GUIDE GG374R REDUCE YOUR COSTS WITH ENVIRONMENTAL MANAGEMENT ACCOUNTING

Transcription

1 GUIDE GG374R REDUCE YOUR COSTS WITH ENVIRONMENTAL MANAGEMENT ACCOUNTING

2 ACCA (The Association of Chartered Certified Accountants) With a move towards a low carbon economy seen as fundamental to long-term survival, sustainable development should be integral to corporate strategy. As carbon and water become commoditised and their use restricted, the value placed on such items will help businesses understand the importance of measuring sustainability performance and the influence this has in financial, environmental and societal terms. Such governance will help ensure risk is reduced, opportunities are created and long-term success is achieved. The Chartered Institute of Management Accountants (CIMA) CIMA and its members are well positioned to help ensure that organisations both survive, and are successful, in light of climate change and other environmental issues. CIMA helps organisations to consider environmental issues in a strategic context and integrate sustainability into their long term decision making process. Management accountants have a key role to play in this process, providing vital business intelligence to support strategy and influence decision making. Environment Agency Environmental management accounting can help companies to report publicly on their environmental impacts and the actions they are taking to reduce them and their associated costs. This can lead to better relationships with key stakeholders, including environmental regulators, financial institutions, investors, customers and local communities. The Environmental Management Accounting Network (EMAN) The Environmental Management Accounting Network is continuing to witness increasing interest in environmental and sustainability accounting, and many innovative organisations have identified ways in which accountants can valuably contribute. This Good Practice Guide translates this into practical actions that accountants working for or advising businesses can take to realise economic and environmental benefits both in the short-term and also taking a longer-term strategic perspective to help ensure that their businesses are sustainable into the future. The Institute of Chartered Accountants in England and Wales (ICAEW) Trusted flows of relevant and accurate information are vital to business sustainability. Such flows and the systems and processes that support them are the natural territory of accountants and that applies to environmental information just as it does in other areas of management accounting. This publication will help organisations improve environmental and business performance and this is one of the aims of our own Sustainable Business thought leadership programme. The Institute of Chartered Accountants of Scotland (ICAS) The accountancy profession has an important role in encouraging organisations to adopt environmental management accounting techniques and to be more accountable to the public for the resources they consume. This practical Guide shows how this can be done - and how organisations can make better informed decisions which benefit both their business and the wider community.

3 REDUCE YOUR COSTS WITH ENVIRONMENTAL MANAGEMENT ACCOUNTING This Good Practice Guide was produced by Envirowise Prepared with assistance from: Martin Bennett and Mabbetts & Associates Ltd

4 SUMMARY Envirowise has worked with a number of accounting professional bodies and interested agencies to deliver this updated Good Practice Guide to help accountants and finance professionals use environmental accounting techniques. Environmental accounting techniques involve identifying, analysing, managing and reducing costs associated with raw materials, utilities, services and waste, with the aim of saving money and reducing the environmental impact. This publication offers practical advice and case studies to help organisations review their decision-making and information flows to enable improved environmental performance to become a key element of their strategy. Some accounting professionals may believe that resource efficiency is not their role but there are many reasons why the accounting profession should get involved and they are explained in this Guide. It should be noted that this Guide does not cover financial reporting of environmental issues such as liabilities or costs arising from business activities. The Guide does cover the environmental aspects of raw material waste, water, energy, transport, the supply chain and explains aspects of various environmental management initiatives. Each section features details on: legislation; likely environmental issues; potential accounting responses in the short-term and the long-term. The Guide also includes a variety of case studies to help illustrate the possible responses to different environmental challenges and signposts to the relevant organisations that can help with aspects of the opportunities discussed in this Guide.

5 Contents 1 INTRODUCTION Environment and management The business benefits of good environmental performance Environmental accounting The purpose of this Guide 5 2 ENVIRONMENTAL ASPECTS AND IMPACTS OF BUSINESS What are an environmental aspect and an environmental impact? Why are these relevant for an accountant? 7 3 WASTES Business activities and environmental impacts Accounting responses 18 4 WATER Business activities and environmental impacts Legislation, regulation and public policy Accounting responses Big Splash and the Rippleffect 23 5 ENERGY USED IN BUILDINGS Business activities and environmental impacts Legislation, regulation and public policy Accounting responses Footprinting, offsetting and adaptation 31 6 TRANSPORT Business activities and environmental impacts Legislation, regulation and public policy Accounting responses 34

