ACCA P1 Governance, Risk and Ethics - 2011 - Study text - Emile Woolf Publishing
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Paper P1: Governance, risk and ethics
344 © Emile Woolf Publishing Limited
the balanced scorecard and sustainability balanced scorecard
the sustainability assessment model (SAM) and full-cost accounting (FCA).
2.4 ‘Environmental footprint’ for individual companies
It is possible to talk about an environmental footprint for individual companies
rather than countries, although not as common. A company can measure its
environmental footprint through a series of measurements. The measurements
appropriate for each individual company might vary according to the nature of its
operations, but should relate to the following environmental issues:
the company’s consumption of materials subject to depletion (such as quantities
of livestock, timber or non-farmed fish) and non-renewable resources (such as
oil, natural gas and coal): also the company’s use of other key resources such as
land
the pollution created by the company’s activities, measured for example in terms
of emissions of carbon dioxide, chemical waste or spillages of oil
an assessment, in either qualitative or quantitative terms, of the broader effect of
the company’s resource consumption and pollution on the environment.
2.5 Triple bottom line reporting
The term ‘triple bottom line’ was ‘invented’ in 1994 by J Elkington. Its aim is to
encourage companies to recognise social and environmental issues in their business
models and reporting systems. This method of reporting is encouraged by the
Global Reporting Initiative (GRI), an internationally-recognised body that promotes
sustainability reporting.
The ‘triple bottom line’ gets its name because companies report their performance
not simple in terms of profit: they provide key measurements for three aspects of
performance:
economic indicators
environmental indicators, and
social indicators.
Triple bottom line reporting is therefore providing a quantitative summary of a
company’s economic environmental and social performance over the previous year.
Economic indicators will include measurements relating to:
sales revenue
profits, earnings and earnings per share
dividends per share
global market share (as a % of the total market)
in some industries, such as car production, units of sale worldwide.
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Environmental indicators might include measurements relating to:
reducing the ‘intensity’ of materials in products and services
reducing energy intensity
minimising the release of toxic materials/pollutants
improving the ability to recycle material
maximising the use of renewable resources
extending the life of a product.
Example
One major global company using triple bottom line reporting reported its
environmental performance in terms of:
global energy use, measured in thousand of GWh
global carbon dioxide emissions, measured in metric tons
production of non-recycled waste, measured in metric tonnes
the number of manufacturing sites that had been awarded an ISO 14000
certificate (which is explained later).
The same company reported, as social indicators:
its donations to communities and sponsorships, measured in US dollars
diversity: the percentage of its employees who were female and the percentage
who came from minority groups
the number of discrimination charges brought against the company during the
year
employee satisfaction, based on a census of employee opinion
the recordable injury rate per 1,000 employees.
Weaknesses in triple bottom line reporting
There are several weaknesses with triple bottom line reporting.
There are no widely-established standards for triple bottom line reporting, and
no standard methods for measuring social and environmental impacts. It is
therefore usual to compare the sustainability of one company with the
sustainability of another. (The work of the Global Research Initiative or GRI is to
standardise measurements for the triple bottom line. It has been publishing
Sustainability Reporting Guidelines since 1999. These were updated and
amended in 2002.)
If the social and environmental measures are not subject to independent audit,
there might be doubts about the reliability of the data presented in a company’s
report.
Paper P1: Governance, risk and ethics
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2.6 Balanced scorecard and sustainable balanced scorecard
The concept of the balanced scorecard was suggested by Kaplan and Norton in the
1990s, as a method of setting targets and measuring performance, for both entire
companies and individual managers within a company.
The balanced scorecard is a ‘strategy map’ divided into four element or
perspectives:
a financial perspective
a customer perspective
an internal perspective (operations)
an innovation and learning perspective.
For each perspective, goals, targets and tasks are established, with indicators of
performance for comparing actual results against the target. The purpose of a
balanced scorecard is to prevent management from directing all their attention to
short-term financial considerations. The four perspectives give suitable importance
to short-term profitability, but also provide for non-financial and longer-term
strategic issues.
A sustainable balanced scorecard has been developed by Moller and Schaltegger.
This adds a ‘non-market’ perspective to the balanced scorecard, for the
environmental and social impacts of the company’s operations or the manager’s
activities. This type of scorecard therefore includes an element of accounting for
sustainability.
2.7 Sustainability Assessment Model (SAM) and full-cost accounting (FCA)
The Sustainability Assessment Model (SAM) measures the impacts on sustainability
of a product over its full life cycle, from raw material extraction through the
production process to its final consumption. These impacts:
the direct economic cost of the product, but also
the direct impact of the company’s operations on society and the environment,
and also
the broader social costs and benefits.
The total impacts are measured as a cost, known as full cost, and the measurement
system supporting the Sustainability Assessment Model is called full-cost
accounting or FCA, because it includes environmental and social costs as well as
economic costs.
The SAM is also used to measure the performance of a company on an index of
sustainability (SAMi). This measures the percentage distance that the company is
from achieving sustainability.
