Harvest (online); Bi-Annual Spl.

Environment Issue Volume 1, 2017

ENVIRONMENTAL ACCOUNTING – NECESSITY IN THIS DYNAMIC BUSINESS

ENVIRONMENT

Debayan Ray
Guest Lecturer, Department of Commerce,
Prabhu Jagatbandhu College, Andul-Mouri, Howrah.
Emailid:[email protected]

Abstract
In current era of highly volatile business environment organizations are facing emerging
challenges in environmental issues and this environment become major interest area of corporate
social responsibility (CSR) and social and environmental accounting (SEA) among business,
Governments, public policymakers, investors, unions, environmentalists and corporate and
industrial houses in today’s word. In order to sustain in this competitive world most of the
industrial and corporate houses globally are incorporating the concept of environmental element
in their daily business operations. Numerous movements towards protecting environmental
pollution and environmental degradation helped to grow an awareness of the value of the world
in which we live, and our obligations to it. As that awareness grew, the public and industry alike
began to see the potential for major environmental problems. This realization brought
environmentalism into the world of business. In recent years everyone in world have witnessed
increasing concern for environmental degradation and degeneration, because of pollution of
various types, viz. air, water, sound, soil erosion, deforestation, etc. which leads to spoils human
health, reduces economic productivity and loss of amenities. Today businesses face a ladder of
environmental regulations and industries from manufacturing to technology must now consider
their ecologic and social impact. Financial health and profitability seldom happen by accident,
and without proper planning and foresight, navigating environmental legislation and social
reporting could drain a business dry. The present research paper concentrates on exploring the
concept of environment accounting (green accounting) and its practices, cost benefit analysis,
problems and reporting along with that current literature focuses on environmental sustainability
and lacks quantitative ways to make capital budgeting decisions at corporate level in India. This
paper also focus on the insight view about the cause and effects of environment pollution on
human by diseases and problems, animals and trees/plants and how corporate and industrial
houses deal with this by taking remedial steps. According to author, time is still left in the hands
to use the advance resources to balance the environment for living and initiates the breathed
intellectuals to live friendly with environment.

Key Words: Green Accounting System, Resource Accounting, Environment, Protection,

Accounting, Environmental Cost Benefit analysis

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1.0.Introduction:
Accounting serves several functions in an enterprise. One, financial accounting, is a score
keeping and reporting tool; a standardized means for compiling and communicating financial
information to external audiences. Another, management accounting, is supplying information
that helps managers to plan and control enterprise activities, and to evaluate performance of an
enterprise, both profitability performance and environmental performance. This includes
complete systems for identifying, monitoring, and reporting corporate environmental impacts,
and for integrating those impacts into corporate decisions on product costing, product pricing,
capital budgeting, product design, and performance evaluation. Responsibility towards
environment has become one of the most crucial areas of social responsibility. Recent years have
witnessed rising concern for environmental degradation, which is taking place mainly in the form
of pollution of various types, viz. air, water, sound, soil erosion, deforestation, etc. It is a
worldwide phenomenon. It spoils human health, reduces economic productivity and leads to loss
of amenities. The developing countries like India are facing the twin problem of protecting the
environment and promoting economic development. A tradeoff between environmental
protection and development is required. A careful assessment of the benefits and costs of
environmental damages is necessary to find the safe limits of environmental degradation and the
required level of development.CSR (corporate social responsibility) is a concept which considers
that how much company spends on social purpose and human resource and environment. The
growing influence of CSR on the development of financial accounting and management
accounting is visible from few decades. When there are few companies in USA which were
accused for causing social problems, they are called and find a solution of this, then CSR
accounting born. CSR accounting worked in the field of external and internal reporting so that all
relevant parties could get relevant information on the social outcomes of given companies
economic activities. Green accounting is a type of accounting that attempts to factor
environmental costs into the financial results of operations. It has been argued that gross
domestic product ignores the environment and therefore decision makers need a revised model
that incorporates green accounting. In this scenario where environmental pollution is increasing
day by day, environmental accounting not only has financial impact but also it has environmental
and social impact. The CSR concept is extremely broad in cover responsibility of human
resource, local community, society etc.
Today an increasing number of companies and other organizations are engaging in
environmental management as part of their management strategies to specify measures for
dealing with environmental issues and to internally carry out environmental conservation
activities. Environmental accounting is a tool to supplement environmental management.
Environmental accounting data is not only used by companies or other organizations internally,
but is also made public through disclosure in environmental reports. The disclosure of
environmental accounting data as one of the key elements in an environmental report enables
those parties utilizing this information to get an understanding of the company’s stance on
environmental conservation and how it specifically deals with environmental issues. At the same
time, a more comprehensive grasp of the companies and other organizations’ environmental
information can be obtained.

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2.0. Research Methodology

Being an explanatory research it is based on secondary data collected from various books,
national and international Journals, government reports, articles, newspapers and magazines,
publications from various websites which focused on various aspects of environmental
accounting and environmental reporting guidelines, rules and regulations. Considering the
objectives of study descriptive type and informative type research design is adopted to have more
accuracy and rigorous analysis of research study.
3.0. Literature Review
3.1.Necessity of Environmental Accounting
Accounting for environment has become increasingly relevant to enterprises because issue of the
availability of natural recourses and pollution of the environment has become the subject of
economic, social and political debate throughout the world. Steps are being taken at the national
and international level to protect the environment and to reduce, prevent and mitigate the effect
of pollution. As a result there is a trend for the enterprise to disclose the community large data
related to environment policies, environment management programmes and the impact of
environment performance on their financial performance. The quantitative management of
environmental conservation activities is an effective way of achieving and maintaining sound
business management. In other words, in carrying out environmental conservation activities, a
company or other organizations can accurately identify and measure investments and costs
related to environmental conservation activities, and can prepare and analyze this data. By
having better insight into the potential benefit of these investments and costs, the company can
not only improve the efficiency of its activities, but environmental accounting also plays a very
important role in supporting rational decision-making. In addition, companies and other
organizations are required to have accountability to stakeholders, such as consumers, business
partners, investors and employees, when utilizing environmental resources, i.e. public goods, for
their business activities. Disclosure of environmental accounting information is a key process in
performing accountability. Consequently, environmental accounting helps companies and other
organizations boost their public trust and confidence and are associated with receiving a fair
assessment.
The environmental accounting and reporting is a proposed discipline that deals with the
consideration, and ultimately the inclusion into the customarily accounting procedures, general
and specific issues related to environmental and social impacts, regulations and restrictions. Safe,
environmentally sound, and economically viable energy production and supply policies should
be essential part of any accounting and management issues. The start of this proposed
consideration and inclusion of EA/ER should be in college syllabi in the form of collateral
reading assignments, case studies and public and scientific student awareness in intermediate and
advanced accounting courses in order to explore current state and future issues of environmental
accounting and reporting.

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3.2.Environmental Accounting under These Guidelines

There are many dimensions to environmental accounting.
 Environmental accounting covers two distinct contexts. It can be used to provide insight
on the interaction between the environment and a nation or region, or can target the
activities of a company or other organization.
 Environmental accounting, within the framework of these guidelines, mainly focuses on
companies and other organizations. Herein the term company refers not only to private
corporations but also includes such organizations as public interest companies and
municipal governments.
 Information obtained from environmental accounting by companies is given in two
forms: monetary value and physical units. Explanations accompany all numerical figures.

Environmental accounting, as described within these guidelines, is composed of three key

facets:
Environmental conservation cost (monetary value), environmental conservation benefits
(physical units), and the economic benefit associated with environmental conservation activities
(monetary value). Put in other words, environmental accounting is structured to identify,
measure and communicate a company’s activities based on its environmental conservation cost
or economic benefit associated with environmental conservation activities, the company’s
financial performance which is expressed in monetary value, and its environmental conservation
benefits, the organization’s environmental performance, which is designated in physical units.

Identify cost and benefits of environmental conservation activities, and provide the best
possible means of quantitative measurement and support communications

FinancialEnvironmental Environment Environmental

Environmental Accounting
PerformanceConservation cost
ConservationPerformanceBenefits

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3.3. History of environmental accounting

The first environmental accounts were constructed in several European countries working
independently of each other. Norway was one of the first. Influenced by the publication of Limits
to Growth (Meadows et al. 1972) and a burgeoning environmental movement, Norwegian
officials were concerned that their natural resources, on which their economy is relatively
dependent compared with other European countries, would run out. They, therefore developed
accounts to track use of their forests, fisheries, energy, and land. In the 1980s, they developed
accounts for air pollutant emissions, which were closely tied to the energy accounts. The energy
accounts were integrated into models used for macroeconomic planning, taking into
consideration the roles of resource-based sectors in economic growth. The Netherlands was also
a leader in the development and adoption of environmental accounting. Dutch interest in this
area originated with the work of Roefie Hueting, who developed and sought to implement a
measure of sustainable national income that would take into account the degradation and
depletion of environmental assets resulting from economic activity. Although his approach was
not implemented at that time, his work led the national income accountants to develop the
national accounts matrix including environmental accounts (NAMEA), which builds on portions
of the national income accounts by adding physical data on pollutant emissions by sector. The
NAMEA approach has been adopted by Eurostat, implemented in many other European
countries, and integrated into the environmental accounting procedures developed. France was a
third early adopter of environmental accounting. In the 1980s, it began developing an approach
termed the Comptes du patrimoine, or patrimony accounts. These involved an integrated system
structured around three distinct, but linked units of analysis.
First natural, cultural, and historical resources were to be measured in physical terms and their
stocks and flows quantified. Second, places were to be organized into geographic accounts,
giving physical data about assets organized by location and by ecological and land
characteristics. Third, people and institutions were to be described in both physical and monetary
terms in agent accounts, which were to be linked to data about how and where each agent used
resources. Portions of this system were constructed, particularly those focused on forests and
water, but its complexity made it difficult to implement fully (Hecht 2000). An accounting effort
that had considerable influence on the field was a study of Indonesia under taken by the World
Resources institute (Repetto et al. 1989). The authors estimated what GDP might have been, had
natural resources been depreciated in the same way as manufactured ones. They, then compared
trends in conventional GDP with trends in their environmentally adjusted measure over a period
of 15 years. The results show that Indonesian growth rates would have been considerably lower
with the adjusted GDP than in the conventional accounts. Though widely criticized on technical
grounds and rejected by the Indonesian government, this study has been very influential. It was
written for a lay audience and distributed widely, and did much to stimulate interest in the field.
Another early accounting project took a very different approach. In the late 1980s, US
Environmental Protection Agency (EPA) undertook the development of a set of pilot accounts
for the Chesapeake Bay region of the eastern United States (Grambsch et al. 1989). This work
was led by an economist, Henry Peskin, who felt that the accounts should incorporate the full
value of non- marketed goods and services, and that all changes in value of capital should be
deducted from gross indicators to calculate net ones, rather than adjusting only for changes
attributable to economic activity. Peskin also brought this approach to USAID-funded work in

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the Philippines. These accounts, built by the Department of Natural Resources rather than the
accounting agency, added in the value of non-marketed services of the environment, subtracted
harm caused by pollution, and calculated an environmental NDP by subtracting the depletion of
natural capital and adding in both the natural growth of forests and new discoveries of minerals
(ENRAP 1999).

3.4.Countries adopting environmental accounting

Norway: Norway was the first country in the world to prepare environmental accounts in the
1970s. It collected data on energy sources, fisheries, forests and minerals to address the issue of
resource scarcity. Subsequently, the country had added data on air pollutant emissions in its
environmental accounts. After feeding environmental accounting data into the national economy,
policymakers in Norway assess the energy implications of alternative growth strategies.
Philippines: The Philippines Environmental and Natural Resource Accounting Project
(ENRAP) have been working on environmental accounts since 1993. Treating the environment
as a productive sector in the economy, they integrated the valuation of pollution impacts, non-
marketed goods and services and other economic aspects of the environment into conventional
accounts. Though, this method of preparation of environmental accounts different from SEEA,
government agencies and researchers in Philippines get a rich array of data from their accounts
for policymaking and analysis.
Namibia: In Namibia, the SEEA approach to environmental accounting has been adopted in a
phased manner. It is focused on several key natural resources sector and is designed to answer
such questions, as how to allocated water among competing uses and how land degradation,
affects the productivity of range land.
Netherlands: in Netherlands, the National Accounting Matrix, including Environmental
Accounts (NAMEA), are routinely constructed which is an extended from of National accounts
input and output matrix. NAMEA tracks pollution emission by the economic sector and assesses
the accomplishment of environmental protection objectives by the country.
Chile: In Chile, the Central Bank undertook the development of environmental accounts that
focused on the forest and mineral sectors. These accounts suggest that the country’s forest-based
development strategy may not be sustainable and hence warrants change in the strategy for
sustainable development.
USA: The United States of America has not been a leader in the environmental accounting
endeavor. In the beginning of the Clinton Administration, the Bureau of Economic Analysis
(BEA) made a foray into environmental accounting in the mineral sector. Opposition from the
mineral industry as well as political controversy stood in the way of operational zing
environmental accounting in the country. The government then asked the National Research
Council (NRC) to from a blue-ribbon panel to consider what the country should do on the
environmental accounting front.
JAPAN: In Japan, the Ministry of Environment has issued comprehensive guidelines titled
―Environmental Accounting Guidelines-2002‖ in March 2002, encompassing the definition,

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functions, roles, basic dimensions and structural elements of environmental accounting. The
guidelines emphatically state that environmental management has to occupy the center stage of
management strategy and environmental accounting would work as a vital tool of environmental
management. The guidelines also envisage that the environmental conservation cost benefits,
including economic benefits associated with environmental conservation activities, are to be
measured, Environmental accounting information, both physical as well as monetary units, needs
to be disclosed in the environmental report for the benefit of management as well as the general
public. According to the guidelines, environmental accounting comprises three key elements,
viz., environmental conservation cost (monetary value), environmental benefit (physical units)
and the economic benefits associated with environmental conservation activities (monetary
value).
4.0.Objectives of the study
Objectives of this research study are listed below
A. To provide a brief historical overview of the development of environmental
accounting system and need of environmental accounting system.
B. To discuss the concept of environment accounting (green accounting) and its
practices which include elements of environmental accounting, recognition of
environment cost, assets, liabilities etc. along with that this paper also discuss the
concept of the measurement of environmental accounting (green accounting) cost?
C. To discuss the concept of environmental reporting and historical development of
environmental reporting and example of few private sector companies and public
companies use environmental reporting along with that cost benefit analysis of a
company for environmental reporting.
D. To investigate steps which needs to be followed for report production.
E. To discuss discloser requirement of environment cost in companies financial
statement?
F. To discuss how can environmental accounting support business decision making?
G. To discuss how to start integrating environmental accounting to capital budgeting.
H. To discuss the problems regarding this environmental accounting system.
I. To investigates how environmental management accounting has effect to the society.
J. To discuss about the cause and effects of environment pollution on human by
diseases and problems, animals and trees/plants and how corporate and industrial
houses deal with this by taking remedial steps.

5.0.Observations and findings

5.1.Green accounting (Environmental accounting)
Environmental accounting, as defined in these guidelines, aims at achieving sustainable
development, maintaining a favorable relationship with the community, and pursuing effective
and efficient environmental conservation activities. These accounting procedures allow a
company to identify the cost of environmental conservation during the normal course of
business, identify benefit gained from such activities, and provide the best possible means of
quantitative measurement (in monetary value or physical units) and support the communication
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of its results. Environmental accounting is the practice of using traditional accounting and
finance principles to calculate the costs that business decisions will have on the environment. For
example, before choosing to close down a manufacturing plant and outsourcing the function to a
foreign corporation, a business uses environmental accounting to determine the short- and long-
term effects of the decision, such as unemployment in the plant’s region. Environmental
accounting is often championed as a component of corporate social responsibility.
Herein, environmental conservation is defined as the prevention, reduction, and/or avoidance of
environmental impact, removal of such impact, restoration following the occurrence of a
disaster, and other activities. The environmental impacts are the burden on the environment from
business operations or other human activities and potential obstacles which may hinder the
preservation of a favorable environment.
5.2.Form of environment accounting
Forms of Environmental Accounting

Environmental Management Accounting Environmental National Accounting

(EMA) (ENA)

Environmental Financial Accounting

(EFA)

(i) Environmental Management Accounting (EMA) - Management accounting with a

particular focus on material and energy flow information and environmental cost
information. This type of accounting can be further classified in the following
subsystems:
 Segment Environmental Accounting: This is an internal environmental accounting tool to
select an investment activity, or a project, related to environmental conservation from
among all processes of operations, and to evaluate environmental effects for a certain
period.
 Eco Balance Environmental Accounting: This is an internal environmental accounting
tool to support PDCA for sustainable environmental management activities.
 Corporate Environmental Accounting: This is a tool to inform the public of relevant
information compiled in accordance with the Environmental Accounting. It should be
called as Corporate Environmental Reporting. For this purpose the cost and effect (in
quantity and monetary value) of its environmental conservation activities are used.
(ii) Environmental Financial Accounting (EFA): Financial accounting with a particular
focus on reporting environmental liability costs and other significant environmental
costs.
(iii) Environmental National Accounting (ENA): National Level Accounting with a
particular focus on natural resources stocks & flows, environmental costs &
externality costs etc.

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5.3.Reasons for adopting environmental accounting

Environmental costs are one of the many different types of costs, businesses incur as they
provide goods and services to their customers. Environmental performance is one of the many
important measures of business success. Organizations use environmental accounting for several
reasons, including the following:
 To help managers make decisions that will reduce or eliminate their environmental costs.
 To better track environmental costs that may have been previously obscured in overhead
accounts or otherwise overlooked;
 To better understand the environmental costs and performance of processes and products
for more accurate costing and pricing of products;
 To broaden and improve the investment analysis and appraisal process to include
potential environmental impacts; and
 To support the development and operation of an overall environmental management
system.
 Many environmental costs can be significantly reduced or eliminated as a result of
business decisions, ranging from operational and housekeeping changes, to investment in
―greener‖ process technology, to redesign of processes/products. Many environmental
costs (e.g., wasted raw materials) may provide no added value to a process, system, or
product.
 Environmental costs (and, thus, potential cost savings) may be obscured in overhead
accounts or Overlooked otherwise
 Many companies have discovered that environmental costs can be offset by generating
revenues through sale of waste, by-products or transferable pollution allowances, or
licensing of clean technologies, for example.
 Better management of environmental costs can result in improved environmental
performance and significant benefits to human health as well as business success.
 Understanding the environmental costs and performance of processes and products can
promote more accurate costing and pricing of products and can aid companies in the
design of more environmentally preferable processes, products, and services for the
future.
 Competitive advantage with customers can result from processes, products, and services
that can be demonstrated to be environmentally preferable.
 Accounting for environmental costs and performance can support a company’s
development and operation of an overall environmental management system.

5.4.Benefit of environment accounting and reporting

An enterprise which recognize its environmental responsibilities and which institute appropriate
and effective systems on environmental management to ensure both competitiveness and
compliance will minimize its exposure to future financial risk arising from environmental
incidents. At the same time:
 Such as enterprise should be able to secure lower insurance premium, reflecting reduce
risk

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 A favorable environmental risk rating may secure the enterprise better borrowing terms –
either when issue corporate debt or borrowing or when issuing new equity
 Pure compliance cost should not result in market penalty unless an enterprise can
demonstrate to be running higher compliance cost than its sector peer.
An enterprise which in addition to recognizing and responding to its statutory environment
responsibilities, also determine to be at the leading edge in terms of utilizing environment
friendly technologies or moving towards a more sustainable mode of operation should reap
additional benefits such as –
 Increased employee commitments and morality.
 Eliminate green tax, levies and fines
 Lower operating cost and lower disposal cost
 Improve corporate profile
 Increased market opportunities (Including public sector and public procurement
opportunities).
 Provide strong focal point for internal EMS development.
 Include the setting and publishing of performance standard which drives continuous
development.
 Establish environmental issue as a key policy / strategy element.
 Enable companies to re assure investors / lenders as to environmental risk and corporate
environmental engagement.
 Minimize risk of regulatory intervention regarding this issue.
 Provide quality public relation / profiling opportunities.
 Support the audit / reporting culture which will make a company more capable of new
development – e.g. social and ethical reporting etc.

5.5.Challenges of Environmental Management Accounting (EMA)

Several limitations of conventional management accounting systems and practices can make it
difficult to effectively collect and evaluate environment-related data. These limitations can lead
to management decision making being based on missing, inaccurate or misinterpreted
information. As a result, managers may well misunderstand the negative financial consequences
of poor environmental performance and the potential costs and benefits of improved
environmental performance. There are few challenges in environmental management accounting
(EMA) –
 Communication/links between accounting and other departments often not well
developed
 Materials use, flow and cost information often is not tracked adequately
 Investment decisions are often made on the basis of incomplete information
 Many types of environment-related cost information are not found in the accounting
records

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5.6.Type and categories of environmental accounting

Type of environmental accounting

National income Financial accounting

accounting
Managerial or management
accounting

5.7.Categories of environmental accounting

5.8.Objectives of environment accounting

Objective of environmental accounting are listed below -
 Taking the total stock of assets or reserves related to environmental issue and changes
therein.
 Estimation of the total expenditure protection or enhancement of environment.
 To identify that part of the gross domestic product which reflect the cost necessary to
compensate for the negative impact of economic growth i.e. the so-called defensive
expenditure to protect environment.
 Assessment of environmental costs & benefits

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 The decrease (depletion) in natural resources due to their use in production & final
demand and
 The changes in environmental quality resulting from pollution & other impacts of
production & consumption and other natural events on one hand, & the expenditure for
environmental protection & enhancement of the environment on the other.
 Elaboration and measurement of indicators, relating to environmentally adjusted product
& income which are disclosed by Environmentally Adjusted Net Domestic Product
(EDP), i.e., Net Domestic Product minus Environmental costs.
 Analysis of EDP: It is to plan the use of resources by squeezing them & reducing waste
to attain sustainable development.

5.9.Conventional accounting as a subset of social and environmental accounting

Social and environmental accounting does represent a broader, more expansive accounting when
compared to the traditional accounting paradigm. In this sense, the conventional accounting
paradigm can be viewed as a subset of social and environmental accounting.

Social and Environmental accounting

- Economic and non economic accountability to financial and non

financial stakeholders

Conventional accounting –
economic accountability to
financial stakeholders

Source: Adapted from Grojer & Stark 1977, p.350; Gray 2002, p.692.
5.10. Environment Accounting Support Business Decision Making
The concepts of environment accounting as they apply to internal management decisions are the
focus of this document. Accurate, timely information is the critical underpinning of business
decision making, and environment accounting practices provide means of exposing information
obscured by conventional management accounting practices. In this context, environment
accounting concepts can be applied at all levels of an organization to help make sound business
decisions such as
 Product Design
 Capital Investments
 Process Design
 Cost Control
 Facility Sitting
 Waste Management

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 Purchasing Cost Allocation

 Product/Process Costing
 Product Retention/Mix
 Risk/Liability Management
 Product Pricing
 Strategic Planning
 Performance Evaluations
 Supplier Selection
 Plant Expansion
 Environmental Program Justification

5.11. Concept of environmental cost and measurement of environmental

accounting (green accounting) cost

Environmental cost comprise the cost of step taken, or required to be taken to manage the
environmental impact of environmental activities in an environmentally responsible manner, as
well as other cost driven by the environmental objectives and requirements of the enterprise. It
should be recognize in the period in which they are first identified

The green accounting is an emerging aspect of accounting science that will influence in the near
future. The adoption of basic elements of green accounting will portray the role of environment
in the economy as well as render easier the analysis of macroeconomic questions. This table
gives an idea about the cost which incurred by the company for protection from pollution and
environment.
5.12. Green accounting measures
Description Green Accounting Issues and Scope
Pollution Costs incurred to prevent air and water pollution along with water
Prevention Costs treatment facilities and other activities
Environmental Costs of energy saving measures as well as costs of global warming
Protection Costs reduction measures
Costs of Resource Costs incurred for waste reduction and disposal as well as for water
Recycling conservation, rainwater usage and other measures aimed at efficient
resources usage
Environmental Cost of environmental restoration operations (eliminating soil and
Restoration Costs ground water contamination, environmental compensation, etc.)
Management Management-related environmental protection costs including
Costs environmental promotion activities and costs associated with acquiring
and maintaining ISO 14001 certification
Social Promotion Environmental protection costs stemming from participation in social
activities such as participation in organizations concerning with
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Activities Costs environmental preservation etc.

Research and Environmental protection costs for research and Development activities
Development and costs of environmental solutions business activities (Green
Costs product/environmental technology design and development costs,
environmental solutions business costs, others) etc.

5.13. Discloser requirement of environment cost in a company’s financial

statement

An argument commonly raised against separate disclosure of environment costs charged to

income in the current period is that it is very difficult to determine the amount involved. In
particular it is difficult to distinguish environmental cost from other cost such as operating cost
and to assemble the information. Ultimately a judgement must be made as to the items that
constitute environmental expenses. As ISAR recommends –

 Type of item identified as environmental cost should be disclosed

 Amount of environment cost charged to income -
I. Distinguish between operating and non operating cost and
II. Analysis in a manner appropriate to nature and size of the enterprise and / or type
of issue relevant to enterprise
 Amount of environmental cost capitalized during the period disclosed in the notes
 An environment cost recorded as a –
I. Fine or penalty for non-compliance with environmental regulation and/or
compensation to third parties as a result of loss or injury caused by past
environmental pollution – no benefit and return to the enterprise,
II. Extraordinary item. Should be separately disclosed.
 Environment liabilities also should be disclosed either in the balance sheet or notes to the
financial statements
i. A brief description about the nature of liability
ii. A general indication of timing and term of their settlement
iii. Any significant uncertainty over the amount of liabilities or timing of settlement
and range of possible income should be disclosed

5.14. Environmental reporting

Environmental reporting is the term now commonly used to describe the discloser by an entity of
environmental related data verified or not , regarding environmental risk, environmental impact
policies, strategies, target, cost, liabilities, or environmental performance to those who have an
interest in such information as an aid to enriching their relationship with the reporting entity.
This report can be prepared in
 The annual report and accounts package
 A standalone corporate environment performance report
 A site-centered environmental statement
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 Some other medium (i.e. staff newsletter, video, CD Rom etc.)

5.15. Historical development of Environmental Reporting

I. Financial accounting and reporting From the 1850’s
II. Financial aspects of corporate governance From the 1990’s
III. Environmental reporting` From early 1990’s
IV. Social and ethical accounting and reporting From late 1990’s

5.16. Environmental reporting in private sector and public sector

Majority of environmental accounting example are found in public sector but there is no rule.
The following are the examples of name of some organization that have issue environmental
reports.

Private sector Public sector

Anglian water – BP Amoco, Body shop New York state pension fund for the fire
international, British airways, NatWest bank, service
Shell(UK) etc.
Novo nor disk(Denmark) DSB / Banelstyrelsen (Denmark’s national
railway company)
Neste(Finland) Eskom (S, Africa)
Sony, Toyota ( Japan) Dutch hospital Group AZU
China light and power ( HongKong) London borough of Sutton ( Local authority)
General motors, Sun company, Pand G, Baxter Liverpool John moores university ( Education
healthcare (USA) sector)
Northam telephone limited ( Canada ) The corporation of London
SAS, Volvo (Sweden) The environment council (NGO)
Bayer ( Germany) The new economics foundation ( Social
reports)
South African Breweries (S Africa) Department of environment, Transport and
regions ( Gov Dept UK)

5.17. The Need of environment Accounting and reporting

There are many reason why environment accounting issue needs to be integrated into corporate
accounting.

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 Enterprise accounts should reflect firm’s attitude towards the environment and the impact
of environmental expenditure, risk and liabilities upon the financial position of an
enterprise.
 Investors need information on environmental performance and expenditure to make
investment decisions.
 Environment issue are management issue, manager’s needs to identify and allocate
environmental cost so that products are correctly priced and investment decision are
based on true cost and benefits.
 Enterprise may be able to exploit a competitive advantage with customers if they are able
to show that goods and service are environmentally preferable.

Most corporate leaders agree that main objective for the economy is sustainable development.
Sustainability requires companies to strive for eco-efficiency, but they can only measure that by
producing accurate information on both environmental cost and revenue and environmental
performance.

5.18. Eco-efficiency indicators

The concept of eco-efficiency was initially developed as ―ecological-economic efficiency‖ by
Schaltegger and Sturm (1994). Based on this Schaltegger and Burritt (2000) developed a more
general framework of EPIs. They state that, in order to measure corporate eco-efficiency, the set
of economic and ecological information available has to be transformed into eco-efficiency
information. By this is understood that economic numbers (measured in monetary terms) and
environmental figures (measured in ecological terms) as indicators of efficiency have to be
integrated.. Examples of eco-efficiency indicators1 -

Stakeholder group Eco-efficiency Focus

indicators
(examples)
Shareholders SHV / NPEIA Assessment of financial investment
Government, Top VA / EIA Assessment of impacts on society as a
management whole
Government, Top Corp. taxes / EIA Assessment of impacts relevant for the
management government and the tax agency
Top management Income / EIA Assessment of annual performance
Site management ROCE / EIA Assessment of site
Project management NPV / NPEIA Assessment of capital investment
project
Divisional management CM /EIA Assessment of product group
Product management CM / EIA Assessment of product

1
CURRENT TRENDS IN ENVIRONMENTAL COSTACCOUNTING – AND ITS INTERACTION WITH
ECOEFFICIENCYPERFORMANCE MEASUREMENT ANDINDICATORS / STEFAN SCHALTEGGER AND MARCUS WAGNER
/ chapter – 3/ page no - 58
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(SHV = shareholder value, VA = value added, ROCE = return on capital employed, NPV = net
present value, CM = contribution margin, Cor = Corporate, NPEIA = net present)environmental
impact added, EIA = environmental impact added)

5.19. Applying Environmental Accounting to Capital Budgeting

Capital budgeting includes the process of developing a firm's planned capital investments. It
typically entails comparing predicted cost and revenue streams of current operations and
alternative investment projects against financial benchmarks in light of the costs of capital to a
firm. It has been quite common for financial analysis of investment alternatives to exclude many
environmental costs, cost savings, and revenues. As a result,
Corporations may not have recognized financially attractive investments in pollution prevention
and "clean technology." This is beginning to change. When evaluating a potential capital
investment it is important to fully consider environmental costs, cost savings, and revenues to
place pollution prevention investments on a level playing field with other investment choices2.

5.20. The following are the number of factors which drive companies into
reporting process :

 International standard / Mandatory requirement ( US, Denmark, Netherland, Thailand)

 Competitive advantage / Best in class
 Environmental management system base
 Supply chain pressure
 Credit and investment conditionality
 Other stakeholder concern
 Peer group pressure

5.21. The cost and benefit analysis of environmental reporting

The company make huge expenditure (i.e. direct expenditure and indirect expenditure) for
environmental reporting and in return benefits which they receive. The cost benefit analysis of
environmental reporting are discussed below
Direct cost of reporting
 Installing the appropriate environment management system
 Employee specialist staff / internal auditors
 Appointing external verifiers
 Publication, distribution cost, web site design cost
 There is also a potential reporting risk cost

Indirect cost of reporting

2
Allen White and Monica Becker, “Total Cost Assessment:Catalyzing Corporate Self Interest in Pollution
Prevention,” NewSolutions, (Winter, 1992), p. 34.
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 Poor environment profile vis a vis competitors

 Potential loss of market / investors
 Loss / foregoing of other benefits

These are the cost which company spends for environmental reporting.