6 7 SUPPLY CHAIN MANAGEMENT Introduction Supply chain management, the environment, and accountants 39 8 OTHER ENVIRONMENTAL MANAGEMENT INITIATIVES Environmental management systems (EMS) Environmental reporting Key Environmental Performance Indicators 48 9 Sources of SUPPORT Envirowise Carbon Trust Energy Saving Trust (EST) National Industrial Symbiosis Programme (NISP) Waste & Resources Action Programme (WRAP) Manufacturing Advisory Service (MAS) Scottish Manufacturing Advisory Service (SMAS) FURTHER READING 56 APPENDIX 1 60 Glossary 60 APPENDIX 2 63 Contact details for accountancy institutes and the Environment Agency 63 APPENDIX 3 65 Additional case studies 65

7 INTRODUCTION 1.1 Environment and management Concern is growing over the increasing pressures that our activities as workers and consumers are imposing on the natural environment as both populations and standards of living rise. The rate at which we consume energy and resources is outstripping generation. Resource consumption, in turn, gives rise to by-products, some of which may create local or global pollution. In particular, evidence is accumulating that climate change as a result of the use of fossil fuels is already happening and will have an increasing effect. SECTION 1 Until recently, pollution and environment may have been perceived as the realm of scientists. A significant factor in opening up the business opportunities and threats from climate change was the publication in 2006 of the Stern Review The Economics of Climate Change, summarising There is still time to avoid the worst impacts of climate change, if we take strong action now. Sir Nicholas Stern, Head of the Government Economic Service and former World Bank Chief Economist, stated: Using the results from formal economic models, the Review estimates that if we don t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more. In contrast, the costs of action - reducing greenhouse gas emissions to avoid the worst impacts of climate change - can be limited to around 1% of global GDP each year. Economic mechanisms influence the costs of raw materials - the costs of gold, steel, copper and chemicals, for example, fluctuate depending on global supply and demand. Businesses facing rising costs must, therefore, look to resource efficiency and reducing energy use, waste creation and materials usage where possible. Fig 1 Environmental costs of business operations INPUTS PROCESSES OUTPUTS Materials Packaging Energy Water Products/ services Packaging Wastes Effluents Air emissions 1

8 SECTION 1 Most activities involve some impact on the environment and use it in one or both of two ways: As a source of resources that provide inputs. These resources may sometimes be sustainable within certain limits, such as fishing stocks. In other cases they may be critical resources that once used can never be replaced, such as the use of fossil fuels and the extinction of species of wildlife or plants. As a sink to accept the wastes (pollution) which represent the unwanted outputs from activities - not only solid wastes, but also liquid wastes going into water and gaseous wastes such as CO 2 emissions discharged into the atmosphere. Business can use the environment in a positive way to generate growth and reduce impacts through sustainable development. Business decisions are influenced by facts, figures and costs. Accounting for the environment in business, therefore, has an influential role in helping to control overheads and making businesses more profitable. This Guide is specifically directed at the contribution that accountants and others carrying out accounting roles can make to support the businesses they serve in this. This includes both accountants working directly for businesses and those in public practice who provide professional accounting services to clients. 1.2 The business benefits of good environmental performance Traditionally, most businesses main concern for environmental issues has been to make sure that they comply with all relevant legislation and regulations that aim to reduce and control pollution. This has usually been of the traditional command-andcontrol variety where the regulator sets rules and issues permits, then checks to confirm that businesses are complying. Where necessary, the regulator then enforces these with prosecutions, fines and improvement notices. The responsibility within businesses for compliance has usually been handled by: specialists in environmental management, or; those responsible for health, safety and quality (for whom environment has been added on to the job-role), or; production manager/site manager/engineer-type roles - since most regulation has traditionally been directed at those sectors with obviously significant environmental impacts such as heavy manufacturing. Historically there has been little obvious role for accountants. However, this is changing as environmental performance is coming to affect many businesses in ways beyond merely complying with regulation. These new pressures on businesses can affect the business s value far beyond the occasional expense of permit fees and fines. Environmental issues which can affect businesses include: 2

9 Environment-related costs, which can increase faster than normal inflation. This is partly due to taxes and other Government policies which are deliberately designed to achieve this effect, such as green taxes. Even without this, environment-related costs will still tend to rise faster than average due simply to the usual laws of supply and demand, as prices reflect the increasing scarcity of environmental resources. Risks of environmental effects on a business such as water restrictions, oil shortages, increased flooding or other severe weather conditions. Costs associated with insurance may rise. SECTION 1 Poor environmental performance can damage stakeholders perceptions of the business and this can have a damaging effect on reputation and image. Stakeholders include groups such as customers, governments, staff, investors, press and non-governmental organisations (NGOs), all of whom can play an important part in the business s ongoing success. This type of impression is not easy to quantify but is increasingly important to monitor. Conforming with the standards expected by society can be seen as an implicit social contract, and a form of unwritten licence to trade. Some leading businesses are taking a forward-looking approach to environmental issues and are creating value by managing environmental risks and opportunities. They are thinking about how they can respond to environmental issues in ways that can improve performance, and are considering environmental issues in longterm decision-making and strategy. As a result, they are seeing both financial and reputational benefits. Ultimately, it is likely that more and more businesses will have to make strategic changes in order to maintain their competitive advantage in markets where there is ever-increasing attention on environmental issues such as climate change. As well as making short-term changes, businesses should also be considering the longterm risks and opportunities that environmental issues present and focusing on performance as well as conformance. 1.3 Environmental accounting The term environmental accounting can be used to cover a range of different techniques and activities. Most of these are ways of adapting or extending conventional accounting in one way or another in order to help businesses address the new challenges posed by the environmental issue. External reporting by businesses on their environmental performance is the most obvious environmental accounting activity since, by definition, this is already in the public domain. External reporting is touched on briefly in section 8 of this Guide, but our main focus is on the use of accounting information and techniques to support management, known as environmental management accounting (EMA). Environmental resources have not traditionally been recognised explicitly as assets in the same way as man-made items such as buildings, plant and equipment, since they have always been assumed to be indefinitely available in unlimited quantities. 3

