Sustainability and management accounting

Chapter 17Sustainability and management accounting17-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineSustainability for businessesEnvironmental management accountingEconomic, environmental and social impactsEnvironmental costsImproving supply chain management through measuring environmental and social impactsSustainability and performance measurementStrategic performance measurement systems (SPMS) and sustainabilityEnvironmental outcomes: capital expenditure analysisClimate change and management accounting17-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSustainability for businessesSustainable investments focus on achieving a sustainable economy, a sustainable environment and sustainable societyCorporate social responsibility (CSR) involves organisations taking into account the social and environmental impact of corporate activity when making decisionsMay increase profitabilityDetermines long-term survivalDemanded by stakeholders: customers, employees, investors 17-3Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEnvironmental management accounting (EMA)Consists of environmentally-related management accounting systems and practicesLife cycle costing, environmental cost accounting, environmental performance measures, assessment of environmental benefits, strategic planning for environmental managementEMA techniquesFinancially-oriented EMAPhysically-oriented EMA17-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithFinancially-oriented EMAEnvironmental costsCosts incurred to prevent, monitor and report environmental impacts and the cost of failing to comply with environmental regulationsCost of waste management systems, environmental training, legal activities and fines, record keeping and reporting, cost of remediation of environmental impactsEnvironmental product costingInvolves tracing direct and indirect environmental costs to products The cost of waste management, permits and fees, recycling17-5(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithFinancially-oriented EMA (cont.)Environmental performance indicatorsUsed to set targets, and monitor environmental performanceEnvironmentally-induced capital expenditureDriven by the desire to improve the organisation's environmental impact, or to comply with environmental regulationsEnvironmentally-induced revenuesArise from positive environmental actionsIncreased revenue from the sale of recycled materials, from higher selling prices for greener products, increased customer satisfaction, improved employee morale 17-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithPhysically-oriented EMATechniques that focus on supplying information to management that accounts for the organisation’s impact on the natural environmentKilograms of noxious waste emissions, kilowatt hours of electricity used, decibels of noise Used for tactical decisions and capital expenditure decisions17-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEnvironmental management systems (EMS) and EMAEMS—systems that organisations put in place to manage their environmental performanceMay include recycling systems, systems to monitor and control levels of liquids, material and atmospheric discharge and wasteISO 14001 is an international standard for EMA and its auditEMS and adoption of ISO 14001 requires that environmental performance be measured against policies, objectives and targets17-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEconomic, environmental and social impactsEconomic and social impacts are difficult to identify and measure, but may be substantialFuture ecological and social impacts are not yet knownCurrent work practices may have future environmental and social consequences which we cannot predictMany costs and benefits are external to the organisationDifficult to detect and assessMany costs and benefits are difficult to measure in financial terms17-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith17-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEnvironmental costsThe costs that an organisation incurs to prevent, monitor and report environmental impactsMay extend into the futureUS EPA defines 5 tiers of environmental costsPrivate costs (tiers 1 to 4) and societal costs17-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)17-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEnvironmental costs (cont.) Environmental costs can be analysed using the same framework as used to analyse quality costsPrevention activitiesSolve environmental problems before they occur, or turn problems into opportunitiesCosts of these activities are ‘investments’, as they reduce the future outlays and provide long-term benefitsAppraisal activitiesMonitor the levels of environmental impactMeasures damage, inspects processes and products, audits supplier performance17-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Environmental costsInternal failure activitiesTo correct breakdowns discovered in appraisal activitiesCost of cleaning the plant after spillage, cost of occupational health and safety claims by employeesExternal failure activitiesOccur when resolution and remediation efforts fall outside of the organisation’s managementCost of cleaning up polluted sites, fines for environmental damage, lost profits associated with damage to reputation17-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith17-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithImproving supply chain management through measuring environmental and social impactsSuppliersAn organisation may be willing to pay more where suppliers have reduced environmental and social impactsOrganisations may work with suppliers to adopt more responsible environmental and societal practices; this can lead to cost reductionsFormal supplier evaluation can include assessment of a range of environmental and social factors, as well as financial factors17-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Improving supply chain management through measuring environmental and social impacts (cont.)CustomersAn organisation can work with customers to reduce the adverse environmental and social impact of productsRecycling and disposal programsSubstitution of materialsCost savingsSometimes customers may be willing