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Requirement
(b) Discuss the extent to which the environmental monitoring and reporting process should be tied into the existing financial reporting system.
(a) Critically evaluate the above statement, giving particular attention to the role accountants can play in environmental reporting and the type of information that should be included in environmental report.
Solution
Introduction
Environmental reporting can be defined as effective information about the impact of the business operations of the organisation on the environment.
Previously accountants in the companies are not showing the information related to environmental impacts and the policies to mitigate those in their annual reports as companies have fear that it will cause damage to their reputation and relations with stakeholders. Now the thought process has been changed, companies are now taking it as a competitive advantage over others by reporting about the environmental impacts of its operations and measures taken in their annual reports.
Answer (a):
“Environmental activists are almost in despair at the apparent widespread of lack of interest and concern shown to environmental reporting by accountants. There seems to be a storing feeling that accountants are not accounting for all that matters in annual reports. Hence financial reports may be misleading.”
The above statement seems to be true but to some extent. Various surveys conducted by numerous organisations in the current scenario in which one of them is conducted by the KPMG in 1999 and in its international survey on environmental reporting it states that among the top 250 companies in the fortune global list only 35% of them i.e. 88 companies have shown reports on environmental performance in their annual reports but it also reflects that there has been a stable increase in the environmental reporting by companies from 1993 to 1999 as the percentage was 13% only in 1993. On the other hand, according to the KPMG survey on corporate responsibility (CR) reporting 2013, there has been a drastic increase in the CR reporting by the companies in various regions as in the Asia pacific region 71 percent of companies now reporting on CR, in USA 76 percent of companies are reporting it in their reports whereas it is 73 percent in Europe. Now a days CR reporting is considered as the mainstream business practice globally. 93 percent of the world’s 250 largest companies are now reporting on CR in their reports. Almost half of the reporting companies globally now includes environmental reporting in their annual reports and it is considered as a standard business practice worldwide. (KPMG, 2013) Therefore it can be said that day by day accountants are taking interest in the environmental reporting in their annual reports and performing the accounting for the environment in their reporting process to make it more transparent and useful for the stakeholders.
Accountants can play a vital role in the environmental reporting by the companies by using their expertise in the accounting field. As for the environmental reporting every organisations need lots of data containing effective information about the various aspects likewise consumption of water and the raw materials, pollution which is discharged in the environment per unit of output, hazardous waste generated by the organisation, recycling of solid waste generated from the business processes, disposal practices adopted for the waste, results of pollution controlling activities by the organisation, other major activities for the protection of the environment, etc. Accountants can measure the values of the environmental goods and services used by the organisationand all the environmental costs associated with it through adopting environment management accounting process. Accountants can help in defining and measuring the various categories of environmental expenditures of the companies such as capital investments, operating costs, research and development costs, environmental administration and planning costs, expenses for remediation measures and recovery expenses.
The type of information that should be included in the environmental reporting will depend on the nature of the business organisation and the industry in which it operates and the laws and regulations prevailing in the country. Various global standards on the environmental reporting such as ISO 14064-1, CPD, etc have been issued by various nations and global organisations such as international organisation for standardisation, climate disclosure standards board.
Instances of Information that can be included in the environmental report can be as follows:
Voluntary greenhouse gas reporting:
Emission of the greenhouse gases can be reported in terms of the measured quantity of the gases emitted or quantity of the carbon dioxide equivalent (CO2e).For the identification and categorization of emission releasing activities ISO 14064-1 has laid down three categories such as direct emissions which are activities of the organisation that releases emissions directly in to the environment, energy indirect are the emissions that are because of the activities which are not directly in control of the organisation likewise in consuming electricity, heat, cooling, etc and other indirect are the activities which are not covered in the energy indirect. Reporting of the addressing of all the risks and opportunities that climate change poses to the organisation’s business. Some explanations also have to be reported in supporting the above information provided such as the period covered, methods adopted in quantifying emissions, any significant changes, policies for reducing emissions and target achieved.
Water:
The information which has to be included in this area is amount of water supplied to the organisation, direct abstraction of water during the period, recycling of water by the entity, rainwater harvesting policy if any, any technology used for efficient utilization of water, organization’s schemes for the minimization of the impact on environment because of use of water.
Waste:
Information which can be included while reporting for the waste is total amount of waste generated by the organization during the period in metric tonnes; calculated figure has to be categorized in separate categories likewise paper, glass, aluminium, plastics, etc. which can be most appropriate, final destination of the waste generated in the categories such as reused, recycled, landfill, etc., figures to be compared with the base year, activities undertaken by the organisation for the prevention of waste generated by it and the benefits realised through these activities and examples of these activities can be any improvement in manufacturing and design or packaging of a product, etc., any energy produced from the waste generated if having any energy generation activities, reduction in the costs by the selling the waste produced, any activities adopted for the distraction of the waste generated from reaching to landfill.
Resource efficiency and materials:
Matters concerning resource efficiency in the report can be deviations in the consumption of significant resources, volume of material purchased and volume of it going to waste, recycle and reuse, amount spend on materials having low influence on environment in comparison of total materials purchased, policies adopted to minimise the environmental impact of the operations of organisation.
If the business is of extraction and processing of minerals, fossil fuels, etc. then there specific sector supplements required under global reporting initiative for the industries such as oil and gas, mining and minerals. In this area reporting information can be included as information on impact on habitat and species from the activities of extraction of materials, if biomass is used in the operation then information on its source from which it is obtained and the amount used, if wood products are harvested by the business then information has to be given on the amount in cubic meters harvested and residue of harvesting by categorizing the type of wood, area from where the wood was sourced and whether it was sourced from sustainably managed forests.
Emissions of harmful chemicals and gases to Air, land and water:
Various types of emissions of hazardous chemicals are made by the organisations such as oxides of nitrogen, particulate matter, sulphur oxides, acidic chemicals, metal emissions, etc. Information which is to be included in the environmental report can be information related to environmental licences and discharge permissions, in relation to transport, logistics and vehicle use,information regarding freight and transport information, any environmental friendly technology used in transportation.
If there is any incident of accidents and spillages then information have to be reported relating to the type of emission, volume of particular emission, numbers of spills and the volume every spill and major initiatives taken for the prevention of the major incidents and spills. (Pramanik, 2002)
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Answer (b):
In the current scenario many non-government organisations and stakeholders are raising voices for the combined reporting of financial and environmental data because traditional reporting systems are unable to reflect the true picture of the organisation’s activities and operations pertaining to various aspects of the society and environment. Organizations which are adopting the integrated reporting system are gaining a competitive advantage with respect to the other entities. There are also numerous advantages in integrating the environmental reporting with the financial reporting system. Some of them are:
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Organisations can be able to easily enter in the capital markets and make business associates.
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It helps in efficient decision making by the managers because of the more transparent and useful information available with this integration.
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There will be cost reductions and effective and efficient operations which contributes to the competitive advantage.
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There will be optimal allocation of the organisation’s resources.
There are various approaches adopted by the company for environmental reporting in various countries such as descriptive and performance reporting which includes the information about environmental policies of the organisation and the data on theenergy savings, emissions and waste disposals.Another one is the quantitative environmental accounts in which the report depicts the environmental policy of the company and the quantitative input output analysis. One is financial environmental reporting approach which is given by the Eni Enrico Mattei Foundation (FEEM). It has developed a standard environmental report that will cater the needs of stakeholders and organisation.(Benett et al, 2003)
Various disclosures of environmental information which can be recommended to be disclosed in the annual reports are any kind of provisions related to environment made in the balance sheet, policy for accounting of environmental information, environment assets and liabilities, measurements of the impacts on environments through various criteria, all the information about the measures taken for the conservation of environment. Information had to be spread in the various section of the annual report.
There should be an international integrated reporting framework which will provide the guiding principles for the preparation of the integrated reports. Key element of the integrated reporting is the business model of the organisation through which its creates the value and sustain it and there will be multiple forms of resources in the forms of various capitals such as financial, human, social, natural, intellectual and manufactured. Five guiding principles are there for the integrated reports. First is the strategic focus which is the objective and its relation in the value creation and resources on which organisation is depended, second is the connectivity of information which shows the interconnection between the organisation’s business model, external factors and various resources contributing to the performance of the organisation, third is the future direction which shows the management’s expectations for the future and the future uncertainties of the organisation, fourth is theresponsiveness and inclusiveness of stakeholders which shows the relationship of the organisation with its key stakeholders and responses to their issues and fifth one is the conciseness, reliability and materialitythrough which an integrated report shows the concise, reliable and material information about the organisation’s ability for the creation of value and its sustainability.
United Nations conference for trade and development (UNCTD) has issued guidance manual for accounting and financial reporting for environmental costs and liabilities. According to which environment data disclosures can be made in the financial reports which shows the environmental performance of the organisation. It states the guiding principles on the environmental accounting, liabilities and costs in the financial statements.
Environmental costs:
There is recognition of environmental costs which are the costs of the activities adopted or will be adopted for the minimization of the impact of the activities of organisation on the environment. These costs should be recognised in the period in which they are initiallyacknowledged. If the environmental cost meets the criteria for recognising as an asset then it should be capitalised. The future economic benefits that will be obtained in future such as improvement in the efficiency of other assets of the organisation, reduction of the environmental impact of the organisation and conservation of the environment makes them assets. Some of the examples of these costs can be environmental damage to the property before its procurement, clean-up of the property which is disposed in a prior period, expenses incurred in the treatment of the hazardous waste generated in prior period. All the environmental costs which cannot be recognised as an asset should be charged to the income statement. These costs can be treatment of waste products, environmental administration expenses, expenses on the environmental audit, compensations paid to the third parties for the environmental damage.
Recovery and impairment:
When any environmental cost is recognised as an asset which is related to any other asset then it should not be recognised separately rather should be included as an integral part of that asset and the combined asset will be tested for the impairment.
Environment Liabilities:
Environmental liabilities are the commitments pertaining to environmental costs which are incurrent by the organisation and meeting the norms of recognising as a liability. For an example an organisation having a legal commitment for cleaning up of the contamination caused from its activities. For those environmental damages for which there is no obligation on the organisation to rectify has to be disclosed in the notes to accounts in the annual reportingor outside financial statements and if there is reasonable possibility for the rectification of those damages in the future period then contingent liability shall be disclosed.
Long lived assets:
Expenses for the site restoration and for the removal of long live assets and if there is a commitment to incur these expenses by the organisation then these expenses should be recognised as environmental liability. In the instance of the long term decommissioning expenses the organisation may recognise them over their life. (UNCTAD, 2002)
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It can be concluded from the above analysis that the organisations are taking keen interest in environmental reporting in their financial reports in terms of gaining competitive advantage. There should be the total integration of the environmental reporting and monitoring process in to the existing financial reporting system. In this way there will be one consolidated report by the organisation covering all the aspects of the financial and non-financial information for the period. It provides the clear presentation of the value creation by the organisation. In many countries various reporting standards and regulations have been formed such as in companies act, etc. to streamline the reporting process of the environmental reporting and making it mandatory for the organisations. Various discussion papers have been issued by the international organisations such as United Nations, UNCTD, etc on the principles of integrating environmental reporting with the existing financial reporting system. In the future organisations are moving towards generating completely integrated reports containing the financial information with the environmental responsibility information tied together so that the annual reports will display completely transparent and required information by various stakeholders. There will be a unique blend of environmental information and financial information in the financial reporting process of companies.
References
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Pramanik, A. (2002). Environmental accounting and reporting. New Delhi: Deep & Deep Publications.
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Integrated Reporting. (2011) Towards integrated reporting communicating value in the 21st century. [online] Available from: http://integratedreporting.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf. [Accessed: 9th June 2016]
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United Nations Conference on Trade and Development.(2002) Guidance manual accounting and financial reporting for environmental costs and liabilities. Geneva: UNCTD (Third Edition)
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PricewaterhouseCoopers. (2012) Integrated reporting the future of corporate reporting. Germany: PricewaterhouseCoopers AG Wirtschaftsprufungsgesellschaft
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United Kingdom. Department of environment food & Rural Affairs. (2013) Environmental reporting guidelines: including mandatory greenhouse gas emissions reporting guidance. London: H.M.S.O.
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Bennett, M., Rikhardsson, P. and Schaltegger, S. (2003). Environmental management accounting. Dordrecht: Kluwer Academic Publishers.
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KPMG International. (2013) Thekpmg survey of corporate responsibility reporting 2013. Switzerland: KPMG International
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Wiseman, J., 1982. An evaluation of environmental disclosures made in corporate annual reports. Accounting, Organizations and Society, 7(1), pp.53-63.
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Neu, D., Warsame, H. and Pedwell, K., 1998. Managing public impressions: environmental disclosures in annual reports. Accounting, organizations and society, 23(3), pp.265-282.
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Gray, R., Owen, D. and Adams, C., 1996. Accounting & accountability: changes and challenges in corporate social and environmental reporting. Prentice Hall.
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Rogers, C. (2005). Financial reporting of environmental liabilities and risks after Sarbanes-Oxley. Hoboken, N.J.: John Wiley & Sons.
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United Nations., (2007). Environmental Monitoring and Reporting by Enterprises: Eastern Europe, Caucasus and Central Asia. United Nations.
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Edwards, D. (1998). The relationship between company environmental and financial performance. London: Earthscan.
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West, B. (2003). The reporter's environmental handbook. New Brunswick, N.J.: Rutgers University Press.
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