10 SECTION 1 However, we are now slowly coming to recognise that environmental resources are finite and, therefore, just as scarce and valuable as assets legally owned by a business. There are several ways in which accountants can adapt their existing skills and usual job responsibilities to help their businesses to deal with environmental issues, and in many ways accountants are in a position to make a unique contribution. However, if this role is not taken on by accountants, it could instead be filled by others. Accountants have a direct interest in controlling and reducing business costs and increasing profits. They have the necessary skills and experience to: monitor, measure and control costs; manage information systems so that the outputs are accurate and reliable; identify and plan financial budgets for improvement projects; help both to formulate and to implement strategy; provide highly regarded advice. Environmental management accounting offers an opportunity for accountants to develop the services they offer beyond the traditional core activities. Two accounting skills are particularly relevant here: Costing. It is essential that the environmental costs of products and services are understood and allocated properly so that they can be managed and prices can be set at an appropriate level. Investment appraisal of projects. Accountants have an important role to play in ensuring that all relevant environmental costs are considered in project proposals. A small number of products often generate a disproportionate share of total environmental costs. The problem is that environmental costs frequently get hidden as overheads and allocated inappropriately. Treating environmental costs as a general overhead rather than allocating them to individual products leads to some products appearing to have higher costs than is actually the case, while other products appear to be cheaper to produce than they really are. Accountants have the skills and experience to determine the true value of environmental costs. This problem also applies to many other types of cost. The technique of activitybased costing (ABC) develops a detailed understanding of costs and identifies cost drivers which reflect the links between causes and effects, and then uses this information to recalculate the costs of products, processes and services. This approach shares many similarities with the techniques described in this Guide. Many businesses do not fully understand the implications of environmental factors on their operations - often because the accountants, environmental managers and others with relevant information are seldom brought together to consider the matter. Applying environmental management accounting techniques gives businesses an opportunity to take a more strategic view of how current and future environmental factors might affect a business s short-term profits and long-term competitive advantage. 4

11 In searching for ways to deliver quality products and services to customers using fewer materials and utilities, businesses may also find better design and distribution solutions that result in cost savings and an improved reputation. In order to keep this Guide focused on what is most likely to be immediately relevant for most businesses, it does not attempt to cover: financial reporting of other environmental issues such as provisions made for environmental liabilities such as contaminated land 1 ; SECTION 1 societal costs or other costs to the environment that are external to a business but may arise partly because of its activities, such as acidification of lakes due to air pollution. 1.4 The purpose of this guide This Guide aims to help both accountants and financial managers in businesses and accountants in practice and financial advisors to use environmental management accounting techniques to: identify and analyse materials, utilities and waste costs to help the business to: make informed decisions about operating costs; identify priority areas for cost-effective environmental improvement and increased profitability; allocate environmental costs to different processes to help stimulate process improvements and cost-saving projects; compare the environmental costs of different products and services to identify areas of the business for future expansion and stimulate cleaner design projects; incorporate environmental considerations into decisions about investment in new technology and equipment; enhance team-working between accountants and non-financial managers. The techniques described in this Guide are applicable to all sizes and types of business in all sectors including the private sector, the public sector, and not-forprofit organisations such as charities 2. However, for simplicity and brevity we use the term business in this Guide to refer to organisations of all types. This Guide is intended to provide practical guidance for accountants which can be applied directly and immediately. Section 2 explains how a business can have environmental impacts, and how these can be linked both to adverse business impacts and to the role of an accountant. 1 The treatment of contaminated land in financial reporting is addressed by financial reporting standards FRS12 in the UK and IAS37 internationally. 2 We have therefore deliberately taken out the phrase increase your profits that was part of the title of the first version of this Guide, which was published in