to pay more for a more environmentally-friendly productMarketing and strategic considerations need to be considered in such pricing decisions17-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSustainability and performance measurementSustainability reporting–formal reporting of information about corporate sustainability that describes the economic, environmental and social impact of the organisation’s activitiesMay also be called triple bottom line reporting, social reports, social audits, environmental reportsInside-out approach–measures developed within the business and then fed through to sustainability reportsOutside-in approach–reported measures of sustainability performance driven by external regulations or guidelines17-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Sustainability and performance measurement (cont.)Global Reporting Initiative (GRI) Guidelines are regarded as the global standard for sustainability reporting48 sets of core indicators + 31 additional indicatorsIncludes unique indicators for certain industriesDow Jones sustainability index (DJSI) compares the sustainability performance of the world’s largest companiesAustralian SAM Sustainability Index (AuSSI) assess the sustainability performance of Australian companies17-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Sustainability and performance measurement (cont.)ISO 14031 environmental performance indicatorsOperational performance indicators include measures of waste levels and energy consumption relative to sales or some other activityManagement performance indicators measure the efforts of management to improve the environmental performance of their organisationEnvironmental condition indicators measure the actual condition of the environment at a local, national or global levelMay be reported as absolute measures or as a percentage relative to a baseline17-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStrategic performance measurement systems (SPMS) and sustainabilityAdding sustainability to the balanced scorecard Sustainability measures may be included within the four perspectivesAn environmental or social perspective may be added to the BSC A separate sustainable scorecard may be developedStrategy maps may be developed to identify cause and effect relationships between objectives, strategies and to guide the selection of performance measures17-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith17-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEnvironmental outcomes: capital expenditure analysisInclusion of environmental costs and benefits may make financially non-viable projects more attractive or financially viable projects less attractiveWeighting given to environmental factors depends on the organisation's values and preferencesSome capital expenditure analysis may be driven by the need to be environmentally responsible17-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith17-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithClimate change and management accountingClimate change is the increase in temperature and changes in other climate characteristics which has been observed since the mid-1980sA result of the build up of gases (particularly carbon dioxide) which are trapped in the Earth’s atmosphere (the “greenhouse effect”)Actions to reduce greenhouse gas emissions are called “mitigation”, and actions to respond to climate change are called “adaptation”An emissions trading scheme (ETS) mitigates climate change and reduces the cost of emissions control17-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Climate change and management accounting (cont.)Implications for businessMany managers are yet to respond to climate change through adopting sustainability approachesThe ETS will increase awarenessOrganisations that respond to climate change may not adopt broader sustainability agendaImplications for management accountingThe five tier cost framework of the US EPA, may provide a useful way to identify, classify and measure costs associated with climate change17-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Climate change and management accounting (cont.)Organisations that participate in the ETS and wish to promote themselves as carbon neutral need to measure their greenhouse gas emissions They will also need to understand their “carbon footprint”, the quantity of greenhouse gas emissions they produceInternational protocol (WRI/WBCSD) outlines three levels of measurementScope 1 – direct emissions controlled by the businessScope 2 – indirect emissions from purchased electricity consumed by the businessScope 3 – other indirect emissions caused by business activities, from sources outside of the business17-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Climate change and management accounting (cont.)Management accountants can play a role byCollecting and analysing non-financial informationGathering information from across the value chainManaging information systems and large data basesFor exampleEstimate the cost of emissions produced by products, department and customers Identify carbon non-value-added activitiesUnderstand carbon driversSupplier evaluation may include supplier emissionsQuantity of emissions produced and causes of emissions may be measured17-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummarySustainability involves considering the economic, environmental and social impacts of an organisation's activitiesEnvironmental management accounting (EMA) consists of environmental-related management accounting systems and practicesEnvironmental and social impacts can be difficult to recognise and to measureEnvironmental costs can be classified and managed using a five-tier framework17-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Summary (cont.)Environmental and social costs can be input into management decision making, including capital expenditure analysisPerformance measurement systems, including SPMS, can be adapted to include environmental and social measuresExternal frameworks include ISO 14000 series and the GRI guidelinesManagement accountants are well equipped to produce a range of information that will help businesses respond to climate change17-30Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith