Happy Earth Day! The news this week is full of environmental statistics. On campus, we will discontinue the sale of bottled water at the end of the semester. This move is estimated to cost the campus $20,000 in revenue. But, other costs will incur, as well. Water stations will be installed. Water fountains will be upgraded, making it easier to fill reusable water bottles. Besides our “earth consciousness,” what strategic goals do we address with this move? How do we evaluate its success? How do we measure the tradeoffs made?
We manage what we measure. So, measurement matters. But, many of the measurement tools associated with ecological management are denominated in flow speeds or error rates or landfill tons. These measures are not meaningful to many of us. Here, we can learn from quality management. Reporting quality problems and progress received appropriate attention when we converted all the problems to a single, common and familiar denominator (dollars!) and added them up. Cost of quality reports revealed to company managers, regulators, legislators and the public reasonable estimates of the expense associated with poor quality. With this data in hand, managers justified expenditures necessary to fix, or even better prevent, quality problems.
Environmental accounting is as old as Earth Day. This generic term applies to multiple levels of accounting from measuring national income to supporting decisions within business organizations. The utility of environmental accounting in supporting business decisions has been documented. Understanding the true costs of business operations allows managers to make better choices. Decisions regarding product and process design, material use and capital investment can be influenced by environmental accounting information.
Environmental costs are frequently hidden across various categories of costs and multiple areas of responsibility. Consider an example in support of this claim. The Tellus Institute submitted a report to the US Environmental Protection Agency addressing the role of environmental accounting in implementing environmental improvements in hospitals. This report identified the following costs associated with purchasing routine supplies for hospitals.
• Cost of acquisition
• Cost of storage
• Cost of utilization (for reusable goods, this may include the costs of cleaning and sterilization)
• Cost of obsolescence (incurred when a product in inventory expires and must be disposed of)
• Cost of disposal (disposal of various waste streams incurs a real cost per unit of weight or volume – costs are significantly higher for products which must be disposed of as hazardous waste)
• Labor cost (include labor costs not elsewhere captured – e.g., labor to collect and segregate waste, receiving and warehousing, staff training)
• Regulatory costs (some items incur costs associated regulatory reporting and compliance)
• Return on investment or avoided costs (savings from cleanup)
“Healthy Hospitals: Environmental Improvements Through Environmental Accounting”
Submitted to the US Environmental Protection Agency by the Tellus Institute
July 2000
Identifying and accumulating these costs potentially change purchasing decisions. Without the information, even well-intentioned managers make environmentally irresponsible choices. And cost their organizations substantial profits.
At the other end of the spectrum are calls to include environmental accounting in measuring national income. Where do we recognize the environmental value of watershed protection afforded by forests or the crop fertilization that insects provide? Similarly, where do we record the degradation of these services? Interest in formalizing the accounting for links between the economy and the environment continues to grow.
So, in observance of Earth Day, an accountant turns her thoughts to how systems of accounting can contribute to environmental sustainability by improving measurement. Will we get it right the first time? Undoubtedly not. Can we wait until we have precise measures of all the cost and revenue elements? Estimates will be necessary. But, we are really good at estimating. Let’s start adding up the dollars associated with environmental decisions.