5.22. Extent to which Indian corporates practice voluntary environmental

reporting
The following list of voluntary environmental reporting practice of corporates in India3

Source: Asia Pacific Journal of Research February 2014

5.23. Steps to be followed to start preparation of environmental report

Successful work on environmental accounting depends on two crucial factors:

3
International Journal of Commerce, Business and Management / A Study of Green Accounting Practices in
India / Dr. Preeti Malik, Dr. Alka Mittal /Vol. 4, No.6, December 2015 /page no - 786
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 First, it must be focused on answering important policy questions. This ensures that the
accounting work responds to a real demand for policy guidance, and is not driven simply
by a desire to build databases.
 Second, it must bring in the major players in the areas of environmental policy, economic
policy, national income accounting, and the development of information systems on the
environment, the economy, and the population. This ensures that people who could either
use or provide the data required will cooperate with and support the project.

The steps below suggest the activities which may be involved in initiating work on
environmental accounting: ·

 Learn more about the subject, by reading and where possible by talking to others with
experience in the area. This learning should cover the purpose of the accounts, the policy
questions which they could answer.
 Bring together the key players in the country and help them learn about the subject. Key
players may include representatives of the national accounting office, the national bank
and the ministries of environment etc.
 Identify the pressing policy questions facing the country. Where is there a clear demand
for better understanding of the linkages between the environment and the economy? Are
specific resource-based sectors crucial to the economy? Are certain resources
constraining economic development? Are pollution problems growing in importance,
affecting well-being, or imposing excessive costs?
 Select a sectoral focus and areas to work on which ensure that key policy issues will be
addressed.
 Choose a methodological approach (or approaches) which will be practical and will also
enable the accounts to answer the key policy questions.
 Select an institution to carry out the initial accounting work.
 Build a team to compile the accounts.
 Build the first set of accounts. Like the national income accounts, environmental accounts
should be produced annually, or every few years, to develop time series data; thus the
accounting process is iterative.
 Publish the initial results and disseminate them widely. Even if they are statistically
weak, it is crucial to publish them and use them to explore important policy questions
from the start, for several reasons. First, wide dissemination of such publications will
increase awareness of the work and show how it can address policy questions. This will
create additional political and social support for institutionalizing the accounts. Second,
publishing initial results based on weak data is likely to help in identifying better data.
Often data exist, but those who control them do not see the connections to the accounting
work, or are reluctant to make them available. The more widely the results are available,
the more people will see connections to other existing data and pressure will increase to
make them available to the project.
 In subsequent years, the focus of the accounting work will be determined by the outcome
of the first cycle of accounts. It will be important routinely to update the accounts, so that
they begin to present a record of how the economy-environment linkages are evolving

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over time. In addition, areas where environmental costs or impacts are found to be
particularly large may warrant further work or additional primary data collection.
Emerging policy concerns may be introduced into the accounting framework. Special
studies may be undertaken on particular questions of policy importance.

Main stages in environment report production

Decide objectives

Take a decision to report

Identify priority audience Review

Audience need and

expectation

Plan structure

Information / data
gathering

Review format

Drafting and data

processing

Design Internal approval

Revision

Verification

Dissemination strategies

Review
Report / receive feedback

Source: Guide to environment and energy reporting and accounting 1997, association of
chartered certified accountants, p29, Design review
6.0.Conclusion

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For the last decade, corporate environmental accounting has gained increased importance in
practice, of which cost accounting receives most attention. This paper gives an overall concept of
environment accounting (Green accounting). Environmental accounting is in introductory stage
in India and whatever shows in the accounts in this regard is more or less compliance of relevant
rules and regulation in the Act. Actually, unless common people of India are not made aware
towards environmental safety, development of accounting in this regard is a little bit doubtful. It
is the call of the time that corporates prepare a firm environmental policy, take steps for pollution
control, comply with the related rules and regulations, and mention adequate details of
environmental aspects in the annual statements. For sustainable development of country, a well-
defined environmental policy as well as proper follow up and proper accounting procedure is a
must. Now in the current scenario where pollution has become major problem and environment
protection issue become main concentration of almost all companies. This is why recently
environmental performance indicators have received more attention. According to author time is
still left in the hands to use the advance resources to balance the environment for living and
initiates the breathed intellectuals to live friendly with environment and make our nation
pollution free and environmentally aware and if required further research is necessary to identify
the way in which improved environmental accounting can be tailored to fit the special needs of
particular firms, industrial processes, and product markets.
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