GUIDE GG374R REDUCE YOUR COSTS WITH ENVIRONMENTAL MANAGEMENT ACCOUNTING

GUIDE GG374R REDUCE YOUR COSTS WITH ENVIRONMENTAL MANAGEMENT ACCOUNTING

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.

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

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.

Contents 1 INTRODUCTION 1 1.1 Environment and management 1 1.2 The business benefits of good environmental performance 2 1.3 Environmental accounting 3 1.4 The purpose of this Guide 5 2 ENVIRONMENTAL ASPECTS AND IMPACTS OF BUSINESS 7 2.1 What are an environmental aspect and an environmental impact? 7 2.2 Why are these relevant for an accountant? 7 3 WASTES 11 3.1 Business activities and environmental impacts 11 3.2 Accounting responses 18 4 WATER 21 4.1 Business activities and environmental impacts 21 4.2 Legislation, regulation and public policy 22 4.3 Accounting responses 22 4.4 Big Splash and the Rippleffect 23 5 ENERGY USED IN BUILDINGS 25 5.1 Business activities and environmental impacts 25 5.2 Legislation, regulation and public policy 25 5.3 Accounting responses 29 5.4 Footprinting, offsetting and adaptation 31 6 TRANSPORT 33 6.1 Business activities and environmental impacts 33 6.2 Legislation, regulation and public policy 33 6.3 Accounting responses 34

7 SUPPLY CHAIN MANAGEMENT 39 7.1 Introduction 39 7.2 Supply chain management, the environment, and accountants 39 8 OTHER ENVIRONMENTAL MANAGEMENT INITIATIVES 44 8.1 Environmental management systems (EMS) 44 8.2 Environmental reporting 47 8.3 Key Environmental Performance Indicators 48 9 Sources of SUPPORT 52 9.1 Envirowise 52 9.2 Carbon Trust 52 9.3 Energy Saving Trust (EST) 53 9.4 National Industrial Symbiosis Programme (NISP) 54 9.5 Waste & Resources Action Programme (WRAP) 54 9.6 Manufacturing Advisory Service (MAS) 55 9.7 Scottish Manufacturing Advisory Service (SMAS) 55 10 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

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

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

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

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

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 2002. 5

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

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 14001. 7

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

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

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

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

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 www.nisp.org.uk. 12

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

SECTION 3 3.1.2 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 www.netregs.gov.uk. 3.1.3 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 4. 3.1.4 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. 14 4 A waste consignment note is required for hazardous waste. This must be kept for three years.

3.1.5 Government Waste Strategies A Waste Strategy has been produced for each of: England (available on the Defra website: www.defra.gov.uk/environment/waste/strategy); Scotland (available on the SEPA website: www.sepa.org.uk/nws); SECTION 3 Wales (available on the Welsh Assembly Government website: http://new.wales.gov.uk/about/strategy); Northern Ireland (available on the Northern Ireland Environment Agency website: www.ni-environment.gov.uk/waste/strategyni.htm). 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. 3.1.6 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: www.netregs.gov.uk. 15

SECTION 3 3.1.7 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

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: www.netregs.gov.uk. 3.1.8 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: www.defra.gov.uk/environment/waste/localauth/lats/intro.htm. 5 This does not apply to the devolved administrations, at least as yet. 17

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 2005. 3.2 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. 3.2.1 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. 3.2.2 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

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 3 3.2.3 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. 3.2.4 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 www.envirowise.gov.uk and look at the following publications: GG707R Measuring to manage: a how-to guide; GG152R Tracking water use to cut costs. 19

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: www.ifac.org. 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 www.leanuk.org 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 14000 series. For more help and information, visit www.envirowise.gov.uk and look at the following publications: GG707R Measuring to manage: a how-to guide; EN509 No-cost and low-cost waste initiatives for businesses. 20 6 Or simply Lean, if applied to non-manufacturing organisations.

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

SECTION 4 4.2 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. 4.3.1 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: www.envirowise.gov.uk/wtl and section 5.2.3). 22 7 For more information see www.defra.gov.uk/environment/water/strategy

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. 4.3.3 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: www.envirowise.gov.uk. 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

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: www.netregs.gov.uk 24

ENERGY USED IN BUILDINGS 5.1 Business activities and environmental impacts Energy is already a significant cost for many businesses in its own right, so that taking action to improve energy efficiency is often easy to justify in simple cost/benefit terms, regardless of any environmental factors. In many cases there may be little or no cost involved in making improvements, and even where there are, these are often easily justified by the benefits they create. The relative attractiveness of making improvements is enhanced even further by a number of Government policies which aim to encourage businesses to be more energy-efficient. SECTION 5 Structured management of environmental aspects and impacts is part of good general management. As with any business expenditure, costs will tend to drift upwards if they are not reviewed periodically. Inefficiencies and wasteful practices tend to creep into any system that is not monitored and controlled. Taking a systematic look at environmental costs for the first time is, therefore, bound to identify opportunities for improvements and cost savings. Remember: If you don t measure it, you can t manage it. 5.2 Legislation, regulation and public policy This section outlines six laws and policies that the UK Government has taken which are addressed to climate change and which could be relevant for accountants. These include both those which are currently existing policies, and some which are currently being planned. 5.2.1 Climate Change Bill The Climate Change Bill commits the Government to legally binding targets for CO 2 reductions in both the short-term and long-term. Progress towards this will be managed through a new system of legally binding five-year carbon budgets, set at least 15 years in advance. These are intended to provide clarity over the UK s pathway towards its key targets and reduce uncertainty so that business can invest and adapt appropriately with more confidence. 25

SECTION 5 Through the Bill, the Government will be enabled to: implement policies to reduce emissions more easily and rapidly; make changes to carbon trading schemes (eg through the Carbon Reduction Commitment, which will affect up to 5,000 medium energy users - see section 5.2.4). Quoted companies will be required to: disclose carbon emissions (from company cars as well as on-site equipment) in the business review sections of their annual reports. Further details of the Climate Change Bill are available on the Defra website at www.defra.gov.uk. 5.2.2 Climate Change Levy The Climate Change Levy (CCL) was introduced in 2001 as a tax on energy which is generated from fossil fuels, and is currently levied at the following rates: Fuel Electricity Gas Petroleum gas or other gaseous hydrocarbon supplied in a liquid state Any other taxable commodity (eg coal) Rate 0.456 pence per kwh 0.159 pence per kwh 1.018 pence per kilogram 1.242 pence per kilogram NB: These rates will change each year in line with inflation - the above rates were effective as from April 2008. Updated rates can be found on the NetRegs website: www.netregs.gov.uk. Energy that is generated from renewable sources ( green electricity) is exempt, to offset any extra costs of generating electricity in this way; so are approved combined heat and power (CHP) systems and companies in sectors which are covered by climate change agreements 8. The CCL was originally intended to be revenue-neutral. A portion of the revenue that it raises (approximately 1 billion) is, therefore, applied to reduce businesses costs in other ways to compensate, and to set up funds to support environmentally positive actions that would otherwise have to be funded from general taxation. These uses include: reducing employers National Insurance contributions by 0.3%; 50 million/year on providing free advice and guidance to businesses on energy efficiency 9 ; 100 million/year on Enhanced Capital Allowances. 26 8 Businesses operating in sectors which are deemed to be energy-intensive such as aluminium, chemicals and food, may get an 80% reduction if they join an agreement negotiated between their trade body and the Government. 9 See section 9 for references to further sources of advice and information for business.

5.2.3 Enhanced Capital Allowances The Enhanced Capital Allowances (ECA) scheme allows companies that invest in certain specified capital equipment to claim a 100% capital allowance against their taxable profits in the year of purchase, with a consequent boost to cash flow and reduction in the net cost of the asset. These are specified products of either energysaving plant and machinery, or water conservation plant and equipment. Some examples are: SECTION 5 lighting; motors and drives; boilers; refrigeration equipment; combined heat and power; solar thermal systems; meters and monitoring equipment; cars with low CO emissions. 2 A comprehensive list of the specific items that are approved can be seen at www.eca.gov.uk. This also describes the criteria and procedures for manufacturers to get their products approved to make them more attractive to potential customers. 5.2.4 Cap-and-trade schemes, the Emissions Trading Scheme and the Carbon Reduction Commitment Trading systems based on a cap-and-trade principle are an alternative way for governments to implement environmental policy by using an economic rather than a regulatory tool. With a trading system, the Government sets a limit on the total quantity of a specified pollutant that can be emitted, and then issues allowances to businesses which wish to emit those pollutants. These initial allowances may be either sold off by the Government, usually by auction, or simply allocated to current participants on the basis of their past and present levels of emissions (known as grandfathering ). In either case, the key principle is that the allowances can subsequently be traded between participants, so that a business which finds that it does not need all the allowances which it owns can sell them to another. A business that emits more than the allowance (via the permits it holds) will incur a fine. Emissions monitoring is checked using a third-party audit. There are two main carbon-trading schemes relevant to UK businesses - the Emissions Trading Scheme (ETS) and the Carbon Reduction Commitment (CRC). The ETS has already been operating for three years and is mandatory on heavy industrial energy users such as power generators and manufacturers of steel and cement. 27

SECTION 5 However, the ETS does not cover sectors such as aviation, transport, and the public sector. The CRC 10 is a UK Government initiative expected to be implemented in January 2010. It is intended to be more wide-ranging than the ETS, and to extend carbon trading to middle-sized organisations 11 which are not necessarily intensive users of energy. These would include sectors such as banks, retailers, hotels, office-based companies, Government departments and agencies, hospitals, universities, and large local authorities. Further details of the plans for the CRC are available at: www.defra.gov.uk/environment/climatechange/uk/business/crc/index.htm. 5.2.5 Energy Performance of Buildings Directive The Energy Performance of Buildings Directive was published in 2003 and states that over 40% of the energy consumed and of the CO 2 generated within the European Union is accounted for by its 160 million buildings 12. The Directive aims to promote the improvement of energy performance of buildings within the Community taking into account outdoor climatic and local conditions, as well as indoor climate requirements and cost-effectiveness. Its key elements, which will be implemented in the UK, will include introducing: a comprehensive methodology to calculate the energy performance of individual buildings; mandatory use of certificates to detail the energy performance of individual buildings; new and enhanced energy performance standards for both new and existing buildings; regular inspections and assessment of heating and air-conditioning plant. Within the UK, the assessment methodology has now been created and is in use. The necessary framework for the introduction of Energy Performance Certificates will be introduced across the UK between 2007 and 2009 13. The introduction of Energy Performance Certificates in particular has considerable implications for the ownership, rental and sale of buildings within the UK. A building s rating or certificate will obviously have a great impact on its saleability or let-ability. With much of the current building stock being classed as inefficient, the introduction of certificates will leave many owners and landlords at a disadvantage. 10 Previously known as the Energy Performance Commitment. 11 The term organisation is used deliberately here rather than business, since the definition of who the CRC covers applies at a corporate level; and organisations rather than companies since the CRC also extends to non-corporate entities such as Government departments. 12 Directive 2002/91/EC of the European Parliament and of the Council of 16 December 2002 on the Energy Performance of Buildings. 28 13 The implementation timescales and approach differ slightly between the central UK Government and the devolved administrations, with individual Building Standards authorities taking separate responsibility for the regions which are covered.

