Concept Of Environmental Accounting

Introduction

There is growing awareness and concern on the impact of human activity on the ecosystem. This concern at global level about the impact of the human activities on the environment and the need for mitigating the effects led to codification of ‘soft law’ on environment which began with the United Nations Stockholm Conference on Human Environment and the launch of UN environmental programme in 1972. The principles such as Polluter Pays, Absolute Liability, No Fault Liability, Precautionary Principle, Inter-generational equity and ‘good neighbourliness’ began to take roots into international and national environmental regulations.

Increasing danger to environment, extinction of many species of plants and animals, depletion of the ozone layer and global warming due to indiscriminate use of fossil fuels emitting Green House Gas has become a reality. States which are considered as trustees of the environment for future generations are increasingly adopting the path of sustainable development in their planning process and formulating tougher regulations for industry based on the soft law developed internationally.

The Brundtland Commission report states “humanity has the ability to make development sustainable -- to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.”

There is an increasing trend to judge an enterprise in relation to the community in which it operates, just as a responsible citizen is judged by his actions in relation to the community in which he lives. The impact of the activities of the organizations on the environment w.r.t to pollution of water, air, land and abuse of natural resources are coming under the scrutiny of governments, shareholders and citizens.

Unless proper accounting work is done either by the individual organization or by the Government itself, it cannot be determined that both have been fulfilling their responsibilities towards environment. Therefore, the need of environmental accounting has emerged. In the early 90’s, the UNEP and the World Bank set out to examine the feasibility of physical and monetary accounting in the area of natural resources and the environment and to develop alternative macro indicators of environmentally adjusted and sustainable income and product. Simultaneously, the statistical division of the United Nations (UNSTAT) also developed methodologies for a system of Integrated Environmental and Economic Accounting (SEEA) and issued as an SNA handbook on Integrated Environmental and Economic Accounting.

Environmental accounting at organization level, the focus of this article, aims to address the needs of organization to measure the economic efficiency of their environmental conservation and the business activities of the company as a whole.

Forms of Environmental Accounting

a. Environmental Management Accounting (EMA)

In EMA there is a particular focus on material and energy balance aspects and environmental cost information. This type of accounting is further classified into:

• 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 specified 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. This could be referred to as Corporate Environmental Reporting. For this purpose the cost and effect (in quantity and monetary value) of its environmental conservation activities are used.

b. Environmental Financial Accounting (EFA):

Environmental Financial accounting concentrates on reporting environmental liability costs and other significant environmental costs.

c. Environmental National Accounting (ENA):

In national level accounting the particular focus is on natural resources stocks & flows, environmental costs & externality costs, etc.

Need for Environmental Accounting at Corporate Level

The environmental accounting at the corporate level helps the management to know whether corporate has been discharging its responsibilities towards sustainable development while meeting business objectives. Environmental accounting addresses the following:

• Meeting regulatory requirements;
• Operate its factory in a way that environmental damages do not occur;
• Promote a culture and attitude of environmentally safe working amongst its employees;
• Disclosure to shareholders the amount and nature of the preventative measures taken by the management;
• Ensures safe handling and disposal of hazardous waste;

Scope of Environment Accounting

The scope of Environmental Accounting (EA) is extensive and includes corporate, national & international level.

The following aspects are included in environmental accounting:

1.The direct investments made by a corporate for minimization of losses to environment. It includes investment made into the equipment/devices that help in reducing potential losses to the environment. This can be easily monetized.

2.Indirect losses due to business operation. It mainly includes

• Degradation and destruction such as loss of biodiversity, air and water pollution, hazardous waste including bio medical waste, coastal marine pollution etc.
• Depletion of non-renewable natural resources
• Deforestation and land uses (measuring and monetizing them can be complex)