NATO ARW May 28-30, 2000

'Green Engineering and Management Methods and Tools for Central and Eastern Europe'

M Bennett executive summaries

Corporate Environmental Accounting

The term 'environmental accounting', even when restricted to the limited context of companies and similar organisations (as distinct from accounting at national, regional or global levels) can be found to be used ambiguously to refer to a number of related but distinct issues. These are: external reporting on corporate environmental performance; the implications of environmental performance for financial reports; environmental accounting within businesses (and similar organisations); and the implications of environmental performance for the financial sector, and in particular its potential effects on corporate valuation ('shareholder value'). This session will review these areas in turn, concentrating in particular on the latter two.

The current position and developments in external environmental reporting will be noted, but left to be developed in more depth in a subsequent tutorial session of the Workshop. Some elements of the accounting profession and financial regulators (such as the US Securities and Exchange Commission) have expressed concern that environment-related liabilities, in particular, may not be fully reported in conventional financial reports, so that these fail to disclose an accurate portrayal of companies' financial positions. However this is not a universally shared concern.

The main area of interest has been environmental accounting in the internal management of organisations, or 'environmental management accounting' ('EMA'), and the potential for closer links between the environmental management and the management accounting functions to generate mutual benefits. This rests largely on the premise that conventional accounting systems are frequently inadequate to identify and report internally the full scale of environment-related costs and benefits, so that the full effect of the organisation's environmental performance on its financial performance is obscured. A number of models have been developed to address this, including Baxter International's 'Environmental Financial Statement' and the Tellus Institute's 'Total Cost Assessment' model. Current research is examining the scope to extend this to include also measures of the external costs on the environment of an organisation's activities, which could become 'internalised' with more stringent environmental regulation and market-based changes.

The financial sector has been identified as a potentially key stakeholder, if it can be convinced of the relevance of environmental performance to future financial performance, because of its strong influence on corporate managements. Most evidence to date appears to indicate that most of this sector is as yet unconvinced of this premise, though this may be due to the absence as yet of techniques to express the effects of environmental performance in terms and concepts that are accepted by the financial sector. Research will be reported on which seeks to address this.

Corporate Environmental Reporting and Performance Measurement

In recent years a growing number of companies have chosen to publish reports on their environmental management and performance. The usual vehicle for this has been through stand-alone reports, published annually, and modelled to a certain extent on the well-established financial reporting process. Companies which have adopted this practice have claimed benefits from taking a more proactive approach to communicating with broad range of stakeholders; of creating an opportunity to explain the company's operations and environmental impacts; and to put current and past performance into the context of efforts being made to improve future performance, and the economic benefits created for society by the company's activities.

Both the decision to report, and the contents of any such report, are entirely voluntary and at the discretion of each individual company. This has led to a diverse variety of practice, which makes difficult inter-company comparisons of performance. On the other hand it has provided scope for a significant degree of creativity in the design of appropriate performance measures. ISO 14031, on Environmental Performance Evaluation within companies, has encouraged a more systematic approach to the design of a system of environmental performance measurement , and there are currently proposals to extend this to a standard on reporting externally.

There are currently moves to encourage a greater degree of standardisation of reporting practices, in particular through the Global Reporting Initiative. Other current developments include the extension of environmental reporting into a broader approach to sustainability reporting which would include also measures of social and economic performance (sometimes termed 'the triple bottom line'); moves to systematise methods of the independent verification of the accuracy of reports; and a trend away from annual stand-alone paper-based reports to reporting over the Internet.

This tutorial will take a participative approach, with groups of participants each examining a sample of leading corporate environmental reports and the performance measures reported therein, and reporting back on their findings to the group as a whole. The results of this will then be used as the basis for a review of environmental reporting and performance measurement more generally.