Key documents and discussions regarding the Directive and its implementation in the UK are available through the Directive Implementation Advisory Group (DIAG) website: www.diag.org.uk. 5.3 Accounting responses This section looks at ways in which conventional accounting systems and procedures might be adapted in order to support cost management in both the short-term and long-term. SECTION 5 5.3.1 Short-term cost management Energy consumption is a significant business cost for most businesses. Accountants can help them adopt a two-step approach to maximise both energy savings and their cost-effectiveness. This approach consists of: implementing a systematic approach to monitoring and controlling energy consumption; targeted investment in energy-efficient equipment. Monitoring and lighting controls cut energy bills Reed Business Information, a publishing house in Sutton, reduced its energy consumption substantially by implementing a number of energy-saving measures. A building management system was installed to monitor air-conditioning, chiller use and other plant to ensure they were operated only when needed. A lighting control system schedules lights to go off at periods throughout the day and when the offices are unoccupied. Lighting in overlit areas has been reduced. Local lighting controls are used throughout the building and selected lights have been replaced with compact fluorescent lamps and lower wattage bulbs. Gas consumption has been reduced by 67% and electricity consumption by 15% as a result of these changes in energy management. How much money would these measures help to save? Further guidance can be obtained from the Carbon Trust and the Energy Saving Trust (see section 9). 29

SECTION 5 The Environment Agency of England and Wales has taken this a stage further and, after negotiations with its several energy suppliers, has designed a supplementary e-billing system which runs in parallel with the main accounting system (see the box below). After discussions with the Agency s several electricity suppliers, they all agreed to send the Environmental Finance section a supplementary supporting document in electronic format, ie e-bills. The use of e-billing proved to have several advantages, including: Providing additional detail in a standardised format avoiding errors in interpretation. Uploading e-bills into a consumption and expenditure database showing usage trends. Responsibility for the accuracy of the invoices is now clearly located with the local staff in the places where the energy is actually being consumed. Detailed information down to the level of individual sites is available to support monitoring and planning. Lists of live sites can be generated to highlight any errors in the billing system. For example, this showed that suppliers were still billing the Agency for two sites which it had already sold. 5.3.2 Long-term decisions and strategy Modern accounting recognises that many of the costs that a product will incur over the whole of its life are largely determined during its design stage, even before production has started. Life-cycle costing aims to measure the whole-of-life costs and help to avoid making decisions which might save costs initially but then incur higher costs later. For more details on life-cycle costing, see section 7. Like costs, many environmental impacts are largely determined for several years into the future once initial decisions are taken on matters such as investments in new capital equipment or taking on long-term projects. For example, construction of a building with inadequate insulation, or without provision for natural cooling to avoid energy-fuelled air-conditioning, could prove to be an expensive short-term expedient since subsequent retrofitting is invariably much more expensive and less satisfactory than getting it right first time. It is, therefore, crucial that decisions like these are taken in full awareness of all the facts, including the likely costs and environmental impacts over the full life of the project. Since the costs of energy and other environment-related assets are likely to increase disproportionately over time compared to general inflation, this cannot be done simply by basing decisions on the costs which are currently being incurred. The accountant s first responsibility here is to ensure that decision-makers and planners are provided with adequate information and the analytical tools to use this. 30

5.4 Footprinting, offsetting and adaptation As well as the conventional accounting responses described above, there are a further three aspects which have recently become topical - carbon footprinting, carbon offsetting, and adaptation. 5.4.1 Carbon footprinting SECTION 5 The recent increased concern over climate change has led several businesses to calculate, and sometimes also disclose externally, their total CO 2 emissions or carbon footprint. This is sometimes linked to a declared strategy of becoming carbon-neutral and often also involves carbon offsetting (see below). Carbon footprinting can be done at several different levels: for a business as a whole, for different types of unit such as for a product or an event, or for an individual person 14. Riverford Organic Vegetables runs a vegetable box home delivery scheme. The company has recently published the results of its first carbon footprinting exercise on its website. This exercise has provided a metric to be able to measure and manage activities. This has led to many changes in performance, including: Redesign of packaging to use less materials and to use pallets more efficiently. This has reduced emissions and costs. Energy efficiency measures looking at the business s refrigeration systems. By making technical and routine maintenance improvements, both emissions and costs have been reduced. Helping businesses to measure their carbon footprint is something that accountants are well positioned to contribute to, and guidance can be obtained from the Carbon Trust website at: www.carbontrust.co.uk/solutions/carbonfootprinting. 5.4.2 Carbon offsetting Carbon offsetting is a process by which a business which emits CO 2 can simultaneously take some action to compensate for this by reducing CO 2 emissions elsewhere so that the net effect is zero. In principle, this action could be undertaken directly or indirectly, for example: planting trees which will absorb CO from the atmosphere (direct); 2 making a payment into a fund which will then be used to support actions to reduce or avoid emissions elsewhere (indirect). 14 The Carbon Trust provides some initial guidance on carbon footprinting at www.carbontrust.co.uk/carbon/briefing/ 31

SECTION 5 All businesses which claim to be carbon-neutral depend on indirect offsetting to achieve this to at least some extent, since it is practically impossible to operate commercially in the modern world without at least some activities which will involve emissions of greenhouse gases. More information can be found at www.defra.gov.uk/environment/climatechange/uk/carbonoffset. Carbon offsetting is well established - it is a central feature of the Kyoto Protocol 15, for example, and is used by the UK Government which aims to offset the CO 2 emitted as a result of its own activities 16. 5.4.3 Adaptation The UK Climate Impacts Programme (UKCIP) has been set up by the Government to support this with research and public information, and as part of this has developed the Business Areas Climate Impacts Assessment Tool (BACLIAT). BACLIAT aims to provide a process which businesses can follow to review their current and planned activities and assess their vulnerability to the potential effects of probable climate change, and then plan how best to respond. This can include taking advantage of potential opportunities offered by climate change as well as defending against risks and threats. BACLIAT looks at seven business areas 17, including finance. Issues for each business to consider in the finance area, against the full range of both its present activities and those planned for the future, include: implications for insurance: potentially increased and less predictable premiums, and some risks becoming uninsurable; the need to future-proof investments, especially those with long asset lives; the risk that new liabilities could arise even in existing developments, and the increased cost-effectiveness of higher specifications in future developments. More information on BACLIAT can be found on the UKCIP website: www.ukcip.org.uk. 15 See www.defra.gov.uk/environment/climatechange/internat/un-kyoto.htm for more information on the Kyoto Protocol. 32 16 See www.defra.gov.uk/environment/climatechange/uk/carbonoffset/government.htm for examples of the types of project (usually in developing countries) to which the Government contributes for its own offsetting. 17 Logistics, finance, markets, process, people, premises, and management implications.

TRANSPORT 6.1 Business activities and environmental impacts Transport has several environmental impacts, the most significant arising from the use of fossil fuels as the main source of energy during the use phase of a vehicle s life. SECTION 6 The main environmental impacts of transport include: CO emissions; 2 other pollutants to air - emissions from exhausts of nitrogen oxide, carbon monoxide and particulate matter (PM10); noise; land use. 6.2 Legislation, regulation and public policy The main direct effect on business of environmental legislation on transport is to increase the cost of road transport through a variety of taxes and, therefore, to provide incentives to business to increase fuel efficiency. For instance: 6.2.1 Using more efficient vehicles with smaller engine size Reduced annual vehicle excise duty (VED) - for cars registered since 2001, this is based directly on the standard CO 2 emissions per kilometre for that model 18. Reduced total fuel costs - in 2007 around two-thirds of the cost of an average litre of petrol was represented by fuel duty and VAT 19. Reduced tax on the initial purchase cost of the car. 18 The current VED rates for different classes of vehicles can be found at www.direct.gov.uk/en/motoring/owningavehicle/ HowToTaxYourVehicle 19 Business Link advises that switching cars to run on liquid petroleum gas (LPG), bioethanol or biodiesel could almost halve the rate of fuel duty. Current fuel duty rates can also be found at www.direct.gov.uk/en/motoring/owningavehicle/ HowToTaxYourVehicle 33

SECTION 6 6.2.2 Travel on public transport Increased productivity of staff: for example, using rail rather than road means that staff can work whilst travelling and will usually arrive at their destination less fatigued. Zero congestion charge costs. 6.3 Accounting responses As with energy used in buildings, there are ways in which the usual accounting systems and procedures can be adapted to support cost management in both the short-term and the long-term. Both of these are best supported by appropriately designed accounting systems and codes. Much of this will already be standard good practice for those businesses where transport costs are a significant business cost, such as road hauliers. The following is, therefore, mainly aimed at the majority of businesses where the transport of people and goods is only ancillary to their main business, but collectively represent the main impact. The manner in which each business provides employees with remuneration policies on transport options may have a significant bearing on the environmental impact and cost to the business. For example, paying an employee a fuel allowance for using a car which is not payable if public transport is used will incentivise him/her to drive. Designing transport allowances more flexibly could mean cost savings for the business, a reduced carbon footprint, and more freedom of choice for employees. 6.3.1 Short-term cost management There are several simple actions that businesses can take to improve their transport fuel efficiency and reduce their impact on the environment. The RAC estimates that motorists are currently wasting 2.2 billion on petrol every year, almost 100 per head, with the related CO 2 emissions and other impacts that this represents, due to poor basic maintenance such as incorrect tyre pressures and poor driving techniques. It can be helpful if someone in a business keeps a central database of different options for travel frequently done by staff, with relevant up-to-date information on costs. This can then be used as the basis for occasional analyses of the full costs of business travel by staff, including: the marginal costs per mile of travel - for cars this is not only the fuel costs but also other variable costs, which can sometimes also include depreciation - see the box opposite on the AA s analysis of motoring costs; the cost of staff time spent in travel; CO emissions (and other significant environmental impacts too if feasible). 2 34

Motoring costs - fixed or variable? The easy assumption unquestioningly made by many people is that the marginal costs of running a car are limited to the fuel costs, and that this is a sufficient basis for dividing the costs between occupants in car-sharing schemes, for example. The Automobile Association (AA) regularly updates its published calculations of motoring costs and makes these freely available. They currently show that the costs of owning and using a typical four-year old petrol-engine car which originally cost 15,000 and which covers a slightly higher-than-average distance of 10,000 miles/year are: SECTION 6 4,112/year standing charges, ie fixed costs; 22 pence/mile running costs, ie variable costs (this is based on fuel costs at 113 pence per litre); ie a total average cost of 63 pence/mile. Fuel at 14 pence/mile represents two-thirds of the running costs, but other variable items such as tyres, service labour, replacement parts and parking account for the remaining 8 pence. In addition, depreciation of 2,486 is included in the annual standing charges and is, therefore, effectively treated as a fixed cost. This is, of course, consistent with the basis for calculating depreciation for financial reporting which most businesses follow. However, most motorists replace their cars after a certain total mileage is reached, or for mileage-related reasons such as increasing maintenance costs or worries over reliability. Even for those owners who will change their vehicles after a certain period of time in any case, an increased mileage will mean a significantly lower resale or trade-in value at the end of the car s life. If the timing of the end of a vehicle s life and its disposal value at that time are mainly determined by usage rather than by time, then depreciation is logically a variable rather than a fixed cost. The total marginal cost per mile is then more realistically calculated as 47 pence/mile (22 pence for fuel, tyres etc, plus 25 pence for depreciation). If decisions on using private car transport were based on a perception that the real marginal cost is around 47 pence/mile rather than only the fuel cost, then current levels of private car use might be significantly reduced even without any further increase through road pricing. However, there is still a widespread misperception that fuel is not only the major cost of motoring, but also the only marginal cost. This is due in part to a readiness to accept established wisdom and published quantities without query, and also a popular misunderstanding of what accounting concepts such as depreciation really mean. NB: The AA s calculations of motoring costs are available at: www.theaa.com/allaboutcars/advice/advice_rcosts_petrol_table.jsp (petrol) and www.theaa.com/allaboutcars/advice/advice_rcosts_diesel_table.jsp (diesel). 35

SECTION 6 6.3.2 Accounting systems As with other areas, good accounting starts with capturing data in sufficient detail, and designing systems to record and process the data so that the results can be used to provide helpful information to management. At a minimum, separate codes should be set up for each of the main alternative modes of travel - car, rail, air, etc. This will also help the business to calculate a carbon footprint if it wishes, since the costs charged to each code will then be a close proxy for CO 2 emissions. Following requests from their customers, several travel agents have now started to record in more detail the travel that they book for them in order to keep a record of distance, frequency, whether journeys are long-haul or short-haul, etc, in order to make subsequent conversions to CO 2 easier. The box below on the HEEPI study describes a situation in which poor design of accounting codes not only made it impossible to carry out the benchmarking comparisons which had been intended between different universities, but would even have hindered any attempt by an individual university to use the information available from its accounting systems to support its own environmental management. Benchmarking travel performance in the university sector A group of UK universities collaborated in a project to benchmark data on their respective environmental performances in the HEEPI project 20. The main impact areas for universities arise from estates management of campuses and buildings, and travel by staff and others on university business. Some comparative data on estates management were already being regularly generated since this was required by the sector s Funding Council. There was nothing comparable in existence for travel, but it was planned to start from the costs recorded in each university s usual financial records and see how far this was sufficient or needed to be supplemented with further detail. However, it was quickly found that although the costs recorded by each university might be adequate for its own purposes as a record of its spending, they were of little value for benchmarking against different institutions. This was due to fundamental differences in the designs of each university s accounting systems, and in particular the definitions used for their accounting codes. In principle it could have been possible to work back from the amounts posted to each university s financial records to the original invoices and expense claims in order to reconstruct the data in a sufficiently detailed and consistent way to enable valid comparison, but in practice this would have been so timeconsuming as to be infeasible. Although it had been hoped that the financial records would provide a good basis for benchmarking, the study found that without consistency in record-keeping from original data capture onwards, this could not be realised in practice. 36 20 Higher Education Environmental Performance Improvement.

If practical, breaking down costs into separate records for each car and/or driver will help to support management control since each car/driver can then be treated as a separate cost centre. This can be used to assess different drivers relative skills in driving efficiently and responsibly, and this can then also be encouraged with incentives, financial or otherwise. 6.3.3 Long-term decisions and strategy SECTION 6 As with energy in buildings, some long-term plans and strategic decisions can lockin environmental impacts for several years into the future. There are two different ways of approaching this. Firstly, acquire assets which meet the business s need with less environmental impact, for example, cars with lower CO 2 emissions per mile or energy-efficient buildings which are designed to require less heating in winter and less air-conditioning in summer. Secondly and more radically, so far as possible, reduce the need for personal mobility in the first place. In both cases, the accountant s responsibility is to ensure that decision-makers and planners have adequate information and analytical tools to choose between the alternative options. Acquisition Acquire assets which meet the business s need with less environmental impact, for example: cars with lower CO emissions per mile; 2 cars powered by more environment-friendly fuels; buildings which are serviced by public transport and sustainable travel networks. Elimination and reduction Eliminate and reduce the reasons for the need for transport and personal travel itself, for example: using telephone and video-conference calling rather than face-to-face meetings; online discussions; encourage car-sharing; promote sustainable travel, such as cycling and walking; work from home initiatives and distance learning schemes; locate new premises to be easily accessible by public transport. 37

SECTION 6 EDF Energy aims to be a leader in its sector in reducing its carbon footprint. In 2007 it voluntarily adopted a set of Climate Commitments including reducing transport-related CO 2 emissions by 20% by 2012 (versus a 2006 baseline). Changes under review include: eliminate the need for travel so far as possible (increased use of video conferencing, etc); replace the current vehicle fleet with more efficient vehicles; behavioural change programmes; fitting speed limiters and air-conditioning default switches; regular review of data. Early results show that by the middle of 2008 emissions had been reduced by 5% versus the 2007 peak (see appendix 3 for more details). Training and support The Energy Saving Trust has a transport advice programme available to businesses in England and Scotland, and offers practical solutions to help reduce costs and improve the environmental performance of car and van fleets. For more information see www.energysavingtrust.org.uk/fleet/organisations/ gettingstarted. The UK Road Safety website www.uk-roadsafety.co.uk provides details on various courses available to businesses in its Fleet/Corporate section. Some long-term decisions can have a continuing long-term effect on the need for personal mobility which may not always be immediately obvious, such as the location of business premises and the structure of the organisation design. A design which physically separates people who need to speak to each other regularly will increase the need for travel, but relatively minor reorganisations can sometimes reduce it. 38

SUPPLY CHAIN MANAGEMENT 7.1 Introduction Supply chain management (SCM) is the process of managing products and services not only within a business s own boundaries but also upstream and downstream along the whole of its supply chain. SECTION 7 SCM is broader than a traditional purchasing function, and includes all activities involved in sourcing, procurement, and logistics. Effective SCM invariably requires co-ordination and collaboration with suppliers, intermediaries, third-party service providers, and customers. SCM is a business function in its own right and is not usually the direct responsibility of accountants. However, an awareness of SCM and what it can mean for a business s environmental performance and reputation is important since: SCM is increasingly important within business; some stakeholders, including pressure groups and the media, are increasingly treating large businesses as being effectively accountable for the consequences of their actions, not only within their own boundaries but along their supply chains too; conventional accounting practices can sometimes have a negative effect unless applied sensitively; more positively, accountants can alternatively provide support with help with data collection, measurement and analyses. 7.2 Supply chain management, the environment, and accountants 7.2.1 Information requirements Accountants will appreciate how difficult it can be to ensure that data definitions and the information that is generated from them are always consistent even within a single organisation. This challenge is multiplied when these data are sought from a large number of suppliers worldwide that may either have different data definitions or not be collecting the necessary data in the first place. The case study of the Carbon Disclosure Project overleaf describes one initiative to attempt to simplify this challenge by setting a standard method of gathering carbon footprint information from suppliers. 39

SECTION 7 Carbon Disclosure Project The Carbon Disclosure Project (CDP) is an independent not-for-profit organisation representing major institutional investors and on their behalf seeking information on the business risks and opportunities presented by climate change and greenhouse gas emissions data from the world s largest companies. The CDP website is the largest repository of corporate greenhouse gas emissions data in the world. In 2007, the CDP issued a call for more companies to sign up to its supply chain reporting initiative. The scheme is currently being trialled by 11 multinationals including Cadbury Schweppes, Dell, L Oréal, Hewlett Packard, Nestlé, Procter & Gamble, Tesco, and Unilever. It requires each of these companies to request carbon footprint information from at least 50 of its suppliers and to promote emission reduction measures across the supply chain. The CDP hopes that establishing a standardised approach for supply chain emissions reporting will also help to minimise the administrative burden on smaller suppliers of monitoring their carbon emissions and reporting them to their customers and others, since they will then have to generate only a single set of information which can be used to meet several different customers requests for information. 7.2.2 Product design and the environment Supply chain management starts with the design of the product - like costs, many environmental impacts are effectively finally decided for the whole life of the product long before the first unit is produced, and cannot easily be changed afterwards. Product designers are, therefore, crucial. They need relevant and reliable information immediately to hand in an understandable format in order to build the product s future environmental performance into its design, along with other objectives such as its performance in use, product quality, and cost. They often have to work under severe time pressures to get a product designed quickly so the business can get it to market before competitors, so this information needs to be immediately to hand when needed in an accessible and reliable form. The box opposite reports one study at a major electronics business into different ways of achieving this. Envirowise provides information and guidance on cleaner product design, or ecodesign. The Envirowise DesignTrack initiative (Scotland and Wales only) provides audits and signposting for both packaging and product design advice. For further information on eco-design, see the following publications at www.envirowise.gov.uk: GG294 Cleaner product design: an introduction for industry; GG295 Cleaner product design: examples from industry; GG296 Cleaner product design: a practical approach. 40

