EMA involves identifying, analysing, managing and reducing the costs paid by businesses for materials, utilities and wastes in a way that can benefit the business and the environment.
Businesses generally spend substantial sums on materials and utilities, often involving significant wastage – but they can typically save between 1-3% of costs by putting simple resource and energy efficiency measures in place.
Producing more goods and services with fewer materials and utilities, and with less pollution and waste, can often help businesses generate significantly more profits without the need for increased turnover.
Accountants have a direct interest in controlling and reducing business costs and increasing profits – they are also ideally placed to work with other business managers to measure, monitor and control these costs.
Often, companies do not fully understand the implications of environmental factors on their business operations. The value of bringing accountants together with environmental managers, production directors, plant managers and so forth is often overlooked. Accountants are in a unique position to review business costs when producing the profit and loss account as part of the year-end financial reports and regular monthly and quarterly management accounts.
More than any other job function, they have the skills and experience to measure, allocate and control costs and also identify and plan financial budgets for improvement projects.
Applying EMA techniques gives companies the ability to take a more strategic view of how current and future environmental factors will affect the business’ short-term profits and longer-term competitive advantage. It also offers an opportunity for accountants to develop their services beyond the traditional core skills of accounts preparation, audit and tax.
Looking at the operating costs of consumption of materials and utilities and generation of waste will place any company in a strong position to improve resource productivity.
Take the following example of a case study from Envirowise, the government programme dedicated to maximising resource efficiency and minimising waste throughout UK industry. Bovince, a screen printing company with 57 employees, achieved cost savings of £181,000 per year – 5% of its annual turnover – by reducing its consumption of materials, utilities and generation of waste.
Despite increased competition, the company’s profits before tax increased from 3.2% in 1995 to 4.5% in 2000.
In conjunction with ACCA, CIMA, the ICAEW and ICAS, Envirowise has produced a detailed guide to EMA. Increase your profits with environmental management accounting (GG374) is aimed at helping management and financial accountants and financial managers use environmental management accounting techniques to identify priority areas for cost-effective environmental improvement and increased profitability. The guide describes the business benefits of environmental management accounting and explains how to:
- use the general ledger to identify costs and potential savings;
- account for the cost of wasted materials, energy and water;
- allocate environmental costs to different processes and activities;
- take steps to increase profits by reducing waste, energy and water costs;
- optimise information available from other management initiatives.
Reviewing the environmental costs of business operations will also help to identify financial risks and opportunities inherent in the company’s consumption of materials and utilities and generation of wastes.
Environmental taxes to discourage poor environmental performance (e.g. the landfill tax and climate change levy) and tax breaks to reward good environmental practice (e.g. the enhanced capital allowance scheme for energy-efficient equipment) are likely to become more common. Ultimately, it can only help to comply with environmental legislation, improving the company’s corporate reputation with its stakeholders in the process.
Insurers, regulators, investors, shareholders, employees, customers and communities will react more positively to a company that can demonstrate it is aware of its impact on the environment and is taking steps to improve its financial performance.
- Martin Gibson is programme director of Envirowise
Accountancy and the environment appear to be mutually exclusive issues, and while some may advise FDs to be kind to the environment through careful management of suppliers, others contend that accountancy – or the standards by which it should adhere, can do the work.
This is the controversial area of green or social reporting, which says companies should own up to the impact they have on the environment, spell out how they will reduce the damage and include this information in the annual report and accounts. The problem is, many people say, the impact on the environment cannot be ‘measured’.
ACCA disagrees, although its attack on environmental intransigence took on a hard edge earlier this year when it accused the International Accounting Standards Boards of not playing its part.
In a report, ACCA accused the IASB of failing to formulate accounting standards that recognise sustainable development. But the IASB seemed unfazed. A spokesman said: ‘ There has never been any significant demand for this in the capital markets.’
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