‘sm COMPANION Social & Enucroumental sus _—«Q 8.1 ENVIRONMENTAL MANAGEMENT SYS- ‘TEMS: ISO 14000 AND EMAS ‘Anenvironmental management system isa broad general term for any system used by an entity to monitor and manage the impact that its products and operations have on the environment. The aims of a management system might be to: + minimise the negative impact of operations on the environment (damage to air, water or land) ‘© comply with environmental laws and regulations make continual improvements incither of the above areas. An environmental management system includes an en- vironmental information system. Information is needed to: monitor compliance with environmental laws and regulations, and/or * monitor the implementation of the company’s own environmental policies. ‘An information system may provide, for example, information about physical quantities of emissions of waste or toxic materials, resources in the environment, the environmental characteristics of the company’s products or services, information about environmental ‘incidents’ such as spillages of waste or toxic material. Guidance for companies in the structuring and operating of an environment management system is provided by anumber of intemational. ISO 14000 ‘The International Standards Organisation (ISO) has issued ‘a series of standards on environmental management systems, known as the ISO 14000 series of standards. ‘They are standards that specify a process for managing, controlling and improving an entity’s environmental performance. ‘They specify an environmental management system, provide guidance for using the system and explain how a company’s environmental management system can beaudited and receive an ISO 14000 certification, ISO 14001, one of the standards in the 14000 series, provides general guidance on: Summarised notes * the general requirements for an environmental ‘management system © environmental p: environmental policy in existence, asa condition of meeting ISO 14000 requirements * planning: an entity should declare its main environmental objectives, which should be primary areas of planning the company’s environmental programme and improvement process implementation and operation: a system must establish procedures, work instructions and controls toensure that the environmental policy is implemented and the planning targets are achieved © checking and corrective/control actions © management review: there should be a regular review of the environmental management system to ensure that it is suitable (for the entity and its objectives) and effective in operation. The standard san be applied by any company in any industry, anyv nere in the world. Companies wishing to obtain ISO 14000 certification will be audited against the requirements of this standard. Having obtained the certificate, companies will be subject to regular audits to ensure that they are maintaining compliance with the requirements of ISO 14000. Another standard in the series, ISO 14000, provides more detailed guidance, including guidance on how to take a structured approach to setting environmental targets and objectives and establishing and implementing asystem for monitoring and control. ‘Companies that apply ISO 14000 and obtain ISO 14000 certification will therefore have a management system for: * identifying the aspects ofits business that have an impact on the environment * monitoring changes in legislation and regulation on environmental issues producing objectives/targets for improvement planning to achieve these improvements, and conducting regularreviews for continual improvement. 1SO 14000 does not specify targets for achievement or standards of environmental performance. It provides guidance on a management system for the management of environmental issues. 295a the benefits of obtaining an ISO 14000 certif. cal panies must be ‘audited’ by an independent ctemal expert before they are awarded an ISO 14000 extircate Having obtained a certificate they are there. cer able to provide an assurance thatthe company has isetive concern for environmental issues to: 2 Nemployees, and {individuals and groups outside the company, such as the government, the public, customers and investors/shareholders. Certification also allows companies to make validated claims about the environmental effect (‘environmental- friendliness’) of their products. EMAS MAS is the Eco-Management and Audit Scheme. It is a scheme operated by the European Union which recognises companies that are continually improving theirenvironmental performance. Organisations regis- tered with EMAS comply with law, run an environ- ment management system and publish environmental statements which are independently-verified. EMAS isvery similar in concept to ISO 14000. Environmental management accounting (EMA) Management accounting is concerned with the provi- sion of information to management, to help manage- ment make decisions. Environmental management ac- counting has the same purpose, but it identifies envi- ronmental costs and benefits, which might be measured in either physical terms or money terms. Environmental management accounting (EMA) pro- vides information that supports the operation of an environmental management system. It provides man- agers with financial and non-financial information to Support their environmental nianagement decision-mak- ing. EMA complements other ‘conventional’ manage- ment accounting methods, and does not replace them. Ay main applications of EMA are for: estimating annual environmental costs (for example, costs of waste control) > budgeting and