Product design for environmental performance at an electronics business A company manufacturing electronics products for use in telecommunications recognised that in a sector like this where technology rapidly develops, innovative design and time-to-market are crucial. At the same time the products may have a physical life of several years or even decades, so until they become technically obsolete, their environmental impacts may be long-lasting. SECTION 7 The problem that it identified in its design process was that its designers were not always clear on the environmental objectives to aim for in products and what information might be relevant to assessing this, and how to make sense of what seemed to be a mass of unfamiliar data. The company, therefore, commissioned a study to develop a tool for designers to help them to clarify and condense the data and make it easily usable at short notice. Three alternative methods were investigated: a visual compass which showed the product s profile in comparison against alternatives for each of six different environmental attributes such as energy demands over its life, the use of hazardous materials, and ease of recycling or similar at the end of its life; a scoring approach which assigned points to these attributes and aggregated them into an overall score; a costing approach which aimed to identify the external costs of the product. The study found that all three methods were potentially useful in different ways in helping designers to understand environmental considerations and take them into account. However, what was even more critical was to have an adequate database of the necessary information to hand immediately as and when needed, since the time pressures of product design did not allow space for extensive data-gathering exercises. 41

SECTION 7 7.2.3 Shared savings ( servicising ) When a business buys an asset, it is not the asset as such that it requires so much as the services which that asset can then provide for the business. A familiar example of this principle is when a start-up business may prefer to rent premises and equipment rather than to purchase them outright. Although this may be more expensive in the long-run, it is worthwhile if it helps to conserve a scarce resource (such as cash) at a particularly critical time. The same thinking can be applied to the purchases of raw materials and consumables in order to realise environmental benefits and cost savings. Traditionally, a purchaser would identify their needs for raw materials and consumables, and then contract with a supplier to provide these at the lowest possible price. The problem is that this traditional approach gives the supplier an obvious incentive to increase its sales volume, and no incentive to help its customer to minimise the quantity it uses. In a servicised contract, the supplier is paid not for the volume of what is supplied, but for its service performance. This responsibility for managing what was supplied is thus being out-sourced by the customer, which provides the supplier with an incentive to look for ways to minimise rather than maximise the quantities consumed. This conserves resources and, with materials such as hazardous chemicals, can reduce risks and environmental impacts. In the long-run, the supplier also has an incentive to look for ways to redevelop or reformulate what it is supplying, possibly even to substitute it with a different technology. There are, of course, downsides to this arrangement since the customer is effectively reducing its own direct control over part of its production process, and its own incentive to minimise quantities used is correspondingly reduced as the supplier s is increased. Whether this is worthwhile in any case depends on the relative balance of knowledge between supplier and customer. In sectors such as chemicals where servicising has become well established, the complexity of the materials means that the balance of expertise is more likely to be with the supplier than with the customer, since the costs of purchasing the chemicals may be much less than the costs of then storing and managing them. 7.2.4 Life-cycle assessment and life-cycle costing Life-cycle assessment (LCA) is a well-established environmental management technique to assess the total environmental impacts of a product or service from cradle to grave in the various different stages of the product s life 21. Life-cycle costing (LCC), also known as whole-life costing, measures the total cost of ownership of an asset or project over the whole of its life including capital costs, installation costs, operating costs, maintenance costs, and disposal costs. An example of LCC in practice is shown in the case study opposite. 42 21 Note that the terms life-cycle assessment and life-cycle costing when used in the context of environmental management refer to the life-cycle of an individual product, rather than of a product-line which is how the term is usually used in conventional management accounting.

SECTION 7 Life-cycle costing of batteries at the University of Cambridge The University of Cambridge has a policy of basing procurement decisions on whole-life costs, arguing traditionally, purchasing considerations went no further than the initial purchase price [but] this initial outlay may not be the largest expense whole-life costs include this initial outlay but also consider the operational and disposal costs of the product. A comparative analysis that it carried out on alternative types of batteries shows how LCC can reveal a dramatically different result than would be obtained from a traditional purchasing decision made on the basis of minimising just the initial purchase cost. Whole-life costing comparison of batteries Alkaline Zinc chloride NiMH Cost of a pack of 4 batteries ( ) 2.50 1.50 6.50 Battery life (hours) 15 6 7 Number of packs needed for 1,000 hours of power 67 167 1 Purchase cost ( ) 167.50 250.50 6.50 Recharging unit ( ) 0 0 10.00 Energy to recharge ( ) 0 0 1.43 Disposal cost ( ) 5.70 14.20 0.04 Total cost ( ) 173.20 264.70 17.97 The University suggests that it is worthwhile to do this sort of analysis both for high-value products, and for low-value products that are purchased in high volumes. Similar results can be obtained for other familiar and mundane products such as light bulbs. 43

SECTION 8 OTHER ENVIRONMENTAL MANAGEMENT INITIATIVES 8.1 Environmental management systems (ems) 8.1.1 Understanding the basics of an EMS Management systems help companies to take a systematic approach to managing business issues. Best practice management systems are based on a four-stage cycle (see Fig 5). The Plan-Do-Check-Act (PDCA) cycle is the operating principle of environmental management system standards. Fig 5 Plan-Do-Check-Act cycle of an EMS PLAN Establish objectives and make plans (analyse your business s situation, establish your overall objectives, set your interim targets, and develop plans to achieve them). ACT Correct and improve your plans and how you put them into practice (correct and learn from your mistakes to improve your plans in order to achieve better results next time). CONTINUAL IMPROVEMENT DO Implement your plans (do what you planned to do). CHECK Measure your results (measure/monitor how far your actual achievements meet your planned objectives). 44

An EMS can be thought of as a communications framework of procedures and management programmes which co-ordinate effective management of environmental issues for a business. EMS standards such as ISO 14001 and the EC s Eco-Management and Audit Scheme (EMAS) (see Section 8.1.2) require a business to manage: compliance with relevant environmental legislation and other requirements to which the business subscribes; prevention of pollution; SECTION 8 continual improvement in its environmental performance. This involves: identifying relevant legal environmental requirements and the environmental impacts of the business s activities; writing an environmental policy; setting targets to reduce significant environmental impacts; developing management programmes to allocate responsibilities, resources and timescales to achieve the targets; audits to check progress against targets; management reviews to evaluate the overall effectiveness of the EMS. For practical help and advice on implementing an EMS, contact the Envirowise Advice Line free on 0800 585794. 8.1.2 EMS drivers Manage a business s impacts on the environment. Improve resource and energy efficiency and associated reduction in waste volumes and costs. Manage risks, liabilities and legal compliance. Evaluate and improve a business s environmental performance in a verifiable way. Improve communication and corporate image with employees, shareholders and other stakeholders. Conformity with customer requirements. Promote sustainable procurement within a business. A framework for continual improvement of a business s environmental performance. 45

SECTION 8 EMS options According to Defra, the Government recommends that organisations use a national or international standard. There are three recognised standards or schemes. ISO 14001 ISO 14001 is the international standard for EMSs which specifies the features and requirements necessary to help organisations systematically identify, evaluate, manage and improve the environmental impacts of their activities, products and services. More information can be found at the ISO website: www.iso.org/iso/home.htm. EMAS (Eco-Management and Audit Scheme) EMAS is a voluntary EU-wide scheme which requires companies to produce a public statement about their performance, focuses on legislative compliance and includes ISO 14001 as the requirement for the EMS component. EMAS is administered in the UK by the Institute of Environmental Management and Assessment (IEMA): www.emas.org.uk. BS8555 BS8555 is an addition to the EMS family and breaks down the implementation process for ISO 14001 or EMAS into six stages. BS8555 encompasses criteria used in the Acorn Inspection Scheme developed by the Institute of Environmental Management and Assessment (IEMA), which enables companies to gain accredited inspection and recognition for their achievements at each step as they work towards ISO 14001 or EMAS. The environmental performance focus of BS8555 is valuable within the supply chain and concentrates on: delivery of measurable benefits for participants; delivery of performance data for internal/external reporting; maximum credibility and competitive advantage. For more information see www.iema.net/acorn/bs8555. A recognised standard provides a sound basis for high-quality environmental reporting. 46

8.2 Environmental reporting Environmental management accounting techniques can also help a business to report publicly on its environmental policy and performance by providing trend data on physical quantities and costs. This can protect or improve its reputation and aid communication with a wide variety of stakeholders. Demonstrating concern about environmental issues can differentiate the business from the competition and attract customers and investors, and reporting can also enhance its reputation as a responsible employer, thus improving staff recruitment and supplier retention. SECTION 8 A business s environmental performance can be reported by including an environmental section in the annual report and accounts, or by producing a standalone report covering environmental performance (and most likely, wider sustainability or corporate responsibility issues). Reporting is increasingly done over the Internet, usually as a supplement to conventional hard-copy reporting but sometimes instead. Where possible, businesses should include trend data in these reports to show how their performance has changed over time. The Global Reporting Initiative acts as a voluntary standard-setter in sustainability reporting to try to harmonise practice across different businesses. Its Sustainability Reporting Guidelines recommend the process that a business should follow in reporting, and suggest 77 different performance indicators of different aspects of sustainability which a business can consider reporting. These guidelines are available at www.globalreporting.org. The Accounting for Sustainability project set up by HRH the Prince of Wales has also produced its own recommendations on Connected Reporting which can be found at www.accountingforsustainability.org.uk. 8.2.1 Why report on environmental performance? Interest from stakeholders in the environmental performance of businesses is at an all-time high. The EU Accounts Modernisation Directive (AMD) 22 means that whether your business is a plc or a large private company, you will need to report to investors on how environmental issues will affect your profitability. The Directive also requires companies to include, where appropriate, non-financial key performance indicators (KPIs) relating to environmental matters. Although the Directive applies only to large companies, BERR encourages medium-sized companies to report on these issues voluntarily in recognition of the benefits that such disclosure brings to the operation of the business. The Companies Act 2006 expands on the requirements of the AMD. The requirements of the Act came into force in 2007 and 2008 and change the way in which companies report on environmental matters. The Act introduced new reporting requirements for quoted companies from October 2007 to the extent necessary for an understanding of the development, performance and/or position of the company s business. 22 See www.businessandbiodiversity.org/pdf/eu%20accounts%20and%20modernization% for more information. 47

SECTION 8 Companies will need to ensure their Business Review includes information about: environmental matters (including the impact of the company s business on the environment); the company s employees; social and community issues. More information can be found on the Office of Public Sector Information (OPSI) website: www.opsi.gov.uk. 8.3 key environmental performance indicators Key Environmental Performance Indicators (KEPIs) are tools that provide a quantifiable metric for measuring and monitoring the environmental performance of a business. As discussed above, there is an increasing acknowledgement that good environmental performance makes good business sense, so the use of KEPIs will help businesses to manage and communicate the links between the environmental and the financial performance aspects of their business. For instance, poor management of energy, natural resources or waste can affect productivity rates; failure to consider rising costs and risks of environmental pollution for a future in which environmental image and marketing of a business are likely to be significant may risk the business s long-term survival. The Government, therefore, expects that businesses will need to use KEPIs to capture the link between environmental and financial performance adequately. Table 1 overleaf highlights commonly used KEPIs under each of the four sections (raw materials and waste, water, energy and transport) that should provide a starting point for a business s measurement of its environmental performance. Each business may have different appropriate KEPIs, but the important issue is to have visibility at the bottom line of the real costs (and environmental impacts) to the business. Businesses should seek to identify their most important environmental matters and utilise the benefits that KEPIs will bring. Accountants have a critical role in informing top management on business efficiency. In January 2006, Defra produced a set of environmental reporting guidelines to help companies to identify and address their most significant environmental impacts. These guidelines outline how businesses might begin to set targets/kepis against which to measure environmental performance. Businesses can make use of standard data which is already collected, for example, from environmental management systems and utilities bills. The environmental guidelines also provide guidance on how data could be reported. 48

Further information on KEPIs can be seen on the Defra website at www.defra.gov. uk/environment/business/envrp/pdf/envkpi-guidelines.pdf as well as on the Global Reporting Initiative website mentioned above. The environmental issue is fast-changing, particularly in terms of legislation and regulation. This Guide was written to offer an accurate and balanced view of the situation at the time of writing, but inevitably some of its content will become outdated over time. The Environment Agency provides a regularly updated database of the environmental legislation and regulation which can affect businesses, plus guidance, on its NetRegs website (www.netregs.gov.uk). SECTION 8 49

SECTION 8 Table 1 Commonly used environmental management accounting Key Performance Indicators (KPIs) Energy Aspect Unit KPI Gas Electricity (from fossil fuel) Electricity (from green sources) Fuel oil Coal Other (woodchip/ biomass boiler fuel) Climate Change Levy (CCL) cost kwh energy 2 m floor area Units of production Number of employees Cost ( ) Total fuel usage Transport Aspect Unit KPI 2 kwh energy/m floor area kwh energy/unit of production Energy cost/unit of production For total usage: % of green fuel vs fossil fuel usage CCL cost/unit of production CCL cost/person Diesel Petrol Biofuel Hybrid engine fuel usage Transport mode (private car, fleet car, truck, public transport) Bicycle use Walking to work Teleconferencing and videoconferencing Distance travelled Litres of fuel used Tonnes of product shipped Unit of production Number of employees Number of deliveries Number of staff journeys Cost ( ) Miles and time of staff journeys avoided (eg by using IT-based conferencing) Litres of fuel type used per shipment per person Efficiency: fuel usage per unit of distance travelled Litres of fuel (and cost) saved - by avoiding journeys through the use of remote communication solutions For total usage: % of total transport fuel from fossil fuel (vs greener fuels) % of employees walking/cycling to work (vs private car use) 50

Water Aspect Unit KPI Water Effluent (wastewater) Effluent quality Water pollution incidents Quantity of water (litres/m 3 ) Quantity of effluent (litres/m 3 ) Quality which meets effluent consent/ permit levels Number of exceedances beyond effluent consent/ permit levels 3 m water/employee 3 m water/unit of production Number of water pollution incidents per year Number of wastewater permit exceedances per year SECTION 8 Number of employees Units of product processed (number/ tonnes etc) Number of water pollution incidents Raw materials and waste Aspect Unit KPI Paper/cardboard Plastics Chemicals Metals Oils Packaging waste Packaging materials - virgin Packaging materials - re-used Waste to landfill (eg general waste) Waste recycled (eg aluminium cans, paper) Waste re-used Waste sent for treatment as hazardous waste Quantities of raw material used (kg/ tonnes/litres etc) Quantity of product manufactured (kg/ tonnes/litres/m 3 etc) Number of employees Cost ( ) Time spent in manufacture Time and materials Tonnes of waste Tonnes of materials % of waste recycled % of paper recycled vs paper purchased Quantity of solid waste per unit production or per person Tonnes of waste generated per tonne of raw materials used Cost of waste per unit product Landfill Tax 51

SECTION 9 Sources of Support Accountants and business managers can obtain support from the following organisations which provide information, advice and, in some cases, on-site support and funding. 9.1 Envirowise Envirowise offers UK businesses free, independent, confidential advice and support on practical ways to increase profits, minimise waste and reduce environmental impact. Envirowise is represented throughout Scotland, Wales, Northern Ireland and the English regions. Envirowise offers UK businesses independent, practical and proven guidance available through: A dedicated, free Advice Line: Envirowise has a panel of expert advisors able to provide free, confidential and independent advice on all aspects of resource efficiency and key environmental issues to businesses within the UK. Information resources from Case Studies to Good Practice Guides. Many events each year, from intimate seminars to major exhibitions. An informative website. For more information, call the Advice Line free on 0800 585794 or visit www.envirowise.gov.uk. 9.2 Carbon trust Carbon Trust is an independent company funded by Government. Its role is to help the UK to move to a low-carbon economy by helping business and the public sector to reduce carbon emissions and capture the commercial opportunities of low-carbon technologies. Carbon Trust has a wide range of products tailored to the needs of different organisations: Large energy users: 52 -- Carbon management reviews.

-- LA/NHS/HE carbon management. -- Feasibility studies. Intermediate energy users: -- Opportunities assessments. -- Implementation advice. -- Low-carbon buildings design advice. SECTION 9 Smaller energy users (< 50k energy spend): -- -- -- Interactive web-based self-help tools. Information sheets and how to guides. Helpline and telephone advice. Knowledge transfer: -- -- -- Extensive publications library. Technical training events. Energy Technology List. For more information, call the helpline on 0800 085 2005 or visit www.carbontrust.co.uk. 9.3 Energy saving trust (EST) EST is a non-profit organisation funded by Government and the private sector. EST s aim is to reduce CO 2 emissions and encourage the sustainable use of energy in the UK domestic, commercial and public sectors. EST is working towards Government targets to reduce CO 2 emissions from 1990 levels by 20% by 2020. EST offers tailored programmes to help: Businesses/workplaces. Consumers/households/individual motorists. Consumer and community grant support for micro-generation technologies. Housing associations and local authorities. Fleet advice. Vehicle manufacturers/technology developers. Grant-based support for refuelling and recharging infrastructure. For more information, visit www.energysavingtrust.org.uk. 53

SECTION 9 9.4 National industrial symbiosis programme (NISP) NISP is a business opportunity programme which links companies from all industrial sectors so that under-used resources such as energy, water and materials which are wastes from one company can be reprocessed, reassigned or re-used by others: Free of charge to business. Cost savings and additional sales for industry. Business-led approach. Positive environmental outcomes. Deals with ALL resources, including logistics, assets and expertise. National membership base of over 8,000 organisations. 12 regional centres across the UK. For more information, visit www.nisp.org.uk. 9.5 Waste & resources action programme (WRAP) WRAP is a UK-wide body focusing on materials resource efficiency. Amongst its various programmes, the following are most relevant to businesses: Business Support Programme - a comprehensive range of support for businesses in the specialist recycling sector. Manufacturing Programme - practical advice and technological support on the use of recycled materials in a wide range of manufactured products. Retail Programme - working with retailers and their supply chains, mostly food processing and packaging companies, to develop innovative products and packaging to reduce the amount of household waste. For more information, call 0808 100 2040 or visit www.wrap.org.uk. 54

9.6 Manufacturing advisory service (MAS) MAS aims to address the practical needs of British manufacturers by delivering handson advice and assistance from experts in a wide range of manufacturing disciplines. MAS is delivered through ten Regional Centres covering England and Wales. SECTION 9 MAS offers manufacturers the following key services: Direct helpline support through the Regional Centres. A free one-day on-site diagnostic visit by a MAS manufacturing specialist to review a company s entire manufacturing operation. Regional Centres can follow-up and deliver up to ten days in-depth consultancy - to introduce, for example, lean manufacturing techniques, product or process innovations, or design advice. Best practice activities, training and workshop activities for manufacturers across each region. Initial advice, information and diagnostic assessments are free of charge for small and medium-sized enterprises (SMEs). For more information, call 0845 658 9600 or visit www.mas.berr.gov.uk. 9.7 Scottish manufacturing advisory service (SMAS) SMAS is a service dedicated to the manufacturing sector. Its specialist team provides manufacturing companies of all sizes throughout Scotland with expert advice, one-to-one support, training and events. SMAS can help you to: Optimise workflow. Source a suitable supplier. Improve productivity. Enhance performance. Increase competitiveness. Reduce costs. For more information, call 0845 609 6611 or visit www.scottishmas.com. 55

