Environmental Management Accounting Procedures and Principles

Environmental Management Accounting
Procedures and Principles
The approach and shortcomings of methods such as the payback period, internal rate of return
or internal interest rate (IIR) are discussed in any textbook on corporate finance.
The methods for determining the value of a company for mergers and acquisition are also
based on capitalized future earnings. Low environmental risks and the capacity to respond to
future trends and stakeholder demands can increase the value of the company.
The high risks, difficult monetarization and high uncertainty of many environment-related future
costs, as well as the potential cost savings of cleaner technologies arising from the reduced
use of hazardous auxiliary and operating materials and related environmental protection
measures have made estimation of the future even more difficult. Still, the methods are widely
used. The task is not so much to change the basic concept of discounting future monetary
flows, but to ensure the inclusion of all relevant earnings and expenses.
8.2. Budgeting for environmental protection
From the point of view of environmental protection investments, conventional investment
appraisal methods often cannot be used without adaption. Quantifying future earnings and
output flows resulting from measures for environmentally protection is a difficult venture.
Particularly in the area of environmental management, one must often work with “soft” or less
tangible data. In addition to pure investment and operation costs, factors such as image,
contacts with environmental and other agencies, legal compliance, employee motivation etc.
need consideration. As discussed in chapter 3, the determination of the “environmental” part of
investments and operational expenditure is difficult.
In a compl iance cont ext , a fact ory ’s choi ce between an end-of- pipe or a pr event ion st rategy wil l
depend heavi ly on the compar ati ve ec onomic s of these options . Thi s is so ev en in instances
wher e prof it abi lit y is negat ive, that is, when the firm ex pects a net loss on its inves tment . Unl ik e
most end-of- pipe tec hnologies, pol lution prevention projec ts tend to reduc e operat ing cost s by
reducing was te gener ati on, regulat or y acti vi ties and polluti on- rel at ed liabi lit ies . In addi tion,
investment s in pol lution prevention may incr eas e rev enue by improv ing produc t or cor por ate
image. Incl udi ng these indi rec t or les s tangible benefit s in the financ ial anal ysi s of projects may
enhance the est imated prof it abi lit y of the prev ent ion strategy, and may be deci siv e in sel ec ting a
poll uti on pr eventi on versus an end-of-pipe opti on. It is at this decis ion point that the concepts and
methods of Total Cos t Assess ment (TCA) -- the comprehensiv e, long- term financial analys is of
poll uti on pr eventi on pr oject s -- can pl ay a rol e in improv ing the fi nancial pic tur e of a pol lut ion
pr ev ent ion investment, and enhance its competit iveness vis -à-vi s end- of- pipe projec ts . TCA
techniques can als o improv e the pr oj ect ed fi nancial per for mance of disc ret ionar y pol lut ion
pr ev ent ion proj ect s, thereby increas ing thei r abil it y t o c ompet e f or li mit ed capit al resourc es. 19
In addition to initial investment and annual operating expenditure, future liability costs and
saving potentials need consideration for investment appraisal.
19 See A. White (1993) and D. E. Savage and A. L. White (1995).
20 See A. White (1993) and D. E. Savage and A. L. White (1995).
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