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Green Accounting

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The traditional stereotype is that the economy and the environment are separate spheres, and that the improvement in one sphere comes at a cost borne by the other. The present situation is that economists, environmental scientists and resource managers are looking upon the economy as a whole which rests upon the functional integrity of the world's ecosystems, and that many aspects of our environment, including those not traded in markets, have economic value.

The common concensus today is that economic forces are at the root of environmental degradation. Well, they do have a point actually. Land developers convert and deface wetlands, timber companies denude forests, fishermen over-harvest lakes and oceans, industries and automobiles pollute the water and the air and so on. Economic activity definitely affects the environment in very many ways. In producing and consuming goods and services, societies draw materials and energy from the environment, adversely affecting the diversty of flora and fauna inhabiting both land and water.

Contents

[edit] What is Green or sustainable accounting

Green or sustainable accounting incorporates environmental assets and their source and sink functions into national and corporate accounts. It is the popular term for environmental and natural resource accounting.

Conventional national accounts largely ignore:

  • New or newly observed scarcities of natural resources, which threaten to undermine the sustainability of economic performance and growth, and
  • Environmental degradation as an ‘external’ (social) cost of economic activity.

It addresses the shortcomings of traditional national accounting, known as the System of National Accounts (SNA) based on the concept that a proper assessment of a country’s income and wealth needs to account for the contributions of activities made by all sectors of the economy and their impact on resource depletion and degradation.

Traditional SNA ignores the value of resources (on and in the ground) as well as the value of environmental degradation. Therefore, it gives a false impression of income and wealth and often leads policy-makers to ignore or destroy the environment to further economic development. Incorporating the real value of natural resources as well as their depletion and degradation allows for better allocation of priorities, thereby helping to address the causes of current major environmental problems including the over-exploitation of natural resources such as forests. (Source:-United Nations Environment Programme (UNEP) report)

[edit] History of resource or green accounting

The conventional system of national accounts (SNA) was first started in the United States of America in 1942. The method of SNA is basically arithmetic, tracing all flows of incomes or goods and services in the economy.

Closing stock = Initial stock + Investments during the accounting period - Capital depreciation

The present situation of environmental or green accounting and its most evolved form, sustainability accounting, has been receiving continuous attention in the academic accounting literature beginning with the work of Gray in the early 1990s, through to the release of the Sustainability Accounting Guidelines at the World Summit on Sustainable Development in Johannesburg in August, 2002.

The concept started almost three decades ago in the early 1970's with important contributions such as “Accounting and Society” (Ralph W Estes 1973) and “Corporate Social Reporting” (Gray R, Owen D and Maunders K 1987).

[edit] Methods of sustainability accounting

Gray is attributed with much of the conceptual development of sustainability accounting and he identified three different methods (in 1993) of sustainability accounting

  • Sustainable cost

Sustainable cost is the (hypothetical) cost of restoring the earth to the state it was in prior to an organisation’s impact; i.e.. . . the amount of money an organisation would have to spend at the end of an accounting period in order to place the biosphere back into the position it was at the start of the accounting period.(Gray, 1994, p. 33)

This accounting concept is of capital maintenance, and applies to the biosphere, in recognising the need to maintain the stock of natural capital for future generations. Sustainable cost is deducted from the accounting profit (calculated using generally accepted accounting principles) to arrive at a notional level of sustainable profit or loss. Where the sustainable cost exceeds the accounting profit the degree of unsustainability is measured in monetary terms.

Unfortunately, the problem with this method is that any damage to critical natural capital would, in theory, be valued at infinite cost because it is irreplaceable, leading to the conclusion that the activities of an organisation which damage critical natural capital are unsustainable.

  • Natural capital inventory accounting.

Natural capital inventory accounting involves the recording of stocks of natural capital over time, with changes in stock levels used as an indicator of the (declining) quality of the natural environment. Various types of natural capital stocks are distinguished enabling the recording, monitoring and reporting of depletions or enhancements within four distinct categories suggested by Gray.

  1. Critical, for example, the ozone layer, tropical hardwood, biodiversity.
  2. Non-renewable/non-substitutable, for example, oil, petroleum and mineral products.
  3. Non-renewable/substitutable, for example, waste disposal, energy usage.
  4. Renewable, for example, plantation timber, fisheries.
  • Input–output analysis

Input–output analysis accounts for the physical flow of materials and energy inputs and product and waste outputs in physical units. It aims to measure all materials inputs into the process, and outputs of finished goods, emissions, recycled materials and waste for disposal.

[edit] What are the advantages and disadvantages of Green accounting

The Advantages

Adopting decisions about the financial performance of the organization and green accounting, providing useful information for reaching cost minimization targets (especially environment) and negative impact on environment, presenting data about costs necessary for estimating the financial impact of such initiatives as:

  • pollution preventing;
  • designing environment and green accounting improvement;
  • projection, costs, estimating life cycle in the environment;
  • product circulation administration from environmental prospective;
  • supply process from environmental perspective;
  • the product or producer’s liability;
  • environment-centered management systems;
  • assessing, testing and reporting performances of environmental activities;
  • reporting of these performances;
  • information source for other routine managerial activities such as: product and process design, cost distribution and control, capital budgeting, supply process, price policies, performance evaluation.