SECTION 10 FURTHER READING ACCA Going Concern? A Sustainability Agenda for Action - this report is an ACCA social and environmental policy document available online at www.accaglobal.com/pdfs/ technical/tech-gc-001.pdf ACCA research reports and publications on various related subject areas are available at www.accaglobal.com/publicinterest/activities/research/reports/ and www.accaglobal.com/publicinterest/activities/research/publications Report of the Judges - ACCA report on ACCA awards for sustainability available online (www.accaglobal.com/). This report provides the strengths of ACCA awardwinning reports and technical recommendations for improving UK sustainability reporting. ACCA Surveys - a collection of surveys on issue-specific topics such as climate change, stakeholder engagement and human capital management are available online at www.accaglobal.com/publicinterest/activities/library/other_issues/surveys ACCA Sustainability Library can be viewed online (www.accaglobal.com/ publicinterest/activities/library/sustainability/). The library provides a single point of access for all the reading resources related to this subject to be found across the ACCA website. ACCA provides an Accounting & Sustainability quarterly e-newsletter which can be subscribed to online (www.accaglobal.com/publicinterest/activities/library/ sustainability/accounting_sustainability/email). This newsletter summarises global sustainability developments, including reporting, assurance, carbon accounting and standards issues. CIMA CIMA (2008), Climate Change Calls for Strategic Change highlights why you should adapt your strategy now, embedding climate change issues into normal business life before it is too costly or too late. CIMA proposes ten actions that your organisation can put in place to help you drive sustainable performance with regard to climate change. Available from www.cimaglobal.com/sustainability CIMA (2008), Managing Responsible Business Report and Survey. CIMA has teamed up with the Institute of Business Ethics to produce a new report that explores the debate on corporate responsibility and business ethics. The survey found the majority of respondents agree that business has a moral obligation to help address global issues such as climate change and poverty. Many also believe that environmental impact is of growing importance and that it is an issue that companies cannot afford to ignore. Available from www.cimaglobal.com/sustainability 56

CIMA Publishing (2007), Accounting for Sustainable Development Performance explores a variety of responses to the sustainable development agenda, introduces the sustainability assessment model (SAM) and provides a case study of BP, that has implemented SAM. The full report and executive summary are available through www.cimaglobal.com/researchexecsummaries CIMA (2006), Accounting for ethical, social, environmental and economic issues: towards an integrated approach explores the extent to which information published by companies about their sustainability performance discharges their duty of accountability to external stakeholders on ethical, social and environmental issues. Looks at whether this information is integrated into strategic decision-making. The executive summary is available from www.cimaglobal.com/researchexecsummaries SECTION 10 CIMA (2006), Emissions trading and the management accountant - lessons from the UK emissions trading scheme explores the costs and benefits of direct participation in the UK Emissions Trading Scheme (UKETS). Outlines the role of management accountants and their systems in motivating reductions in emissions that support the general initiatives to mitigate the effects of climate change. The full report is available from www.cimaglobal.com/researchfullreports and the executive summary is available from www.cimaglobal.com/researchexecsummaries CIMA (2006), The burden of complying with employment and environmental regulation assesses UK businesses perception of employment and environmental regulation in terms of compliance costs, quality of UK regulations and formalities, quality of UK administration of regulations, and innovation and barriers to trade. The executive summary is available from www.cimaglobal.com/researchexecsummaries CIMA (2005), OFR and sustainability roundtable: examining the impact of the OFR on sustainable development and corporate reporting reports on the discussion of a wide range of experts on the impact of the OFR on sustainability reporting, including quantitative and qualitative information, investors and investor pressure, CSR reports and the OFR and shareholders vs the stakeholders. The report is available from www.cimaglobal.com/technicalreports CIMA Publishing (2002), Environmental Cost Accounting: An Introduction and Practical Guide provides an introduction to corporate environmental accounting. It outlines the business case and rationale for engaging in environmental accounting and illustrates how leading UK companies are adding value and reducing risk through the use of innovative environmental accounting techniques and methodologies. Available from www.cimapublishing.com Thorogood Publishing Ltd (2008), Managing Climate Risk: A Practical Guide for Business. By treating climate change as more than a legal obligation, this book explains how organisations can reduce their exposure to any direct threats, while at the same time improve their efficiency and put themselves in a position to gain from any shifts in how their markets operate. CIMA contributed a chapter to this book on Accounting for climate change. Available from www.thorogoodpublishing.co.uk 57

SECTION 10 EA Corporate environmental disclosures - EA s latest report looking at the environmental disclosures of the 500+ companies in the FTSE All-Share http://publications. environment-agency.gov.uk/pdf/geho1007bngj-e-e.pdf?lang=_e Corporate environmental governance - research investigating the link between the financial performance of a company and how it manages its interactions with the environment http://publications.environment-agency.gov.uk/pdf/geho0904bkfee-e.pdf?lang=_e Environmental accounting case studies - the EA produces annual reports using its environmental accounting system that examine its environmentally significant expenditure; these can be viewed and downloaded from www.environment-agency.gov.uk/environmentalfinance EMAN Schaltegger S., Bennett M., Burritt R. and Jasch C. (eds.) (2008). Environmental Management Accounting for Cleaner Production. Dordrecht, Netherlands: Springer Publishing. Schaltegger S., Bennett M. and Burritt R. (eds.) (2006). Sustainability Accounting and Reporting. Dordrecht, Netherlands: Springer Publishing. Rikhardsson P., Bennett M., Bouma J.J. and Schaltegger S. (eds.) (2005). Implementing Environmental Management Accounting: Status and Challenge. Dordrecht, Netherlands: Springer Publishing. Bennett, M., Rikhardsson P. and Schaltegger S. (eds.) (2003). Environmental Management Accounting: Purpose and Progress. Dordrecht, Netherlands: Kluwer Academic Publishers. Bennett M., Bouma J.J. and Wolters T. (eds.) (2002). Environmental Management Accounting: Informational and Institutional Developments. Dordrecht, Netherlands: Kluwer Academic Publishers. Bennett M. and James P. (2001). Eco-Management Accounting: Guidelines for Accountants, Business Advisers and Environmental Managers. London: British Standards Institution and Hitchin, UK: JL Publishing Ltd. Bennett M. and James P. (eds.) (1998). The Green Bottom Line: environmental accounting for management - current practice and future trends. Sheffield: Greenleaf Publishing. 58

ICAEW ICAEW, Sustainable Business thought leadership prospectus from ICAEW. ICAEW, Sustainability: the role of accountants. Bent, David, Forum for the Future (2008), Competitiveness and Sustainability: Building the Best Future for your Business, ICAEW. Environment Agency and ICAEW (2009), Reporting on Environmental Issues in Annual Financial Statements: A practice guide to report preparers, users and auditors. SECTION 10 The Business Sustainability Programme, www.icaew.com/bsp ICAS The Development of Corporate Websites and Implications for Ethical, Social and Environmental Reporting Through these Media. Adams & Frost (2004) (ISBN 1-904574-06-8). The Professional Accountancy Bodies and the Provision of Education and Training in Relation to Environmental Issues. Gray, Collison et al (2001) (ISBN: 1-871250-89-7). The Valuation of Assets and Liabilities: Environmental Law and the Impact of the Environmental Agenda for Business. Gray, Bebbington, Collison et al (1998) (ISBN: 1-871250-60-9). The reports are available to purchase from the ICAS Research Centre. The 2004 Report is available to download from the ICAS website and the Executive Summaries for the two older reports are also available on the website. 59

APPENDIX 1 Glossary British Standards Institution (BSI) A leading standards and quality services organisation, independent of Government, industry and trade associations. Provides systems assessment and registration, product certification testing, commodity inspection and testing, and training, publications and management. Carbon Trust An independent not-for-profit company funded by the UK Government to assist UK businesses and the public sector to reduce carbon emissions and to take advantage of any ensuing commercial opportunities. Climate Change Levy (CCL) A tax on the use of energy in industry, commerce and the public sector to encourage energy efficiency and reduce emissions of greenhouse gases. This tax, which was introduced in April 2001, is applied to energy bills before VAT is added. Corporate social responsibility (CSR) The management of a company s impact on society and the environment so as to add value to the company and increase wider economic and social wellbeing through its operations, products or services and through interaction with key stakeholders such as employees, customers, investors, local communities, suppliers and others. Eco-Management and Audit Scheme (EMAS) An EU regulation allowing voluntary participation by companies in the scheme launched in 1995 which enables them to evaluate, report and improve their environmental performance. Enhanced Capital Allowance (ECA) scheme A Government initiative that enables businesses to claim a 100% first-year capital allowance for investments in selected energy-efficient technologies. For more information, visit www.eca.gov.uk. Environmental costs That part of a business s costs which are related to environmental factors in some way, such as where an environmental factor is a significant cost driver. These will depend on the nature of the business, and on the management s judgement on which of its costs should be considered environmentally related in order to support better 60

business decision-making. However, most businesses would usually consider costs related to raw materials and wastes, water, energy and transport to be significantly environment-related. Environmental management accounting (EMA) The generation, analysis and use of financial and non-financial information in order to benefit a business s environmental and economic performance. APPENDIX 1 Environmental management system (EMS) A communications framework of procedures and management programmes based on the best practice model for management systems (plan, do, check, act) to co-ordinate the effective management of environmental issues at a business. Envirowise A UK Government-funded programme providing practical environmental advice for business. European Union Emissions Trading Scheme (EU ETS) An EU-wide cap-and-trade system covering five industry sectors, for reducing carbon dioxide emissions. It is the world s largest mandatory carbon dioxide emissions trading scheme. Greenhouse gases (GHG) Carbon dioxide, methane and other gases that cause and accelerate the greenhouse effect, thereby damaging the insulation of the earth s atmosphere. Institute of Environmental Management and Assessment (IEMA) The IEMA was formed in 1999 as the professional body for the environment, with the overall aim of promoting the goal of sustainable development through best practice standards in environmental management, auditing and assessment. ISO 14001 First published in 1996, this standard issued by the International Standardisation Organisation (ISO) specifies the requirements for an environmental management system (EMS). An updated version of the standard was published in 2004, ie ISO 14001:2004. 61

APPENDIX SECTION 1 2 Mass balance Comparison of the weight or volume of materials brought into a business against the weight or volume of materials that end up in the final product (ie product yield), to identify how much material is wasted in the process. Construction of a mass balance involves balancing the amounts of materials purchased during the year against the amounts of materials stored on site or leaving the business as product or waste. Non-governmental organisation (NGO) An organisation, generally non-profit seeking, which is set up for a specific purpose and is independent from governments and their policies. Resource efficiency Producing more goods and services with fewer inputs of materials and utilities, and with less pollution and waste. Also known as resource productivity or waste minimisation. Sustainable development Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. 62