12 SECTION 1 Sections 3-7 are intended to help accountants gain an understanding of the areas of waste, water, energy, transport and supply chain management, and of how environmental management accounting techniques can be used here to a business s benefit. Section 8 outlines other environmental management initiatives such as environmental management systems, environmental reporting, and key performance indicators. Section 9 outlines the free advice and guidance which is available from Envirowise, Carbon Trust, Energy Saving Trust, National Industrial Symbiosis Programme, Manufacturing Advisory Service and the Waste & Resources Action Programme on the related environmental management accounting topics which are discussed in Sections 3-7. The Guide also includes: business examples highlighting the benefits of environmental management accounting; a short-list of further reading made available by British Accountancy Institutes and Associations (Section 10); a glossary (Appendix 1); contact details for the professional bodies which were involved in its preparation (Appendix 2); details of additional case studies which are included in this Guide but are not available on the Envirowise website (Appendix 3). 6

13 ENVIRONMENTAL ASPECTS AND IMPACTS OF BUSINESS 2.1 WHAT are AN ENVIRONMENTAL ASPECT AND AN ENVIRONMENTAL IMPACT? An environmental aspect is an: SECTION 2 Element of an organisation s activities, products or services that can interact with the environment. Whereas an environmental impact is: Any change to the environment, whether adverse or beneficial, wholly or partially resulting from an organisation s activities, products or services. 3 Once the most significant environmental impacts and associated business costs have been identified, it is recommended that a business analyses these areas for opportunities for environmental improvement and cost savings. Fig 2 overleaf shows some common examples of environmental aspects and impacts which accountants may observe at their place of work. 2.2 WHY ARE THESE RELEVANT FOR AN ACCOUNTANT? The impact of environmental matters on business performance is increasing and will continue to do so. From Fig 2, it can be seen that there can be many potential effects on business as a result of environmental impacts. By identifying a business s environmental aspects and environmental impacts, an accountant can identify a clearer picture of their significance and how the business may be affected. Although Fig 2 merely shows a single impact for each aspect, it should be noted that some of a business s activities can often each have more than one environmental impact, for instance, the use of electricity from non-renewable resources impacts on the environment through both air pollution and its contribution to climate change. It is important for a business and its accountant to realise this and also that a single environmental impact can often result from several different environmental aspects of a business, potentially increasing the overall significance of that impact. This significance can range from a minor short-term business effect such as noncompliance, financial penalties, and additional waste disposal costs, to more serious long-term business effects such as negative public relations and lack of investment which can ultimately threaten the business s survival. 3 These definitions are according to ISO

14 SECTION 2 By using the environmental management accounting responses suggested in Sections 3-7, a business can identify its environmental aspects and associated environmental impacts as shown in Fig 2, and control their potential effects. Fig 2 Potential effects on business as a result of environmental impacts TYPICAL ENVIRONMENTAL ASPECTS TYPICAL ENVIRONMENTAL IMPACTS POTENTIAL EFFECTS ON BUSINESS RAW MATERIALS AND WASTE Paper consumption >> Use of renewable resources >> Packaging (eg plastic, wood, cardboard) >> Raw material use >> Use of non-renewable resources Carbon emissions from transport of materials Refrigerant gas consumption and emissions >> Depletion of ozone layer/ climate change contribution >> Re-use of packaging >> Conserves non-renewable resources >> >> >> Contributions to climate change Legal prosecution and environmental fines Increased liability and increased insurance premiums Solid landfill waste >> Greenhouse gas emissions from transport and disposal >> Recycled or re-used waste materials >> Conserves non-renewable resources >> Use of hazardous materials >> Litter >> Hazardous waste generation >> Human health impact and potential pollution Visual impact on environment Pollution of land through disposal to landfill >> >> >> 8

15 TYPICAL ENVIRONMENTAL ASPECTS TRANSPORT TYPICAL ENVIRONMENTAL IMPACTS POTENTIAL EFFECTS ON BUSINESS SECTION 2 Use of fossil fuels (eg private car, company fleet) Use of biofuels >> Noise and vibration from vehicle movements >> Use of non-renewable resources >> Conserves non-renewable resources Nuisance to local residents and wildlife >> >> >> Increased financial costs to business Stakeholder pressure/ corporate risk Emissions from fuel use (eg private car use) >> Global climate change and air pollution >> Video and teleconferencing services use >> Reduced greenhouse gas emissions to atmosphere >> WATER Water consumption >> Use of renewable resources >> Water treatment >> Effluent generation and treatment >> Use of non-renewable chemicals Climate change from energy intensive treatment >> >> Reduced investment from stakeholders in the business Drainage systems >> Flooding and damage to land >> Recycled process water (eg closed-loop systems) >> Conserves non-renewable and renewable resources >> 9