The Disadvantages The implementation of green accounting doesn’t represent a guaranty for obtaining financial performance or environment-related performances.

[edit] The environmental analysis

Environment analysis elements Forms of impact on the environment - by means of: Action taken as a result of the environment analysis
Products

Services Activities

- discharged rivers;

- used underground waters discharged by sewage;
- gas emissions in the atmosphere;
- vibration noises;
- abnormal situations;
- other pollution factors.

- controlling impact on the environment;

- adapting to legal requirements, according to the legislation in the filed.

Technology - quantity, product nature, its environmental sensitivity;

- created/natural/possible incidents and/or accidents;

- controlling the impact on the environment;

- current situation;
- product’s life cycle;
- studying product-related ecological aspects and the corresponding interest rate of the clients;
- adapting to legal requirements, according to the legislation in the filed.

[edit] GDP is a poor welfare indicator

The Gross Domestic Product (GDP) is by far the most important economic indicator, not least because it is often considered to be measures of how well we are doing as a nation. While it does a pretty good job of estimating the size of our economy, it is inadequate as true welfare measures.

Time and again, GDP ignores our environment. Even worse, GDP often includes the environment on the wrong side of the balance sheet. If we first pollute and then pay to clean up the pollution, both activities add to GDP. Environmental degradation frequently looks good for the economy.

[edit] U.S. Green NNI

Beginning in the 1970s, economists have attempted to adjust GDP to derive a so-called "Green Net National Income (Green NNI)" and bring it closer to a true welfare measure. Official green accounting efforts are now under way in several countries, most notably in China and many European economies. Not so in the United States.

In 1995, Congress halted official green accounting efforts and commissioned a National Academy of Sciences study. That study provides a clear mandate for green accounting. Among its first recommendations was the creation of a set of U.S. timber accounts, one of the more easily measurable natural resources.

[edit] Green accounting as an enabler to wider sustainable development

Engaging an organisation in the transition to sustainability is difficult. It requires that people engage in a process which builds their understanding of the need to change their behaviour and gives them options and alternatives on how to change. Green accounting can be a vehicle for that process.

Sustainability accounting allows for a justification of sustainable decisions. It uses financial language which decision makers are familiar with and provides opportunities for more sustainable behaviour. As such, it can act as a bridge between the ‘old’ and the ‘new’.

The purpose of green accounting is to be one carrier in a large change process.

[edit] How does one begin

What usually works best is when an organisation, country or people start from within rather than from the outside. Reporting performance for internal purposes can then feed into external disclosure.

Also, in order to prepare a ‘complete’ set of sustainability accounts an organisation needs to have the crucial data, such as carbon dioxide emissions and so forth. Starting a sustainability accounting project can drive improving non-monetary environmental and social reporting as well.

Below are some of the questions one could ask oneself one starting out on green accounting:

  • What decisions need to be made for the organisation to be more sustainable?How will the information generated be used?
  • Who will make those decisions? Who is this information for?
  • What are the organisation’s blind spots? What do people not realise that they need?
  • Who will have to be convinced for this to happen?

The answers to these questions will differ from place to place. For some organisations it will be most appropriate to start with an isolated part – say one location, one country, one product line, one project. For others it will make more sense to be global.

There will be problems: how does one value an impact? Where should one draw boundaries? Green accounting is only about getting a number that is good enough to enable the larger change process towards sustainability. The complexities and difficulties of green accounting should not prevent organisations making a start. They should recognise that their approach will evolve and improve over time.

[edit] News

  • India’s blueprint for tackling climate change: In The Woods Over Environment Policy

[edit] Further Reading

  • Green Accounting in Europe - Four Case Studies (Economics, Energy and Environment) (Hardcover)by Anil Markandya (Editor), Marcella Pavan (Editor)

[edit] References

  • Industry as a partner for sustainable development: Accounting Sectoral Report, Executive Summary, UNEP DTIE May02
  • World Summit on Sustainable Development
  • Sustainability accounting—a brief history and conceptual framework by Geoff Lamberton.
  • Accounting for Sustainability: Guidance for Higher Education Institutions
  • Environmental Economics: An Indian Perspective, edited by Rabindra N. Bhattacharya, Published by Oxford University Press.
  • UNEP, Green Accounting: A Virtual Resource Center
  • Archive of Publications on Environmental-Economic Accounting
  • Sustainable Development: Promoting Progress or Perpetuating Poverty? edited by Julian Morris published by Profile Books, London, August 20
  • To What Extent Green Accounting Measure Sustainable Development by Arief Anshory Yusuf and Armida Alisjahbana
  • Implementation Opportunities of Green Accounting: for Activity-Based Costing (ABC) in Romania
  • Gray, R. (1993). Accounting for the environment. London: Paul Chapman
  • Jorgensen, H. B. (1993). The ‘‘green account” of the Danish SteelWorks Ltd. Social and Environmental Accounting

[edit] Additional Information

  • The Encyclopedia of Earth
  • Green Accounting
  • SUSTAINABILITY ACCOUNTING GUIDE

[edit] See Also