The SAM and FCA approach
The SAM is a four-step approach to measuring the impacts of a project or product
over its entire life cycle, from cradle to grave.
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Step 1. A SAM exercise is established. The object of the exercise is identified, that
will be subjected to evaluation. This might be a product, a process, a part of an
entity’s operations or the whole of its operations.
Step 2. The boundaries of the SAM evaluation are defined. All the costs and
benefits to be included, including environmental and social costs or benefits, are
identified over the full life cycle of the product (or other object of the exercise).
Step 3. The impacts of the product are measured under four headings:
- economic
- resource use
- environmental
- social.
Some of these measurements might be in money terms, but many of the costs
and benefits will be non-monetary measures, including physical (environmental)
measures.
Typically, the economic impacts and social impacts should normally be positive
(benefits), whereas the resource use and environmental impacts are negative.
Step 4. These non-monetary measures are converted into a common basis of
measurement: money. This total money measurement provides the full cost
analysis of the product, process or operation.
‘None of these steps is easy to do and a great deal of judgement will be exercised at
each stage…. While at some levels FCA appears to be conceptually straightforward,
it is not an easy technique to develop and use in practice. In particular, FCA requires
substantial amounts of physical data about the object of the exercise and requires
extensive modelling of complex real-world relationships. The data required for FCA
is usually only available in organisations that are at the forefront in responding to
the environmental agenda’ (Bebbington, Gray, Hibbitt and Kirk, 2001). The main
problem is deciding how to convert the physical measurements of environmental
impacts into money measures.
Making use of FCA
Full-cost analysis might show the entire cost of a product or an activity, including its
social and environmental impacts (or ‘externalities’). However, it might have
benefits for strategic planning in companies where it might be expected that in
future companies might be required to pay for its ‘externalities’, so that the
‘externalities’ become internal costs.
For example, companies might in the future be required to pay for their impact on
the environment by:
paying a carbon tax for their carbon emissions
having to take back products from customers at the end of their useful life, for
recycling or disposing of the materials
having to comply with stricter environmental standards.
Companies that are aware of the full costs incurred by their products should be in a
better position than other companies to plan reductions in those costs, by acting
now to reduce carbon emissions, improve environmental standards and so on.
Paper P1: Governance, risk and ethics
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2.8 Sustainability reporting: concluding remarks
For various reasons, companies are increasingly producing sustainability reports in
one form or another. The reasons that seem to be persuading companies to report on
sustainability include competition, risk management, emerging markets, corporate
reputation and, in some countries, mandatory minimum reporting requirements.
However, there is (as yet) no universal agreement about the meaning of
sustainability, which acts as a restraint on the development of suitable reporting.
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Environmental management systems, environmental management
accounting and environmental audit
Environmental management systems: ISO 14000 and EMAS
Environmental management accounting (EMA)
EMA techniques
Social and environmental reporting
Social and environmental audit / environmental audit
3 Environmental management systems, environmental
management accounting and environmental audit
3.1 Environmental management systems: ISO 14000 and EMAS
An environmental management system is a broad general term for any system used
by an entity to monitor and manage the impact that its products and operations
have on the environment. The aims of a management system might be to:
minimise the negative impact of operations on the environment (damage to air,
water or land)
comply with environmental laws and regulations
make continual improvements in either of the above areas.
An environmental management system includes an environmental information
system. Information is needed to:
monitor compliance with environmental laws and regulations, and/or
monitor the implementation of the company’s own environmental policies.
An information system may provide, for example, information about physical
quantities of emissions of waste or toxic materials, resources in the environment, the
environmental characteristics of the company’s products or services, information
about environmental ‘incidents’ such as spillages of waste or toxic materials.
Guidance for companies in the structuring and operating of an environment
management system is provided by a number of international.
ISO 14000
The International Standards Organisation (ISO) has issued a series of standards on
environmental management systems, known as the ISO 14000 series of standards.
They are standards that specify a process for managing, controlling and improving
an entity’s environmental performance.
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They specify an environmental management system, provide guidance for using the
system and explain how a company’s environmental management system can be
audited and receive an ISO 14000 certification.
ISO 14001, one of the standards in the 14000 series, provides general guidance on:
the general requirements for an environmental management system
environmental policy: an entity must have an environmental policy in existence,
as a condition of meeting ISO 14000 requirements
planning: an entity should declare its main environmental objectives, which
should be primary areas of planning the company’s environmental programme
and improvement process
implementation and operation: a system must establish procedures, work
instructions and controls to ensure that the environmental policy is implemented
and the planning targets are achieved
checking and corrective/control actions
management review: there should be a regular review of the environmental
management system to ensure that it is suitable (for the entity and its objectives)
and effective in operation.
The standard can be applied by any company in any industry, any where in the
world. Companies wishing to obtain ISO 14000 certification will be audited against
the requirements of this standard. Having obtained the certificate, companies will
be subject to regular audits to ensure that they are maintaining compliance with the
requirements of ISO 14000.