16 SECTION 2 Fig 2 Continued TYPICAL ENVIRONMENTAL ASPECTS ENERGY TYPICAL ENVIRONMENTAL IMPACTS POTENTIAL EFFECTS ON BUSINESS Electricity use (from fossil fuels such as petrol and coal) >> Air pollution and contribution to climate change >> Negative public image and damaged public relations Renewable energy use (eg wind or solar) >> Natural gas use >> Reduced contribution to climate change Use of non-renewable resources >> >> Increased carbon footprint Biofuel use >> Conserves non-renewable resources >> Hybrid vehicle use >> Conserves non-renewable resources >> 10

17 WASTES 3.1 Business activities and environmental impacts Wastes have several impacts on both costs and the environment: SECTION 3 income, through a combination of lost raw materials and the cost of disposal; the transport, storage and handling of wastes consume labour resources and incur additional costs; potential for penalties and fines for breaches of compliance such as pollution incidents; loss of land resource through increased requirements for landfill space; generation of methane, a potent greenhouse gas which is generated as wastes biodegrade. A waste hierarchy of approaches can be defined. In order of preference, these are shown in Fig 3. Fig 3 The waste hierarchy Start here 1 Eliminate Avoid producing waste in the first place 2 Reduce Minimise the amount of waste you produce Material 3 Re-use Use items as many times as possible Product 4 Recycle Recycle what you can only after you have re-used it 5 Dispose Dispose of what is left in a responsible way 11

18 SECTION 3 Using wastes creatively at NISP One of the roles of the National Industrial Symbiosis Programme (NISP) is to act as a sort of corporate dating agency by developing a network through which it can arrange introductions between: businesses which generate wastes; other businesses which could use these wastes as inputs into their own processes. This can sometimes involve considerable creativity in devising novel uses for wastes. Examples have included: re-using the waste sand which foundries generate in large quantities as a surface for horse racing tracks; re-using large wooden drums, which a cable business was previously disposing of to landfill, in schools and youth groups as tables on theatre sets and for display purposes; crushing wastes from ceramics manufacturers so that the wastes could then be used as a highly durable, decorative aggregate for use in landscaping and footpaths, starting at a golf course in Essex; converting food wastes into a fuel vapour similar to natural gas which is then used to produce energy for sale to the National Grid; re-distributing other food wastes to charities and community organisations such as hostels and day centres; arranging a supply of wood wastes for a propagator of garden plants who could then use them to generate heat for winter propagation in their nursery. These arrangements have helped to: reduce wastes going to landfill (which was where most had ended up previously); reduce the use of environmentally sensitive resources, including fossil fuels and, therefore, CO 2 emissions; reduce costs for the businesses using the wastes, and generate an extra income stream for those creating them. Details of these and further cases are accessible at 12

19 3.1.1 Wasted materials - the true cost of waste Minimising the amount of wasted materials is an extremely effective way of improving resource productivity, yet half of all businesses do not know how much waste they dispose of each year. Refer to Envirowise publication GG414 Measuring to manage: the key to reducing waste costs for help to identify opportunities. When including the hidden costs of wasted materials such as energy, labour and other added value costs, the true cost of wasted materials is typically between five and 20 times the waste disposal costs. SECTION 3 On average, the true cost of wasted materials is about ten times the cost of disposal. Minimising waste in offices Most offices find that they can reduce their waste costs by around 20% through no-cost and low-cost measures. An office that adopts best practice produces less than 200 kg of waste per staff member per year - this is a useful guide when setting targets. For example, the average office worker uses up to 100 sheets of paper per day, of which half is wasted. This is equivalent to consuming over one and a half trees per person per year. A best practice small office can use as little as 15 sheets per person per day - that is only a quarter of a tree per person per year. How much paper does the office use? Fig 4 The true cost of waste VISIBLE COSTS Disposal costs Lost materials Energy Lost labour Liabilities and risks Other costs 13

20 SECTION Legislation, regulation and public policy The Government and the devolved administrations have published a number of policies and have implemented several items of legislation and regulations which aim to reduce the UK s wastes: Environmental Protection Act; EU Landfill Directive; Government Waste Strategies; Landfill Tax; Producer responsibility legislation; Landfill AllowanceTrading Scheme (LATS). For more information on legal aspects of waste generation, storage, transport and handling and treatment/disposal, see Environmental Protection Act 1990 The Act places on all businesses which generate wastes a legal duty of care for those wastes, and requires them to: store and dispose of all waste responsibly; ensure that waste is handled or dealt with only by registered waste contractors - people or businesses that are authorised to do so; keep records for at least two years of all waste that is transferred to registered waste contractors EU Landfill Directive 2000 The Directive aims to prevent or reduce, as far as possible, negative effects on the environment, in particular the pollution of: surface water; groundwater; soil; air; the global environment. This Directive does not directly affect waste generating businesses but has an indirect effect by increasing landfill operators costs. This will then be reflected in the charges they make to waste generators, and is intended to put pressure on governments to encourage waste reduction at both national and local levels A waste consignment note is required for hazardous waste. This must be kept for three years.

