METRIC MATTERS: What is financial environmental accounting?

Wednesday, July 13, 2005

Environmental accounting covers both the physical flows of materials and energy, and the associated financial costs and benefits. Forum for the Future, a UK sustainable development charity focuses on financial environmental accounting, which can help make the link between financial and environmental performance and so give management the information they need for win-win decisions. Financial environmental accounting has three different faces:

1. Tracking the benefits and costs to the company of its initiatives.
The costs of environmental activities are all too prominent but the benefits are often hidden. Many projects have environmental and financial benefits: avoiding fines, creating cost efficiencies or leading to new sources of revenue while increasing resource productivity and reducing waste. More intangible benefits come from motivating employees and enhancing a company’s reputation. Unless these benefits are brought to management’s attention, environmental activities only look like a cost center. Bringing the costs and benefits of environmental activities together allows companies to build the business case.

2. Measuring the externalities created. An externality is the costs borne by other people, now and in the future, from an activity which was not included in the transaction price. For instance, the price of a taxi journey does not include the costs to future generations of climate change. It’s possible to calculate the externality a company is creating but, because externalities are by definition outside of the market’s price setting process, any valuation is judgmental.

3. Calculating the cost and benefit to the company of avoiding its environmental impacts. A company needs to know the financial exposure of having to internalize its externalities. Companies can be quickly asked to reduce their environmental impacts – either through regulation and taxes (such as the Climate Change Levy or Landfill Tax) or from changes in stakeholder expectations (disposal of oil rigs such as Brent Spa). With an account of how much it would cost the company to avoid or restore its main environmental impacts, a company can move to limit its exposure, improve its decision making and report progress to stakeholders.

Adapted from “Convincing the finance department with environmental accounting” in the current issue of Corporate Responsibility Management.

Blogged on 7:31 PM by Upay

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