability performance as one of the key drivers to increased profitability now and in the future (Handford, 2010). An issue that had long been seen as peripheral to the real business sustainability, sustainable performance has become an issue that is difficult to disregard or ignore in the current business environment. It is therefore a mainstream issue causing the board members in different corporations worldwide to work extra hard to attain. In the recent past, interest in sustainability performance reporting and management has been driven and stimulated by factors such as increased environmental degradation and global climate change, natural resource depletion as well as increased understanding of economic and social roles played by the corporations in the contemporary world to bring about social and economic change (Cormier, Magnan & Morard, 2003). In turn, the above sustainability elements are perceived as directly impacting on the investment value, future liabilities and assets and the risk profile of the company. Beyond its association with the physical environment, sustainability performance has also been extended to the governance and social realms (Margolis & Walsh, 2003). In this respect, new methods of reporting such as social, environmental and governance (SEG) reporting have taken a centre stage in financial reporting even as companies strive to become green and show their commitment to the social and environmental aspects in addition to their governance issues that surround their operations. Even though confusion has characterised the issue of sustainability reporting, many corporations in Australia are publishing sustainable performance reports in addition to their financial reports (Schaltegger & Synnestvedt, 2002). More than any other time, investors, stakeholders and shareholders are more concerned about the steps being undertaken by different companies to reduce pollution of the environment as a way of enhancing the future growth of the companies (Margolis & Walsh, 2003). Even though many companies and firms particularly in Australia regard the carbon tax and other environmental conservation issues as contributing to the increase in the firms cost burden, it is evident that reducing emissions increases efficiency and saves money thus giving firms a cost advantage. A research study conducted by A.T. Kearney, a global strategic and management consulting firm, indicated that companies with higher commitment to sustainability performance showed above average performance during the financial crisis (A.T Kearney, 2009). The difference between such companies and those companies less committed to sustainability performance was seen to be more than $600 million in market capitalization per individual company (A.T Kearney, 2009). This is a positive indication that sustainability performance such as reduction of emissions helped committed companies to save money thus increasing their profitability. Specifically, the companies committed to sustainable performance through reduction in greenhouse gas emissions were found to have an enhanced brand image and improved company image that drove their business into greater heights (A.T Kearney, 2009). This was attributed to the fact that customers, investors, suppliers and other stakeholders now more than ever desire to be associated with companies that undertake stringent sustainability performance measures such as reduction in emissions of greenhouse gases due to the increased understanding of the repercussions that face the world as a result of excessive emission of greenhouses gases (Dowell, Hart & Yeung, 2001). The study concluded that sustainability performance through reduction in emissions of greenhouse gases puts firms at a more competitive edge than their peers. Additionally, sustainability performance such as reduction in emissions was also found to increase the relations between the company and the stakeholders both internally and externally thus enhancing the image of the company in the market. This was also noted as contributing to the attainment of a firm’s competitive position (A.T Kearney, 2009). The study found that sustainability performance through reduction in emissions as well as corporate social responsibilities was responsible for increased efficiency and reduction in costs of operations which helped organisations to save money thus giving firms a cost advantage. According to Grieg-Gran (2002) sustainability performance is responsible for the cost reduction in companies. The author held that the adoption of clean technologies helps in increasing productivity and reducing emissions. Specifically, the author noted that reduction in the use of raw materials and enhancing recycling methods in the firm can help to reduce the costs of purchasing raw materials and increase productivity of the firm. The use of clean technologies is therefore a direct opportunity for saving money and increasing efficiency in production. Economically, cost reduction and increased efficiency in production enables the company to attain a competitive edge in the market because such a company can sell its products at a relatively cheaper price thus attracting a wider customer base. Reducing emissions creates a favourable working environment which translates into good working conditions. Dowell, Hart & Yeung (2001) observed that this helps to minimize disputes originating from employees unions which translate into reduction in costs associated with legal fees as firms’ battle with employee unions due to bad working conditions in the workplace (Dowell, Hart & Yeung, 2001). The authors noted that reduction in emissions increases efficiency because the firm is able to attract and retain employees’ thus increasing production efficiency. Additionally, reducing emissions through adoption of sustainability performance measures has also been attributed to high chances by companies to save money because firms are continuously faced with environmental legislation changes such as changes in liability rules associated with environmental pollution (Dowell, Hart & Yeung, 2001). Firms are also faced with continuous tightening of regulations that require firms to be more vigilant on the environmental sustainability performance measures. For instance, the introduction of the carbon tax in Australia is one of the legislation changes deemed to increase the commitment of firms to reduction in carbon emissions. However, firms that had prepared in advance by adopting sustainability performance measures aimed at reducing carbon emissions would not incur costs of adjusting to the carbon tax rules. Such firms will save money because they had prepared in advance for regulatory change and thus gain a cost advantage