21 3.1.5 Government Waste Strategies A Waste Strategy has been produced for each of: England (available on the Defra website: Scotland (available on the SEPA website: SECTION 3 Wales (available on the Welsh Assembly Government website: Northern Ireland (available on the Northern Ireland Environment Agency website: The strategies set out each country s vision of waste management for a set time period and, therefore, provide a signal which businesses can use to guide themselves towards the most appropriate methods of waste management on which they should be focusing, and away from any which they should be avoiding Landfill Tax The Landfill Tax was introduced by the Government to: help reduce the amount of waste being landfilled in the UK; promote re-use and recycling; provide funding for research into more sustainable ways of managing waste. It is a tax directly on landfill site operators which they then pass on to their wastegenerating clients, thus increasing their costs. Landfill Tax rates from 1 April 2008 were: Standard Rate of 32/tonne for all active waste; Lower Rate of 2.50/tonne for all inactive (inert) waste; VAT is also applied to the total disposal cost, including the Landfill Tax component. In accordance with the Government s Landfill Tax escalator policy, the amount by which the Standard Rate will be increased over the next two years has been set at 8 per tonne per annum, so that the rate in 2010/11 will be 48. Further information on the Landfill Tax can be found on the NetRegs website: 15

22 SECTION Producer responsibility legislation The principle of producer responsibility is that a manufacturer s responsibility for its products should not end when it delivers the finished product to its customer, but should extend to the end of the product s life when it becomes waste. Design for environment covers the waste aspects of: products; vehicles; electrical equipment; packaging. One reason for governments to introduce producer responsibility legislation is to encourage manufacturers to pay more attention to the long-term effects of their products at the end of their useful lives, at the stage when they originally design their products. This can give an advantage to traditional materials such as metals and natural textiles in preference to some plastics. Asset recovery at Dell Dell is one of a growing number of high-tech companies which are offering their customers an asset recovery service under which the original supplier of equipment will take it back at the end of its life. Dell collects unwanted computers and related equipment from its customer s premises (what it is prepared to collect is not limited to only its own manufactures). It then makes them safe technically by over-writing readable hard discs and other technical processes to protect the confidentiality of the customer s data. Then, depending on the item involved and the customer s preference, Dell will either sell the item(s) on behalf of its customer, donate it to a charity for disabled and disadvantaged children, or dispose of it in an environmentally responsible manner. Dell claims that since it introduced this service it has recycled millions of units, and that only about 1% of used computer equipment that it has collected has ended up in landfill. There are two areas where producer responsibility regulations have already been implemented into law in the UK: packaging; electrical and electronic products. 16

23 Producer Responsibility Obligations (Packaging Waste) Regulations 2007 Businesses that handle more than 50 tonnes of packaging in a year and have a turnover of more than 2 million are required to comply with the Producer Responsibility Obligations. These obligations require businesses to: register with the environmental regulator; recycle and recover certain amounts of packaging waste. SECTION 3 Waste Electrical and Electronic Equipment (WEEE) Regulations Businesses that need to comply with the WEEE Regulations are those that manufacture, export, import, distribute and treat and/or dispose of electrical and electronic equipment. Each of these businesses will have different requirements determined by the Regulations. Business users of electrical or electronic products must ensure that WEEE is separated from other waste, keep records of their waste, and ensure that it is disposed of properly. This can, of course, be through the take-back systems provided by the manufacturers and distributors. Further information on both schemes is available from the NetRegs website at: Landfill Allowance Trading Scheme (LATS) The Government has set up a trading system in England (the Landfill Allowance Trading Scheme (LATS) 5 ). Under LATS, a local authority can: trade its landfill allowances; save some of its allowances for future years ( bank ); use some of its future allowances in advance ( borrow ). These allowances will give a waste disposal authority the right to send to landfill a certain amount of biodegradable municipal waste in a specified scheme year. Further information on LATS can be found at: 5 This does not apply to the devolved administrations, at least as yet. 17

24 SECTION 3 Zero wastes Following a similar philosophy to the zero defects principle of Total Quality Management, some organisations are now aspiring to zero wastes. Bath and North East Somerset Council has adopted the vision of zero waste as part of its waste strategy, and plans to take a lead in developing further measures to prioritise recovery over disposal and to commission new local resource recovery facilities. Some businesses are already there. Toyota won a Big Tick at Business in the Community s Environmental Awards for Excellence in recognition of achieving zero waste to landfill at its Burnaston and Deeside plants in both 2004 and ACCOUNTING RESPONSES How much waste reduction is worthwhile depends on the particular business and what it does. However, wastes, and usually opportunities to reduce them, are universal to some extent in all businesses Short-term cost management Simple direct actions can often achieve much, even before any help from the accounting system. For example, emptying a waste skip before it is disposed of and segregating its contents into different categories (eg metals, plastics, paper, etc). Each category can then be weighed and its source within the business identified, and rough estimates made of the costs of the materials being discarded. Photographs of waste and where it is being produced can also help to highlight problem areas, and convince others of the need for action and allow for future comparisons Accounting systems Accounting systems can be used to draw attention to the full costs of wastes, though this may often require some adaptation since: Waste disposal costs are often aggregated into accounting codes which also include other quite different items under a general code for building management costs or similar, and so may not be transparent to decision-makers. Even when waste disposal costs are posted to their own code, this is usually accounted for as a general overhead and either: written off against a central budget; if re-charged to individual cost centres, then this is often done only on a general basis of apportionment which would not reflect which centres were creating the most wastes in the first place. 18

25 Allowances are sometimes built into budgets and standard costs for normal losses in production. Although this is pragmatic and realistic, it also sends an unfortunate signal that a certain level of wastage is expected and tolerable. These limitations can be addressed by considering the design of accounting codes, and regularly reviewing the allowances made in budgets and standard costs for normal rates of wastage, and asking whether these are still appropriate or should be reduced. SECTION Long-term decisions and strategy Ensure that occasional major decisions with long-term effects such as redesigning products and processes are supported by analyses that include estimates of the wastes that these will create, at realistic predictions of future costs. Remember that product design (which includes packaging) can affect the wastes which the business s customers will eventually have to dispose of. Make sure that product designers are made fully aware of disposal costs and take these into account, and have appropriate performance indicators to guide the design process. A business with a demonstrable superiority over its competitors in this respect may be able to create competitive advantage by using this as a selling point. The accountants of businesses which are affected by producer responsibility legislation should also consider whether provisions for end-of-life costs are needed Mass balances A mass balance is a quantitative account which shows where resources such as raw materials, water and energy enter and leave a business, and where within the business they are used. It typically contains information about the amount (volume, weight, etc) used by each main area or process, and in some instances can be very detailed. Presenting the mass balance as a diagram makes it easy to understand and use as a management tool. For more information on mass balancing and process mapping, visit and look at the following publications: GG707R Measuring to manage: a how-to guide; GG152R Tracking water use to cut costs. 19

26 SECTION 3 International Federation of Accountants (IFAC) The IFAC International Guidance Document on Environmental Management Accounting (EMA) presents a method of cost analysis which aims to link together physical and monetary measures of performance. The results generated by this method represent attention-directing information which highlights the high proportion of the total costs incurred by many businesses that end up as wastes. The IFAC method includes in its definition of environmental cost not only the costs of disposal of wastes, but also the original costs of the original raw materials plus the costs of other resources such as labour and overheads that have been incurred up to the point at which the waste is created. For further information see the IFAC website: Similar projects include Lean Manufacturing 6 where multi-disciplined teams consider process steps, including costs and where actual value is added to (or drained from) the process flow. For more information on Lean thinking, see Material flow cost accounting (MFCA) MFCA is another application of the mass balance principle. An MFCA analysis aims to analyse flows of materials and energy inside a business, and in essence it can be seen as a particularly detailed and in-depth application of traditional process costing techniques. Unlike traditional process costing, however, the primary aim is not to calculate product costs but to identify losses in production by analysing physical flows and the costs associated with them, in order to identify opportunities for improvements in both cost efficiency and environmental performance. MFCA requires that the business already has a production information system which collects data in considerable detail for each stage of the process. It was originally designed for large manufacturers which already have an Enterprise Resource Planning (ERP) system such as those developed by SAP or Oracle, and can be seen as effectively an optional add-on module to the ERP. However, this is not essential and smaller businesses without such sophisticated systems can also benefit from simpler applications of MFCA. A guideline on MFCA (ISO 14051) is currently being developed for inclusion in the ISO series. For more help and information, visit and look at the following publications: GG707R Measuring to manage: a how-to guide; EN509 No-cost and low-cost waste initiatives for businesses Or simply Lean, if applied to non-manufacturing organisations.