setting targets for improvements in environmental performance product pricing investment appraisal (for example, estimating clean- Up costs atthe end of a project life and assessing the environmental costs of a project) identifying opportunities for cost savings estimating savings from environmental projects, SME COMPANION Although environmental management accounting infor- mation is intended for use mainly by management, also included in reports that the entity publishes exter- nally, such as sustainability reports/environment reports EMA techniques Environmental management accounting techniques include: > re-defining costs > input-output analysis > environmental activity-based accounting > Environmental life cycle costing Re-defining costs ‘The US Environmental Protection Agency (1998) suggested terminology for environmental costing that distinguishes between: > conventional costs: these are environmental costs of materials and energy that have environmental rel- evance and that can be ‘captured’ in costing systems > potentially hidden costs: these are environmental costs that might get lost within the general heading of ‘overheads’ > contingent costs: these are costs that might be incurred at a future date, such as clean-up costs, > image and relationship costs: these are costs asso- ciated with promoting an environmental image, such as the cost of producing environmental reports. There are also costs of behaving in an environmentally irresponsible way, such as the costs of lost sales as a result of causing a major environmental disaster. In traditional management accounting systems, environmental costs (and benefits) are often hidden. EMA attempts to identify these costs and bring them to, the attention of management. Input-output analysis Input-output analysis isa method of analysing what goes into a process and what comes out. It is based on the concept that what goes into a process must come out oF be stored. Any difference is residual, which is regarded as waste. Inputs and outputs are measured initially in physical quantities, including quantities of energy and water. They are then given a monetary value. Inputs 100% Output product: 60% Scrap sold for re-cycling: 20% Disposed of as waste: 15% Unaccounted for: 5% 296SME COMPANION Environmental activity-based accounting = Environmental activity-based accounting is the appli- cation of environmental costs to activity-based account- ing. Adistinction is made between: + environmental-related costs: these are costs that are attributable to cost centres involved in environmen tal-telated activities, such as an incinerator or a waste recycling plant * environmental-driven costs: these are overhead costs resulting from environment-related factors, such as higher costs of labour or depreciation. The cost drivers for environment-related costs may be: # the volume of emissions or waste * thetoxicity of emissions or waste ‘environmental impact added” (units multiplic environmental impact per unit) * the volume of emissions or waste treated account- ing + environmental life eycle costing by Environmental life cycle costing Life cycle costing is a method of costing that looks at the costs of a product over its entire life cycle. Life cycle costing can help a company to establish how costs are likely to change as.a product goes through the stages of its life (introduction, growth, maturity, decline and withdrawal from the market). This analysis of costs should include environmental costs. ‘Xerox provides a good example of the environmental aspect of life cycle costing. Xerox manufactures photo- copiers, which it leases rather than sells. Atthe end ofa lease period, the photocopiers are returned from the customer to Xerox. Atone time, photocopiers were de- livered to customers in packaging that could not be re- used for sending the machines back at the end of the lease period. Customers disposed of the old packaging and had to provide their own new packaging to return the machines to Xerox. Xerox then disposed of this packaging. The company therefore incurred two costs: the cost of packaging to deliver machines and the cost of disposal of the packaging for returned machines. By looking at the costs of photocopiers over their full life cycle, Xerox found that money could be saved by manufacturing standard re-usable packaging. The same packaging could be used to deliver and retum machines, and could also be re-used. At the same time, the com. pany created benefits for the environment by reducing disposals of packaging materials, Social and environmental reporting Reporting on social and environmental issues isa majop feature of corporate social responsibility reponing (CSR reporting). Some companies publish social and environ. ment reports, often called sustainability reports, as g separate document each year. It is usually published at the same time as the annual report and accounts, butas asseparate booklet. ‘These reports are entirely voluntary (although in the EU companies are now required to include some social ‘and environmental information in their annual business review). Companies can therefore choose what to put in and what to leave out. This, for example, is where companies that use triple line reporting might publish their triple line results, There could be several reasons why a company chooses to publish a social and environmental report: = The board of directors and senior management might havea genuine ethical wish to achieve a sustainable business, and consider that reporting on social and environmental issues is extremely important. For ‘example, a company with an ISO 14000 certificate should want to provide information about its achievements. * The company might want to publicise its ‘green credentials’ to investors. This is particularly important as institutional investors expect to see information about a company’s social and environmental policies and achievements. + There could be some element of competition. A company might see a competitive advantage in explaining its social and environmental achievements tocustomers, for comparison with rival companies, Environmental Reporting In Practice Inputs and outputs, direet and indirect reporting The environmental footprint is normally considered for environmental reporting as the environmental conse- quences ofan organisations inputs and outputs. * Inputs include the measurement of key environ- ‘mental resourees such as energy, water, inventories and land use. * Outputs include the efficiency of internal processes and impact of outputs, for example the proportion of product recyelability, tonnes of carbon or other gases produced, waste or pollution. These inputs and outputs can be considered both directly and indirectly: 297Direstenvironmental accountin within the reporting entity; «Indirect environmental accounti the forward and backward suppl company incurs in bringing the ~ie. externalities. 'S Measures only that ng also report E Son ly chains which the Products to ‘market 0 for example a furniture maker cout ume of waste and carbon emissions factory (direct). However, it could extend tend th i retail and distribution components of its supply et (indirect). a dl discuss the vol- Produced by its n Inpractice most organisations restrict their reporting the direct environmental consequencesasitigso hire cult to measure environmental impacts outside there. porting company. What is Environmental Reporting? Environmental reporting is now widely accepted as be- ing the production of narrative and numerical informa- tion on an organisation's environmental footprint for the accounting period under review, The narrative is used to convey objectives, explana- tions, aspirations, reasons for success or failure against targets and addressing specific stakeholder concerns. Numerical information is used to convey messages in areas that can be tangibly measured, such as pollution amounts (tonnes or cubic metres), resources consumes (tonnes, litres, kWh) or land use (square metres or hect- ares). Mandatory (statute) or voluntary Inmost countries environmental reporting remains en- tirely voluntary in terms of statute or listing rules. In practice most large companies adopt some kind of en vironmental reporting driven by reputational and polit cal motivations. Note that references to the environ ment and sustainability have existed in annual reports for many years but its reporting has become: ‘much more formal in recent years. Anumber of voluntary repor most common of these being the Global Rep tiative (GRI) as discussed above. ting frameworks exist, the orting Ini- Reporting media Companies typically embe¢ tal’ section into their annual re even commission the production 0 <4 social and environmen- port, Some companies fa stand-alone re SME COMPANION ort lei Port dedicated to environmental, and sometimes, social issu 4 ‘estes. These can be expensive to produce, particularly ifan audit firm i an audit firm is employed to provide some kind of Assurance report, Tem ‘logy is normally linked to the company’s mar- ‘ting and public relations efforts, for example: * Citizenship report (Barclays bank) Corporate responsibility report (GlaxoSmithKline) Sustainability and corporate responsibility report (Ericsson) Sustainable business (Vodafone) Advantages of environmental reporting A number of advantages can be enjoyed by companies ‘who embrace environmental reporting such as: * Reporting companies can discharge their account- abilities to society and future generations Strengthens accountability to shareholders and re- duces the agency gap between directors and share- holders through wider information disclosure * Companies can respond to certain issues that may threaten the perception of their ethics and/or com- petence (for example oil companies) + Shareholders are better able to manage their expo- sure to environmental risk and make more informed decisions * Companies use the process and output of environ- ‘mental reporting as a lever to improve internal effi- ciencies of operations. Subsequent technical ad- vancements can help save costs, increase opera- tional efficiency and reduce waste. ynmental ‘What is a social and environmental audi A social and environmental audit, or simply an environ- mental audit, can have several meanings. «It can mean a formal audit of an environmental management system, to check that the system op- crates effectively. Companies with an ISO 14000 certificate are required to have an audit each year of their system, undertaken by an independent ex- ‘ternal expert. « Itcould be an internal check ofa particular aspect of the company's environment management sys- tem, such as its system for measuring the environ- ental costs of waste, or the methods used to mea- sure the cost of site contamination at a particular ‘manufacturing site. This audit might be caried out bby members of the company's own internal audit team (who might be an environmental expert rather 298SME COMPANION than an accountant). . * There may be a check on the company’s compli- ance with environmental and social legislation and regulations, * It could involve a verification of social and env ronmental information