position as compared to their peers that had not prepared for regulatory change such as the introduction of a carbon tax. Mir and Rahaman (2011) argued that reducing emissions increases efficiency and saves money thus giving firms a cost advantage. The authors observed that investment in social services through corporate social responsibility as well as management of environmental pollution through reduction in emissions goes along way into enhancing and improving the relations between the firm and the community (KPMG, 2007). This translates into reduction in costs that might be incurred by the firm damage and compensation suits from the community members. As a result, the firm saves considerable amounts of money and gains a cost advantage position as compared to another peer constantly engaged in damage and compensation suits with the members of the community. Mir and Rahaman (2011) added that by reducing emissions the firm can also enhanced its money saving status because insurance premiums also reduce since such as firm is not likely to enter into disputes due to its positive environmental record. Financial markets perceive firms that undertake emission reduction measures to be less risky and thus such a firm experiences reduction in the cost of capital which enhances efficiency and thus it gives the firm a cost advantage position. Sustainability performance through reduction in emission of greenhouse gases has also been attributed and associated directly to the firm’s attainment of market advantages. In their study on why firms volunteer to undertaken environmental regulations Arora & Cason (2006) established that companies with stringent social and environmental sustainability measures generate numerous market benefits that increase efficiency and helps companies to save money thus giving the firms a cost advantage. Arora & Cason (2006) noted that firms that take the option of going green in order to reduce emissions can also access markets that are environmentally sensitive. In addition, if buyers become environmentally sensitive and selective about their pollution habits, then a firm that goes green is able to retain its market. Firms that strive to reduce emission of green house gases by adopting greener measures such as the use of lean technologies are therefore faced with a myriad of advantages that put them at a more competitive position that the peers. This helps the firms to save money and increase its efficiency in production because such a firm has no fear of being painted negatively in terms of environmental and social aspects that surround the company’s operations. Fombrun (2000) observed that the reputation of the firm in the market adds up to the benefits gained by the firm in terms of its intangible assets. Fombrum argued that a negative reputation can increase the firm’s costs of operations because it results into loss of sales and thus a decrease in revenues generated by the firm. A negative reputation can be caused by campaigns carried out by non-governmental organizations against firms perceived as key threats to the environment. This has been the case in the extraction industry where NGOs undertaken serious negative campaigns against mining companies. Such campaigns results into consumer boycotts and also affect the social licence required by the firm to operate among the communities (Roger, 2001). This has serious costs repercussions because it take more time for such a firm to begins its operations because it has to convince all the stakeholders that proper mechanism are put in place to enhance sustainability performance. It also affects any intended expansion or developments of the company in future. In this respect, a firm that desire to enhance a positive reputation in the eyes of the public must also its course in going green and reducing emission of green houses gases. This will in turn result into greater acceptability of the company by the public and thus increase the productivity and efficiency of the firm (Alexander & and Buchholz, 2002). Greater productivity and efficiency in the firm’s operation will translate into increased revenues and thus the firm will gain a cost advantage. This is because greater acceptability of the firm due to positive sustainability performance means greater community support and thus an increase in the firm’s customer base. Such a firm can easily save money because it does not have to invest in fighting the negative publicity spread by the NGOs in the eyes of the public. In conclusion, sustainability performance is one of the key issues that has found its place in the boardroom of many corporations worldwide. Among the aspects of sustainability performance that CEOs and business managers are striving to achieve include reduction in emission of greenhouse gases as well as increased social responsibility to the society. As seen above, reduction in emission of greenhouse gases is a worthwhile approach that firms can use and apply to achieve higher levels of efficiency, save money and thus gain a cost advantage. References Alexander G. & and Buchholz, R. 2002. Corporate Social Responsibility and Stock Market Performance. Academy of Management Journal 1978 Vol. 21, No. 3 479-486 Arora, S., & Cason, T. (1996). Why do Firms Volunteer to Exceed Environmental Regulations? Understanding Participation in EPA’s 333/50 Program. Land Economics 72(4) 413-32 Cormier D., Magnan, M. & Morard, B. 2003. The impact of corporate pollution on market Valuation: some empirical evidence. Ecol. Econ. 8, 135-155 Dowell, G. Hart S. & Yeung, B. (2001). Do Corporate Global Environmental Standards Create or Destroy Market Value? Management Science, Vol.46, No.8. Handford, R. 2010. Global Trends in Sustainability Performance Management. Wal-Mart, May 13. KPMG, (2007). Sustainability Reporting in Australia”. The Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines represent the most widely adopted framework for sustainability reporting. Margolis, J., & Walsh, J. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative science quarterly, 48, 2, 268-305. Mir, M. and Rahaman, A. (2011), “In pursuit of environmental excellence: A stakeholder analysis of the environmental management strategies and performance of an Australian energy company”, Accounting, Auditing and Accountability Journal, Vol. 24, No. 7. Roger, C. 2001. Investing in Social Responsibility Risks and Opportunities. ABI Research Report, Association of British Insurers, London UK. Schaltegger, S., & Synnestvedt, T. (2002). "The link between 'green' and economic success: environmental management as the crucial trigger between environmental and economic performance", Journal of Environmental Management, Vol. 65, pp. 339-346. Read More