How we account for environmental costs and liabilities can have a profound impact on financial results.
By Ramona Dzinkowski
Since the early 1990s, when the poignant work of Rob Gray titled The Greening of Accountancy: The Profession After Pearce (1990) was published, a substantial body of research and practice has emerged in the area of environmental management and sustainability accounting and disclosure.
Almost 20 years later, environmental accounting and reporting, and more broadly, sustainability reporting, have become common components in annual reports.
Through their collaborative work with international environmental standard-setting organisations (such as the Global Reporting Initiative, Environment Australia Public Environmental Reporting, United Nations Environmental Program, US Environmental Protection Agency, ISO 14000 Standards) and through a multitude of research and policy initiatives, many of the worlds professional accounting bodies have adapted. Theyve responded to the need for generally accepted environmental management and accounting principles, standards, and best-practice guidelines that can both accommodate and motivate corporate sustainable development agendas.
These include (among others):
2005 International Guidance Document Environmental Management Accounting IFAC
MD&A Disclosure about the Financial Impact of Climate Change and Other Environmental Issues CICA
Environmental Issues in the Audit of Financial Statements ICAEW
Practitioner Guidance on Provider Assurance on Greenhouse Gas Emissions Information - CICA/AICPA
Much of the work of the international accounting bodies addresses the implications of the underlying principles of environmental accounting and reporting, the need for uniform environmental performance indicators, as well as the need to establish a common set of environmental accounting tools. Ultimately, the way in which we account for environmental costs and liabilities can have compelling impacts on financial results.
As an extreme example, Rob Gray of the Centre for Social and Environmental Accounting Research points out that if an accounting system was implemented to capture all of the potential internal and external environmental and social costs of production, and these numbers were deducted from calculated accounting profit, the results could be profound.
'This will thus lead to a recognition that organisational income has been grossly overstated for some considerable time, and that current generations have been benefiting at the cost of some future generation,' he explains. 'The probability is that no Western company has made a sustainable profit for a very long time, if ever.'
Despite the progress made by international accounting bodies in the area of environmental accounting and reporting, much remains to be done to improve disclosures to the general stakeholder community. According to Alister Cowan, CFO of BC Hydro in Canada, one challenge in reporting environmental indicators relates to the comparability of the data. 'Developing relevant metrics that are benchmarkable and for which relevant targets can be set is critical, as [is] moving from qualitative to quantitative reporting,' he says.
In addition, says Cowan, some of the measures are difficult to interpret and have differing definitions depending on the country or sector of origin. Also, the sheer volume of information required to be reported on an annual basis adds additional complexity, both to the management process and to understanding what is actually being disclosed.
BC Hydro, one of Canadas largest hydroelectric power providers, reports in accordance with Canadian GAAP. It is also required to comply with guidelines of the BC Transparency and Accountability Act, to guidelines issued by the Crown Agency Secretariat, and respond to review comments by the auditor-general.
The company also reports in accordance with the UNEPs Global Reporting Initiative for Sustainability Reporting. Also, the companys environmental reporting of its environmental management system (EMS) is based on ISO 14001 requirements. 'A vast amount of data is generated that is difficult for users to understand and make meaningful decisions on,' Cowan says. 'And a great deal of internal collaboration is required to collect and consistently report this information.'
Cowan believes that in order to make environmental/sustainability accounting reporting more relevant and uniform across industries, accounting bodies need to focus their efforts. '[The accounting bodies] need to sharpen standards for non-financial reporting, or refer to other reporting standards for other areas, like the IPCC for greenhouse gas reporting, or the Global Reporting Initiative for sustainability reporting,' he says.
Cowan believes the accounting bodies should provide more guidance on life-cycle reporting, which is especially relevant for companies that have expensive, long-lived assets. Other observers echo these sentiments, pointing specifically to the role of the accounting bodies in providing appropriate training in the environmental, sustainability management and reporting arena.
Frank Dandrea is senior manager, corporate accounting and reporting at Hydro-One, the owner of Ontarios high-voltage transmission system.
He says that in order to improve the comparability, verifiability, and consistency of social and environmental reports, international accounting bodies need to take two critical steps. 'First, there needs to be an education outreach program for capital issuers to increase understanding of the corporate sustainability reporting issues, and that should form part of the of the MD&A [management discussion and analysis] section of the financial reports,' he says. 'The program should be consultative and involve governments, regulators, academics and other interested parties.'
Second, says Dandrea, is to develop a meaningful platform for comparisons of criteria other than financial performance.
The body of literature on accounting standards, guidelines and practice around the world is immense. Yet, following the widespread adoption of IFRS, there is optimism that a uniform framework for environmental and sustainability accounting will emerge. Its hoped that this will tie information on sustainability and environmental costs and benefits to the financial statements and expand the scope of our current thinking.
More work is needed to further support the progress of the international standard-setting organisations such as the GRI, the UNEP, ISO and international accounting bodies. Says Dandrea: 'Further rigorous guidance is needed to allow for a common framework for disclosure, and to measure the extent to which material issues have been identified and addressed.'
Guidelines and tools for sustainability reporting
The Sustainability Reporting Guidelines of the Global Reporting Initiative (GRI), 2006 (G3)
Framework for Public Environmental Reporting Environment Australia, 2000
General Guidelines on Environmental Reporting UK Department for Environment, Food and Rural Affairs (DEFRA), 2001
Japanese Environmental Reporting Guidelines Minister of the environment, government of Japan, 2001
Der Leitfaden 'Der Nachhaltigkeitsbericht' German guideline for sustainability reporting
CEFIC Responsible Care Health, Safety and Environmental reporting guidelines The European Chemical Industry Council
WICE Guidelines The World Industry for the Environment, 1995
CBI Guideline 'Introducing Environmental Reporting' Confederation of British Industries, 1995
UNEP/Sustainability Reports United Nations Environment Program
Forum on Environmental Reporting (FEEM) Guidelines for Preparation of Company Environmental Reports Fondazione Eni Enrico Mattei, 1995
ACBE Guidelines 'Environmental Reporting and the Financial Sector: An Approach to Good Practice' The Advisory Committee on Business and the Environment UK, 1997
'Coming Clean' International Institute for Sustainable Development, Deloitte Touche Tohmatsu International and SustainAbility Ltd, 1993 (first guideline for environmental reporting)
Belaggio Principles International Institute for Sustainable Development
GEMI tools and publications Global Environmental Management Initiative
DIN Norm 33922 for an environmental report The German standardisation body DIN
Handreiking Maatschappelijke Verslaggeving en Richtijn 400 Dutch Advisory Board for Annual Reporting, 2003
CMA Management Accounting Guideline 'Writing and Evaluating Sustainable Development and Environmental Reports' CMA Canada, 1998
UNCTAD Report: 'Environmental Financial Reporting Accounting and Reporting at the Corporate Level' The Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting UNCTAD, 1998
