Environmental Management Accounting
There are various definitions of Environmental Management Accounting (EMA), but essentially it involves refining a management accounting system so that it more tightly and rigorously accounts for environment related costs. The intention is to identify environmental costs in order to enable more informed decisions about how these costs can be better managed and integrated into operational and strategic decision-making.
The drivers behind why an organisation might consider undertaking an EMA initiative include a mix of external and internal environmental and financial pressures. These could include increasing community, government and market expectations as to how a business manages its environmental impacts, as well as an organisation seeking out new opportunities to reduce costs.
The benefits of EMA include: identifying cost saving opportunities; better decisions with regard to product mix and pricing; avoiding future costs through better investment decisions; and, financial justification for environmental initiatives.
Like the broader field of corporate environmental accounting, EMA is an emerging and dynamic field that can be considered work in progress. A working description of EMA can be considered as follows:
EMA involves the more transparent accounting of environment related costs within an organisation's management accounting system. Management accounting systems have the purpose of providing cost information for internal management use in decisions such as cost management, product pricing and investment appraisal. EMA mainly focuses on identifying the private environmental costs that would normally be captured within an organisations accounting system. Often these environmental costs are lost in general overhead accounts and therefore not focused on by management.
The environmental costs looked at through EMA would include costs such as those relating to waste management, energy consumption and water usage. The United Nations Division for Sustainable Development publication Environmental Management Accounting Procedures and Principles (2001) provides a checklist of possible costs to consider when undertaking an EMA initiative.
Interest in EMA is being generated by the growing appreciation of the lack of awareness and understanding that people within an organisation generally have with respect to the magnitude of the environmental costs being generated by their organisation. This in turn can mean that many opportunities for cost savings and environmental improvement are being lost.
One of the main objectives with EMA is to get over the situation whereby conventional management accounting systems have attributed many environmental costs to general overhead accounts. This results in the situation where environmental costs remain hidden from the attention of management. Whilst many environmental costs can be considered hidden, they are also often found to be under-estimated. For example, waste costs are often simply identified as the costs associated with the actual disposal, rather than also including the cost of lost raw materials, licence fees etc.
When environmental costs are attributed to general overhead accounts the allocation of these costs to the production of different goods and services with the accounts often bears little resemblance to where the environmental costs are actually incurred. This results in the subsidisation of costs between products and inaccurate pricing of products.
Central to many approaches to EMA are the concepts of material tracking, activity based costing (ABC) and full-cost accounting. These concepts all aim to more accurately identify where environmental costs are being incurred as well as report their true value within the accounts. As a result, undertaking an EMA initiative often not only leads to a better understanding of environmental costs, but also a much better understanding of the physical process and environmental impacts generated by an organisation.
The Department of the Environment, Water, Heritage and the Arts is keen to support the exploration, development and use of EMA within Australia. More detailed information is available via the Environmental Management Accounting Project that provides a comprehensive introduction to EMA as well as case studies involving Australian companies. Further information on the use of EMA in local government is also provided at EMA in Local Government.