Another standard in the series, ISO 14004, provides more detailed guidance,
including guidance on how to take a structured approach to setting environmental
targets and objectives and establishing and implementing a system for monitoring
and control.
Companies that apply ISO 14000 and obtain ISO 14000 certification will therefore
have a management system for:
identifying the aspects of its business that have an impact on the environment
monitoring changes in legislation and regulation on environmental issues
producing objectives/targets for improvement
planning to achieve these improvements, and
conducting regular reviews for continual improvement.
ISO 14000 does not specify targets for achievement or standards of environmental
performance. It provides guidance on a management system for the management of
environmental issues.
The benefits of obtaining an ISO 14000 certificate
Companies must be ‘audited’ by an independent external expert before they are
awarded an ISO 14000 certificate. Having obtained a certificate, they are therefore
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able to provide an assurance that the company has an active concern for
environmental issues to:
employees, and
individuals and groups outside the company, such as the government, the
public, customers and investors/shareholders.
Certification also allows companies to make validated claims about the
environmental effect (‘environmental-friendliness’) of their products.
EMAS
EMAS is the Eco-Management and Audit Scheme. It is a scheme operated by the
European Union which recognises companies that are continually improving their
environmental performance. Organisations registered with EMAS comply with law,
run an environment management system and publish environmental statements
which are independently-verified.
EMAS is very similar in concept to ISO 14000.
3.2 Environmental management accounting (EMA)
Management accounting is concerned with the provision of information to
management, to help management make decisions. Environmental management
accounting has the same purpose, but it identifies environmental costs and benefits,
which might be measured in either physical terms or money terms.
Environmental management accounting (EMA) provides information that supports
the operation of an environmental management system. It provides managers with
financial and non-financial information to support their environmental management
decision-making. EMA complements other ‘conventional’ management accounting
methods, and does not replace them.
The main applications of EMA are for:
estimating annual environmental costs (for example, costs of waste control)
budgeting and setting targets for improvements in environmental performance
product pricing
investment appraisal (for example, estimating clean-up costs at the end of a
project life and assessing the environmental costs of a project)
identifying opportunities for cost savings
estimating savings from environmental projects.
Although environmental management accounting information is intended for use
mainly by management, it is also included in reports that the entity publishes
externally, such as sustainability reports/environment reports.
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Example
Environmental management accounting can be used to identify opportunities for
cost savings.
An example might be the assessment of a proposal to replace the use of toxic
materials with a non-toxic alternative material that has a higher purchase cost from
the supplier.
An analysis of environmental costs might show that the company would benefit
from a switch to non-toxic materials in the form of:
removing the cost of having to make reports to the regulatory authorities on
toxic materials, and
a reduction in materials handling costs.
The benefits might exceed the higher costs of the non-toxic materials.
Environmental management accounting is also used in the assessment of using
recycled materials and making constructive use of ‘waste’ materials.
A framework for environmental management accounting
Burritt et al (2001) suggested a framework for EMA based on providing information
to management:
that is gathered from internal or external sources
as monetary or physical measurements: physical measures of energy
consumption, pollution and so on can be converted into a monetary measure
as historical or forward-looking information
where the focus is short-term or longer-term
that consists of routine reports or ad hoc information.
Four of these elements of EMA are shown in the following table.
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Environmental management accounting (EMA)
Monetary EMA Physical EMA
Short-term
focus
Long-term
focus
Short-term
focus
Long-term
focus
Historical
orientation
Routine
reporting
Environmental
cost
accounting
Analysis of
environmentally-
induced capital
expenditures
Material and
energy flow
accounting
Accounting for
environmental
capital impacts
Ad hoc
(one-off)
information
Historical
assessment of
environmental
decisions
Environmental
life cycle
costing,
environmental
target costing
Historical
assessment of
short-term
environmental
impacts, e.g. of
a site or product
Post-investment
assessment of
environmental
impacts of
capital
expenditures
Future
orientation
Routine
reporting
Environmental
operational
budgets and
capital
budgets
(monetary
reporting)
Environmental
long-term
financial
planning
Environmental
long-term
physical
planning
Ad hoc
(one-off)
information
Relevant
environmental
costing (e.g.
special orders)
Environmental
life cycle
budgeting and
target costing
Assessment of
environmental
impacts
Physical
environmental
investment
appraisal.
Specific project
life cycle
analysis
3.3 EMA techniques
Environmental management accounting techniques include:
re-defining costs
input-output analysis
environmental activity-based accounting
environmental life cycle costing.
Re-defining costs
The US Environmental Protection Agency (1998) suggested terminology for
environmental costing that distinguishes between:
conventional costs: these are environmental costs of materials and energy that
have environmental relevance and that can be ‘captured’ in costing systems
potentially hidden costs: these are environmental costs that might get lost within
the general heading of ‘overheads’
contingent costs: these are costs that might be incurred at a future date, such as
clean-up costs
image and relationship costs: these are costs associated with promoting an
environmental image, such as the cost of producing environmental reports.
There are also costs of behaving in an environmentally irresponsible way, such
as the costs of lost sales as a result of causing a major environmental disaster.