that will be included in a pub- lished report, such asan environmental performance report. * Similarly it might be a check on the accuracy of figures supplied by the company to the government authorities responsible for environment regulation, * Tteould also refer to the checks that the company’s extemal auditors need to carry out on the company’s financial statements, insofaras they relate to envi ronmental issues. Forexample the introduction of new environmental laws might have an impact on the impairment of non-current assets, anda failure by the company to carry out envi- ronmental improvements required by law might create a requirement to make an accrual for remedial costs or a provision for the payment of a fine. Environmental audits are performed atthe discretion of the company’s management and can be performed by internal or external experts. The use of independent ex- ternal auditors will add more credibility to the report than would be added by internal auditors. However, the value of such audits continues to be disputed due to the lack of mandatory standards. Engagement characteristics An environmental audit will result in the production of an assurance report that enhances the credibility (or not!) of the subject matter on which the au porting. The engagement will typically contain three el- ements: © Agreed metrics (i. what should be measured and how) — typically emissions (e.g. pollution, waste and greenhouse gases) and consumption (e.g. en- ergy, water and non-renewable feedstock) * Performance measured against those metrics. # Reporting on the levels of compliance or variance The challenge lies in deciding what to measure and how to measure it. In the absence of mandatory regulatory requirements the company is free to design any metrics it wishes the auditor to review. There are not yet any formal audit standards that spe- cifically govern the audit of social and environmental reports. However, some guidance is provided by stan- dards covering reviews and assurance engagements other than the audit of historical financial information, ‘How can environmental audits contribute toenvironm accounting? ; ; ‘At the moment there is no legal requirement in any country for environmental audits. This type of auditis voluntary. Similarly there is no legal requirement for environmen. tal accounting, although professional accounting bodies are encouraging more research by academies and prac- tice by companies. It seems quite possible however, that environmental audits and environmental accounting will both become more common, as companies become increasingly aware of the problems of sustainability and sustainable growth, The development of environmental accounting and en- vironmental auditing will depend to a large extent on the development of environmental management systems, and how soon more companies establish environmental ‘management systems. When environmental management systems are established: + management needs reliable environmental informa- tion + ingeneral, managers prefer information in a quanti- fied/measured form rather than in qualitative and descriptive terms + as environmental management systems develop, with measurement systems for setting targets and monitoring performance, it seems likely that the need for audits of the information system will be neces- sary, to reassure management that the information systems are sound, ‘The link between environmental audits and envi ronmental reporting Environmental audits are becoming more important be- cause investors are increasingly interested in the envi- ronmental footprint of a company as well as its eco- nomic performance. + There is a growing opinion amongst investors that environmental issues are a potential source of risk toacompany’s business and reputation, and envi- ronmental issues must therefore be managed. * There may also be increasing numbers of “ethical” investors, who prefer to invest in companies with strategies for sustainable business. * Consumers may gradually be moving towards a preference for purchasing ‘environmental-friendly" 299- sovets rater than cheaper alternatives, This eis that companies should possibly be develop- mestratgies that postion themselves as environ- ing aly friendly” businesses within the industry or market: sjocethees growing interest in environmental ssus, Sif jga growing demand for environmental reports ery companies. Companies are better able to produce vvmental reports if they carry out regular environ- e smental audits. However, there still seems a long way to go before so- eland environmental reporting rivals financial report ing (economic reporting) as the main method of report- ingby companies. ‘The elements ofan environmental audit ‘Anenvironmental audit typically has three elements: « Metrics. These are agreed aspects of performance that are measured (quantified). For example, there may be an agreed metric for measuring emissions into the atmosphere, or for pollution of rivers. ‘+ Setting targets for achievement and measuring a: tual performance. Performance should be measured : 7 interms of the agreed metrics. z «Reporting on achievement of targets or-variances!. ‘non-compliance with targets, with reasons for any non-compliance. 2 In practice the metrics used in an environmental audit tend to be context-specific and somewhat contested. Typical measures, however, include measures of emissions (e.g. pollution, waste and greenhouse gases) and consumption (e.g..of energy, water, non-renewable feedstock). Together, these comprise the organisation's environmental footprint. 300 SME COMPANION