Putting the Focus on Environmental Management Accounting
Dr. Roger L. Burritt , Stefan Schaltegger, PhD, Dr. Katherine Christ PhD, BCom(Hons), AdvDipAcct, CPA | September 15, 2021
1. What is environmental management accounting (EMA)?
EMA supports managers to make better decisions by informing them about environmental impacts of an organization beyond its boundaries and about environmental issues that influence the organization. This includes economic drivers and consequences of environmental issues. EMA can help identifying environmental problems caused, environmental improvements made and how they relate to the economic performance of the organization.
Apart from identifying problems and solutions to environmental problems, EMA helps identifying ‘win-win’ situations that improve both economic and environmental performance. In order to do this. EMA provides relevant monetary and physical information to managers to support decisions specific to their role in the organization. The information provided by EMA connects: short-run operational and long-run strategic concerns; repetitive routine and ad hoc decision settings; past and future performance; and the decision-making, planning and control, coordination, motivation and communication responsibilities of different types of managers.
2. How has EMA practice developed over the last 15 years?
From the late 1980’s early approaches to EMA were proposed and, by 2005, there was sufficient agreement amongst stakeholders for IFAC (2005) to offer guidance to members and to develop a common understanding of what EMA should cover. IFAC aimed to engage with professional bodies who were producing separate advice for the practitioners its members represented. To reduce some of the international confusion about EMA, IFAC provided a general framework and set of definitions. IFAC’s (2005) guidance to members referred to its Management Accounting Concepts definition:
“The management of environmental and economic performance via management accounting systems and practices that focus on both physical information on the flow of energy, water, materials, and wastes, as well as monetary information on related costs, earnings and savings.” (IFAC 2005, p. 16).
Since this guidance on EMA was issued over 15 years ago various developments have occurred in the profession. In this period there has been a significant increase in concern over the risks posed by environmental crisis, especially in relation to the existential threat from climate change, as included in the United Nations Sustainable Development Goals, and movement of the world beyond the safe-space of environmental planetary boundaries. For practitioners this has meant growing demand for their environmental accounting services, not only in relation to internal management advice, but also external reporting standards about the stewardship of environmental resources.
To meet these pressures, EMA research and practice has developed to provide granular accounting advice in relation to risk management of, amongst others, carbon emissions management and disclosure, water management and reporting, material flow and waste management within the context of a circular economy, and accounting for transformation of entities and governments towards zero impacts (or better) on the environment.
Practitioners and students of accounting now have access to a growing body of professional development courses and basic education about environmental issues and the tools that environmental management accounting offers.
3. How should EMA practice develop in the future?
As awareness of environmental crisis grows through international conventions, regional and national agreements, EMA practice should be mainstreamed in several roles.
First, it should build its attention-directing function to make environmental risks apparent to clients of accountancy firms and managers of organizations where accountants are employed.
Second, EMA should be integrated in the planning and control processes of organizations as a key set of tools, such as operational and capital environmental budgeting, environmental investment appraisal and environmental benchmarking based on science-based targets.
Third, EMA practice should be strongly linked with identifying opportunities that emerge from the continuously changing global and local stakeholder pressures to reduce environmental risks in line with international conventions, regional and national agreements. EMA practice should, in these ways, be viewed as support for both problem-solving and opportunity-seeking where organizations aim to transform their activities in operations, supply chains, and the product-service portfolio.
With these roles to the fore, EMA practice should be supported through: appropriate funding demonstrated to provide attractive ROCE; knowledgeable teams of specialised staff; and organizational responsibility structures in place to advise about accounting systems that identify, measure and communicate environmental risks and opportunities. To institutionalise these roles, EMA practice should also be embedded in the educational processes of students and practitioners through university degrees, professional accreditation courses, and ongoing professional development. Focus should be on the strength of EMA to demonstrate how it helps change behaviour to transform organizational activities and contribute to environmental solutions.
4. Where is EMA research today, and what are the future research opportunities in this area?
EMA research has developed substantially in recent years. Initial projects focussed on establishing and demonstrating the ways in which EMA could result in win-win outcomes and there are numerous case studies from multiple countries and industries that speak to this point. Nevertheless, despite this early success, the focus of EMA was largely inside the company while the external impacts with regard to planetary boundaries and society still need to be developed.