Contact details for accountancy institutes and the Environment Agency The Association of Chartered Certified Accountants (ACCA) Rachel Jackson, Head of Social and Environmental Issues, ACCA, 29 Lincoln s Inn Fields, London WC2A 3EE Tel: 020 7396 5845 Fax: 020 7396 5730 e-mail: rachel.jackson@accaglobal.com APPENDIX 2 Further information is available through www.accaglobal.com/sustainability. The Chartered Institute of Management Accountants (CIMA) Helenne Doody, Sustainability Specialist, CIMA, 26 Chapter Street, London SW1P 4NP Tel: 020 8849 2262 Fax: 020 8849 2468 e-mail: helenne.doody@cimaglobal.com Further information is available through CIMA s sustainability website www.cimaglobal.com/sustainability. Environment Agency (EA) Howard Pearce, Head of Environmental Finance and Pension Fund Management, Environment Agency, Rio House, Waterside Drive, Aztec West, Almondsbury, Bristol BS32 4UD Tel: 01454 624332 Fax: 01454 624031 e-mail: howard.pearce@environment agency.gov.uk 63

APPENDIX 2 Environmental Management Accounting Network - Europe (EMAN) Martin Bennett, Reader in Accounting and Finance, University of Gloucestershire Business School, The Park, Cheltenham GL50 2RH and Environmental Management Accounting Network (EMAN) Tel: 01242 714349, 01905 821574 e-mail: mbennett@glos.ac.uk or martindbennett@btinternet.com EMAN is an international network of researchers and practitioners who are interested in environmental and sustainability management accounting and reporting. It holds annual conferences following which it publishes an edited and refereed selection of the best papers presented. Information about conferences organised by EMAN is available on www.eman-eu.net. The Institute of Chartered Accountants in England and Wales (ICAEW) Rachel Bird, Corporate Responsibility Executive, ICAEW, Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ Tel: 020 7920 8794 e-mail: rachel.bird@icaew.com Information about the activities of ICAEW s Environmental Steering Group is available on www.icaew.co.uk. The Institute of Chartered Accountants of Scotland (ICAS) Christine Scott, Assistant Director, Accounting & Auditing, The Institute of Chartered Accountants of Scotland, CA House, 21 Haymarket Yards, Edinburgh EH12 5BH Direct line: 0131 347 0238 Direct fax: 0131 347 0110 Tel: 0131 347 0100 Fax: 0131 347 0105 www.icas.org.uk 64

Additional case studies The following case studies were commissioned for this publication and are not available on the Envirowise website. Managing energy bills at the Environment Agency Although the Environment Agency s primary objective is unique, in its operations it is typical of many other large organisations (with 13,000 staff and an annual budget of over 1 billion, it is equivalent in scale to a FTSE 100 company). This means substantial environmental impacts and associated costs, including energy at its 2,000 sites with a metered electricity supply. In 2007/08, its total electricity bill amounted to 4.8 million. However, it found that its existing accounting system was not adequate to support the control of electricity costs in sufficient detail, despite having been designed to record physical units of measure (eg kwh, kilos, tonnes) as well as the financial value of invoices. Several problems were identified: APPENDIX 3 Invoices were not being posted until they had been approved. This meant that interest payments were incurred, and also made it impossible to attribute costs accurately to the month in which the consumption had occurred. Input staff sometimes found it difficult to understand the bills sent by suppliers, each of whom had its own format, and to identify from them the separate amounts for units consumed, standing charges, and other charges respectively. Most bills were estimated and it could take several months to correct them, receive credit notes and then pay the supplier. The result was that the information which was needed to support management control over consumption was frequently late, inconsistent and incomplete. The Agency s Environmental Finance section made several distinct but complementary changes to the system to address this: The invoice posting section was instructed to record and pay every bill within 10 days of receipt whether it had been approved or not. The local regional staff were made responsible for ensuring the accuracy of each bill and if necessary to submit to the energy supplier customer readings within 15 days of receipt of the invoice, to guarantee a credit in the following month. Crucially, negotiations were held with each of the Agency s several electricity suppliers by which they all agreed not only to submit their usual invoices for payment, but also to send to the Environmental Finance section a supplementary supporting document in electronic format. These e-bills would correspond with the main bills but provide more detail, and would do this in a standardised format to avoid errors by the recipients in interpreting their contents. These e-bills include details of all transactions, including credits, for each month - site, meter identity, meterreadings at the start and end of the period, the type of each charge, kwh, and cost. Environmental Finance uploads this every month into a database which is used to generate information on both consumption and expenditure. This means that data 65

APPENDIX 3 can now be attributed to the correct month, comparisons can be made between sites and regions, and usage and spending trends can be tracked and reported during the course of each year. Other advantages have also been found with this system, including: Responsibility for the accuracy of the invoices is now clearly located with the local staff in the places where the energy is actually being consumed. Detailed information down to the level of individual sites is available to support monitoring and planning. Lists of live sites can be generated to highlight any errors in the billing system. For example, this showed that suppliers were still billing the Agency for two sites which it had already sold. Further information is available from: www.environment-agency.gov.uk/environmentalaccounting. EDF Energy - Sub-metering All electricity consumers have a gross supply meter which measures how much they take from their suppliers and will be billed for, which is sufficient for their financial control. They can also choose to install sub-meters downstream of this to measure how much each part of their business is using and derive data in more granularity, and thus improve their management control through both more well-informed decisions and closer control over spending. How far it is worthwhile to go in installing sub-meters depends on the balance in any case between the cost of fitting and using them on the one hand, and the opportunities available to realise savings on the other. Since there are several different types of meters, and since opportunities to make savings vary between different consumers, there are no hard-and-fast rules. However, broad guidelines can be generated based on experts experience. Ashley Pocock, Home Technology Director of EDF Energy, has been advising customers on metering and energy efficiency for several years and has found that in his experience an ongoing saving of 5-10% is typical when an area within a business is sub-metered. Even an average residential household will consume around 4,000 kwh of electricity in a typical year, and at 20 pence per kwh (say) this will mean an annual bill of around 800. All but the smallest businesses will consume several times more than a household - a business or part of a business which consumes electricity equivalent to ten households (say) will have an annual bill of 8,000. At this rate, a simple meter of traditional design costing 500 to purchase and install would pay for itself in only 15 months, even with savings of only 5%. A basic smart meter for 1,000 would save the trouble of manual meter readings and could be connected to appliances such as real-time display devices, which would make the rate of energy consumption more immediately visible to those in the business, and would still pay back within 30 months. 66 Note: This refers to electricity only, but the same also applies to gas and water.

EDF Energy - Cutting transport emissions As a leading energy producer, EDF Energy has a keen interest in carbon emissions and aims to be a leader in the sector in reducing its own footprint. The main part of this comes from its power generating stations, but it also has several other activities such as transport which are common to most other businesses too. EDF Energy s Sustainable Future programme requires that all proposed new investment projects in the business are assessed against social, environmental and economic hurdles. In 2007 it voluntarily adopted a set of Climate Commitments under which it committed itself to several targets, including to reduce transport-generated CO 2 emissions by 20% by 2012 compared to a 2006 baseline. Since, if nothing were done, the underlying trend of transport use would be upwards, this effectively represents an even more challenging target. APPENDIX 3 These emissions arise mainly from EDF Energy s fleet of approximately 4,600 owned or leased vehicles. These range from heavy freight down to small vans and cars which are used to support power stations and distribution networks. Further impacts are added by staff who use their own cars for business travel and then reclaim the expenses they incur (some 22 million miles of travel each year) and rented vehicles, as well as through air and rail travel. In 2006 this represented a total carbon footprint of 27,100 tonnes. EDF Energy is considering all feasible options to reduce the carbon footprint of its use of transport. These include new technologies and fuels (eg electric cars, hybrid vehicles, etc), replacing the existing fleet with more efficient vehicles, and in the longterm trying to eliminate the need for travel in the first place through technologies such as video-conferencing. It also recognises that for a substantial and lasting effect, it needs to reduce both the total mileage travelled and the fuel consumption per mile. Two simple but effective innovations that it considered in order to reduce carbon emissions were fitting speed limiters and air-conditioning default switches to certain types of vehicles. When this was investigated and appraised it was found that these could be fitted to up to 2,500 vans, and that together with behavioural change, this would not only reduce annual carbon emissions by 5,000 tonnes (based on Defra s standard conversion factors), but that the search for ways of improving environmental performance had also revealed opportunities for economic benefits which had not previously been recognised. Initial financial appraisals showed that an investment of 1 million could generate an NPV of nearly 5 million over five years (after discounting at a cost of capital of 10%/year), an IRR of 73%/year, and discounted payback of 2.33 years. Final investment cases are currently in development. To derive maximum benefit, before-the-event appraisals need to be supplemented by after-the-event monitoring of actual performance to assess how far the benefits which were originally forecast are then being actually realised in practice. Collecting the data to do this is practically complex as EDF Energy s several different modes of transport mean that several different business systems are involved in collecting the data that is needed. As well as the main bought ledger, these also include expense claims, corporate credit cards, car rental contractors, and travel agents (for air travel). 67

APPENDIX 3 The company s main accounting system is the focal point as all these sources of emissions also incur costs, but the necessary physical data on quantities of fuel purchased and miles driven are collected on a regular basis through a supplementary spreadsheet-based system which draws data on physical quantities from the same data capture systems that were primarily set up to feed into the accounting system. These data capture systems will be enhanced as the project progresses. Amongst the improvements being considered is a system to capture distances travelled directly by automated odometer readings rather than by using fuel purchases as a proxy. Early results are promising: by the middle of 2008 EDF Energy had begun to see improvements, with emissions (measured on a like-for-like basis) down 5% from their 2007 peak. Further information is available from: www.edfenergy.com/sustainability/performance-report/performance/glance.shtml. Sun Microsystems - Data centre efficiencies Although computers are now universal in business, it is still not always appreciated how significant are the environmental impact and related costs of their use. Globally, IT costs businesses around $7.2 billion in utility bills every year and the annual cost of energy is predicted to exceed that of the hardware itself within the near future. Since the power consumption of data centres has doubled between 2000 and 2005, it is little surprise that 25% of the average IT budget is consumed by energy costs alone. Historically, this has been tolerated since the environmental impacts were largely ignored, energy costs were low, and the available technology allowed little practical opportunity to design more energy-efficient IT systems. However, this is changing through both the use of new hardware and software technology which has only recently been developed, and better use of existing technology. Sun Microsystems has set up a specialist unit to exploit this opportunity both for clients and in their own business. Peter Bennett of Sun s Data Centre Efficiency Practice section identifies a number of areas where many organisations regularly and unknowingly waste energy unnecessarily. Over the years, many organisations have built up rooms full of servers which incur major costs, not just in energy but also in acquisition, depreciation, maintenance and management. Sometimes these computers are no longer needed for their original purpose, but with staff turnover and poor documentation, nobody is certain which these are. No one will dare turn them off, just in case. Using modern tools and methods it is possible to identify these with a high degree of confidence. In a typical audit of customers systems it is not unusual for Sun to find that 10-15% of their systems can often be orphaned in this way. Similarly, many systems are found to be over-specified for the purpose for which they were originally purchased, often to support only a single software application such as a departmental email server. The result is that the equipment is under-utilised or idle, with average utilisation figures of only 15-30% frequently being found across a business s total population of servers. When these systems were first designed 68

and implemented this may have been difficult to avoid, but new developments in virtualisation software mean that computers can now safely and reliably share workloads, driving up overall utilisation and often resulting in some very steep savings. Recent developments in hardware stimulated by the need to save energy have also created opportunities, through innovations such as the pod concept which uses a self-contained group of racks and benches to optimise power, cooling and cabling efficiencies in data centres. These replace the typical old inefficient configurations with racks of computers in the centre of the room and air-conditioning units placed around the perimeter. Similarly, the old dumb terminal concept is making a comeback in the form of modern thin client desktops which perform the same function as conventional desktops, but more reliably and consuming as little as 5% of the power, with the supporting infrastructure safely managed in the data centre. APPENDIX 3 Sun applied these principles in its own business in consolidating multiple European data centres into a single state-of-the-art facility 23. Its original plan had been to consolidate into 3,000 square feet of data centre space, but further analysis showed that it could use its new pod technology to compress the equipment into only 450 square feet, and could achieve this within less than a year without any down-time. The result was a saving of more than 80% in space, power and cooling costs, whilst still providing the potential to expand IT capacity by up to five times. However, Peter points out: Technical solutions on their own are only part of the solution. Technical consultants can provide these, but the business needs first to be aware of the potential for improvements which are represented by the current costs of the energy and other resources used in its IT, and then to evaluate them intelligently. However, sometimes the constraints imposed by some traditional accounting and budgeting systems need to be worked around first. Many businesses simply aren t even aware of the costs they incur on energy to power their IT, so there s still a long way to go. Initially, Sun Microsystems chief motivations for innovating more cost-effective approaches to building, managing and running IT systems were mainly internal. However, after having successfully consolidated and modernised much of its own IT worldwide, and saving millions in the process, it then started looking to see how it could help its customers similarly. Today, through its Data Centre Efficiency Practice, Sun is helping companies worldwide to build and maintain cost-effective eco IT systems. Further information is available from: www.sun.com/aboutsun/environment/green/datacenter.jsp. 23 See www.sun.com/aboutsun/environment/docs/uk_datacenter.pdf and www.sun.com/customers/servers/sun_newark.xml for more details. 69

APPENDIX 3 Carbon footprinting at Riverford Organic Vegetables The Greenhouse Gas Protocol has defined the approach to carbon footprinting on which the Carbon Trust bases its advice to companies, and which most companies follow. This is built around a structure of three levels at which footprinting can be done, defined in terms of the extent of their boundaries: Scope 1: Scope 2: Direct emissions from activities the organisation controls. Emissions from using electricity from an outside supplier. Scope 3: Indirect emissions, upstream along the supply chain and downstream in the delivery and consumption of products and services. Scopes 1 and 2 are obligatory, but Scope 3 is optional and it is up to each company to decide whether to follow this too and, if so, how far upstream and downstream to go in defining its own footprint. Riverford Organic Vegetables runs a vegetable box home delivery service, competing with other food retailers such as the big supermarket chains. Mark Howard, Riverford s Sustainable Development Officer, is responsible for calculating Riverford s own carbon footprint and is critical of the exaggerated claims made by some companies: When you look at what they re doing, you can find they re only counting a selective part of their total emissions, sometimes just to publicise newsworthy initiatives which don t reflect the business as a whole. It may be well manicured public relations, but this can actually impede sensible questioning of the real issues, such as the packaging and energy used in the global sourcing of food which some footprints just ignore. Instead, we get stories in the media about wine going up the Manchester Ship Canal, but behind this it s just business as usual. Riverford aims to go as far into Scope 3 as possible in calculating its own carbon footprint, although Mark recognises that there are practical limits to how far it is feasible to go: We extend our calculation as far as we can, and concentrate on what we can capture without too much difficulty and what we can have some influence over. However, these calculations are still sufficient to dispel some popular myths about what constitutes good environmental performance and how this can be measured (see the next case study). Riverford has published the results of its first carbon footprint exercise on its dedicated website (www.riverfordenvironment.co.uk), together with details of much of its other environmental work. Mark is currently developing a more embedded system of calculating the carbon footprint on an annual basis, with the 2007 figures expected later this year. The calculation of CO 2 emissions has provided a metric by which activities can be measured and thus managed, and this has led to several changes in practice to improve environmental performance and sometimes also reduce costs. 70

These include: redesigning packaging materials to use less material, thus reducing both manufacturing and transport emissions, and costs, through the more efficient use of pallets; energy efficiency measures by looking at refrigeration systems in detail and improving routine maintenance and making some technical improvements which improved equipment performance, and reduced carbon emissions and costs; comparing alternative transport modes such as shipping from Morocco rather than trucking (ships take an extra day to reach the UK, but incur only one-fifth of the carbon emissions of trucks). APPENDIX 3 Further information is available from: www.riverfordenvironment.co.uk. Riverford s search for balanced performance indicators Most accounting textbooks and manuals offer several examples of how analyses need to consider all the relevant costs and benefits associated with an action if they are to result in a balanced picture which provides a good guide for action, and the risk that an analysis which is partial and unbalanced could lead to inappropriate actions. An obvious but classic example could be a performance measurement system which measures the volume of production but not its quality, and so encourages staff to cut corners in order to boost production quantities. The need to ensure comprehensive and balanced performance measurement has driven the development of approaches such as balanced scorecards. Environmental accounting similarly needs to ensure that indicators are balanced and complete, and provides examples of how results can be distorted if too much importance is attached to only a single indicator taken on its own. In Riverford Organic Vegetables sector, one example is food-miles. In the popular media this is often simplistically assumed to be a meaningful indicator of the environmental impacts of food supplies (in particular, of their climate change impacts), with the implication that it is necessarily always more environmentally responsible for food to be grown close to where it is going to be consumed. Riverford s calculation of its carbon footprint brings in as much as possible of its Scope 3 impacts as well as Scopes 1 and 2 (see previous case study). One element in this is the carbon impact of transporting a kilo of tomatoes to the UK: 250 grams if imported from Spain by road, 60 grams if imported from Morocco by sea, but only around 50 if sourced from a UK supplier. However, to grow tomatoes in the UK s climate requires artificial heating, and this pushes the total impact up to 2,250 grams compared to only 300 and 150 if sourced from Spain and Morocco respectively. Although the food-miles indicator on its own would suggest that sourcing locally is more environmentally responsible, this would be a distortion of the full overall effect. The exercise also showed the dramatic differences in carbon emissions per unit per kilometre of alternative methods of transport. Trucking by HGVs incurs six times the emissions of deep sea freight per kg transported, vans 20 times, and airfreight 40-100 times. 71

APPENDIX 3 Some of the results produced by Riverford s holistic approach to carbon footprinting are counter-intuitive and contradict popular prejudices. It had, for example, expected the carbon emissions generated in running its cold stores to be a major source. Its analysis found that these were, in fact, outweighed not only by emissions from transport (as it had expected) but also by those incurred in the manufacture of its packaging. Riverford had always used paper for packaging rather than plastics, expecting that this would be more environmentally benign, but its carbon footprint calculation unexpectedly showed that plastic can often have lower carbon emissions than paper, even when it has been made from recycled fibres. Prompted by these results, Riverford is now planning to restructure its packaging system radically by moving to a system of returnable plastic crates which can be re-used many times for its vegetable boxes. To encourage customers to return them, these crates would carry a deposit, which will mean an additional accounting process to track them. Mark Howard acknowledges that like any measurement system, carbon footprinting exercises have to be realistic and recognise that what can be included may have to be constrained if the required information is not currently available. We take a pragmatic approach here. For example, at first we didn t attempt to include the carbon emissions associated with actually growing the crops in the first place, since the necessary data wasn t available for all crops. Since then we ve done an extensive review of academic journals and had several discussions with growers, and this has uncovered the appropriate information for crops grown in greenhouses. This has led us to consider moving some production to France where no heat is required and the overall impact is lower. However, the picture is much more complex for crops grown in fields and we don t expect to be able to resolve this in the near future, so for the time being, we ll have to continue to leave these out of our calculations. 72

Envirowise - sustainable practices, sustainable profits. Envirowise is a Government-funded programme dedicated to putting the sustainable use of resources at the heart of business practice. It is managed by AEA Technology plc and Serco TTI. Envirowise is funded by Defra, the Scottish Government, the Welsh Assembly Government and Invest Northern Ireland. Envirowise offers a range of free services including: Free advice from Envirowise experts through the Envirowise Advice Line. A variety of publications that provide up-to-date information on resource efficiency issues, methods and successes. Best practice seminars and practical workshops that offer an ideal way to examine resource efficiency issues and discuss opportunities and methodologies. ADVICE LINE 0800 585794 Glengarnock Technology Centre Caledonian Road Lochshore Industrial Estate Glengarnock Ayrshire KA14 3DD E advice@envirowise.gov.uk www.envirowise.gov.uk Crown copyright. First printed March 2009. Printed on paper containing 80% recycled post-consumer fibre. This material may be freely reproduced in its original form except for sale or advertising purposes.