27 WATER 4.1 Business activities and environmental impacts Water is becoming an increasingly expensive resource with mains, sewerage and trade effluent charges rising, so there are several water issues that can affect business costs. For example: SECTION 4 Treating and pumping both incoming water supplies and outgoing effluents and sewage requires significant energy consumption. Climate change is likely to mean both more volatility and extremes of droughts and floods, and also changing weather patterns (hotter, drier summers and warmer, wetter winters). Some long-term climate projections forecast that by 2080, rainfall in the South East during the summer could be as little as one-half of current levels. Nearly all businesses have to pay for actual water usage, measured by meters. This should create a financial incentive to be water-efficient but, outside of water-intensive sectors such as foods and metals, water has not historically been a major cost for most businesses. Many businesses do not always appreciate the full costs of water use. Firstly, water is paid for not once but twice - first to purchase, then again to dispose of as effluent. Other costs driven by water consumption can include: Energy used to heat or cool water. Meter charges, since water supply companies decide what meters to provide to their customers based on an estimate of their likely consumption and charge a rental based on the size of the meter that is fitted. Businesses with meters that are larger than necessary will be charged more than they need to be. The costs of materials or products lost in waste water, for example, metals lost by poor control at metal plating facilities. Pumping, storing and additional treatment costs. The Environment Agency calculates that many businesses can save up to 50% of their water costs through implementing simple and inexpensive water minimisation measures, and that for those businesses that use water in their production processes, this could represent 1% of their turnover. 21

28 SECTION LEGISLATION, REGULATION AND PUBLIC POLICY The Government s Water Strategy for England 7 (issued in February 2008) mainly addresses the water supply sector and domestic users, but some of its content directly affects businesses. The Water Strategy encourages not only metering but also the use of more intelligent metering technology to support variable tariff structures. These could then be used to encourage more efficient water use, such as through seasonal tariffs which link price to seasonal availability. This would mean differing costs through the year, with higher charges in summer than in winter, and probably a particularly significant differential in regions of relative water shortage such as the South East. 4.3 ACCOUNTING RESPONSES Businesses vary widely in how water-intensive they are, and this will determine how far it is worth going to reduce water consumption. However, all businesses consume at least some water, and there are many simple things that most can do to reduce their water use without requiring significant investment or complex analyses. The accountant s basic responsibility as always is to make sure that adequate and reliable information is available to draw management s attention to excessive consumption and the potential opportunities to reduce this. Some actions which accountants can take to support their businesses in this are suggested below Short-term cost management Review bills regularly and compare these against water meters to avoid over-charging. Install sub-meters in order to measure exactly where within the business water is being consumed. Read meters regularly, and monitor the amounts over time to identify usual usage, leaks etc. Review the Government s list of the water-saving equipment that is covered by the Enhanced Capital Allowances (ECA) scheme (see the Water Technology List: and section 5.2.3) For more information see

29 4.3.2 Accounting systems Make sure that the accounting codes capture and record costs in the most appropriate way to support subsequent reporting and cost analyses. In particular, make sure that there is a separate code for water costs so that they are not aggregated with other items, and record charges separately for incoming water supplies and effluents. Record charges for water that are based directly on consumption separately from other parts of the total cost such as standing charges. SECTION 4 Where possible, set up fields in accounting codes to record physical quantities as well as financial costs Long-term decisions and strategies When new buildings are designed or existing buildings are refurbished, make sure that projected water consumption is considered as part of the investment appraisal process. Look for opportunities to incorporate water efficiency features in new or refurbished buildings, for instance: closed loop water cycles; rainwater capture; mains-fed water dispensers; dual-flush toilets; self-stop taps. 4.4 BIG SPLASH AND THE RIPPLEFFECT Envirowise has introduced two initiatives, the Big Splash (Scotland) and the Rippleffect (England), to support businesses by helping them to: understand how much water a business uses; identify simple ways to start saving water and money; measure the water and cost savings that a business has made. More information on these two initiatives and the support available in Wales and Northern Ireland can be found on the Envirowise website: Also refer to the following publications: GG522 Cost-effective water saving devices and practices - for commercial sites; GG523 Cost-effective water saving devices and practices - for industrial sites. 23

30 SECTION 4 Accountant leads a water minimisation programme As a result of an improvement programme led by the company s management accountant, F Smales and Sons (Fish Merchants) Ltd has reduced water consumption at its site in Hull by 39% and achieved cost savings of around 27,000/year by promoting water efficiency to its 200 employees and making low-cost changes to its fish processing methods. Following an audit of water consumption, meters were fitted at a cost of 870 to measure the amounts of water used in fish cleaning and production processes. All employees were invited to offer their suggestions for ways to reduce water consumption and effluent generation, and the meter readings were used to set cost targets for each part of the factory. Section managers were given responsibility for meeting the cost targets, which now form part of their key performance indicators within the annual staff appraisal process. Meter readings are taken twice a day by engineering staff and water consumption graphs are fed back to the section managers each week. The management accountant highlights any significant anomalies and overall progress against cost targets is reviewed at monthly management meetings. As well as reducing the volume of water consumed, the company has also reduced the strength of its effluent by taking steps to minimise the amount of waste materials entering the drains. Many businesses can dramatically reduce their water costs by making simple changes in operating practices or maintenance procedures. For further information on water legislation and business responsibilities see the NetRegs website: 24