Further challenges exist in specific areas, especially with regard to access to and creation of certain types of environmental data (e.g. biodiversity) and the best way to link such data with monetary metrics. When set against the backdrop of increasing interest in new forms of advanced technology related to machine learning, big data, artificial intelligence and Industry 4.0 (the fourth industrial revolution), complementary opportunities exist to develop tools that increase the accuracy of EMA and improve decision making (Burritt and Christ, 2016). Advanced technology could also support EMA research to be undertaken along the supply chain improving environmental traceability to show the full environmental and economic benefits and costs associated with products and activities. Research is also needed into EMA and the changing perspective on globalization brought about by disasters such as the global pandemic.
There has also been movement towards expanding EMA towards a more complete form of sustainability management accounting, which encapsulates social and environmental as well as economic issues (Maas et al., 2016). Although under-researched a move towards sustainability management accounting could be a way to assist business in relation to various initiatives like the UN SDGs. Further research is needed into accounting support for managers to combine economically viable environmental and social opportunities.
5. What is the role of the accountancy profession in EMA?
EMA seeks to bring together physical and monetary information and, although opportunities and revenues are considerations, conventionally the profession’s focus has been on recognizing and reducing environmental costs. This can be seen in the development of EMA tools like material flow cost accounting which has been heavily promoted in Germany and Japan and was later standardised via an ISO standard; ISO 14051.
EMA is recognised by the profession as an interdisciplinary activity requiring commitment from different departments within organisations. Accountants engage with other professionals and development of working groups to address EMA issues has grown in importance. For example, support for decisions by managers through water management accounting requires joint expertise from environmental engineers, natural science-based experts such as meteorologists, logistics and transportation specialists, information technology and accounting experts. Yet notwithstanding this fact, as the gatekeepers to financial information within organisations, accountants are expected to play a key role in relation to the successful implementation of EMA.
Thus, the accountancy profession plays a leading role in EMA take-up. It builds awareness of managers in their different roles thereby promoting learning about the environmental contexts and capacity building scenarios for transformation of organizations through collaborative opportunity and cost sharing.
6. What could IFAC and its member organizations do more of to support the role of accountants in EMA?
For practitioners: Professional accountancy bodies can promote diffusion of EMA and its extension into sustainability management accounting through professional development activities which recognise that environmental risk is seen as the most critical issue facing business (World Economic Forum, 2020). With the increasing need to transform industries and companies towards operating in the safe space of planetary boundaries, EMA training and method development as well as industry agreements and policy recommendations for EMA adoption could be initiated and supported. Nevertheless, as highlighted by the COVID-19 pandemic, social issues are of joint concern and the profession needs to help build practitioner resilience and adaptation strategies in the context of developing opportunities. Accountants are first responders to socio-psychological issues when businesses are ordered to shut down, forced to lay-off staff, or move into bankruptcy and liquidation and professional bodies can prepare them to be well equipped to address societal and client needs for future scenarios.
For academia: Professional bodies can extend support to the development of research in EMA and sustainability management accounting to demonstrate increases in environmental benefits through EMA application, such as restoration of forested and grassland areas, as well as continue with the conventional concern over the reduction of environmental impacts and costs. They can also encourage research into geopolitical and technological risks and opportunities of sustainability transitions of organizations, industries and markets, edging their way into sustainability management accounting through review of globalization and the development of artificial intelligence-based robotics.
For education: The professional bodies can build EMA and sustainability management accounting developments into curricula for accountancy students and, via the accreditation process, encourage universities to mainstream EMA and its connections with global challenges.
7. What are some of the most useful guidance documents on EMA?
- Burritt, R., & Christ, K. (2016). Industry 4.0 and environmental accounting: a new revolution? Asian Journal of Sustainability and Social Responsibility, 1(1), 23-38.
- Burritt, R. L., Hahn, T., & Schaltegger, S. (2002). Towards a comprehensive framework for environmental management accounting—Links between business actors and environmental management accounting tools. Australian Accounting Review, 12(27), 39-50.International Federation of Accountants (IFAC) (2005). International guidance document: environmental management accounting. New York, NY: IFAC.
- Maas, K., Schaltegger, S., & Crutzen, N. (2016). Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, 237-248.
- Schaltegger, S. (2018). Linking environmental management accounting: A reflection on (missing) links to sustainability and planetary boundaries. Social and Environmental Accountability Journal, 38(1), 19-29.
- World Economic Forum (2020). The global risks report 2020 - 15th Edition. World Economic Forum. Available at: http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf.