The Importance of Environmental Accounting

Where It Came From

In the 19th century, American society was run on a balance sheet with little to get in the way. Millionaire industrialists gambled with fortunes and set up empires. Industries were built and the economy grew, but there were awful problems.

One of these problems was the cost imposed on Mother Nature. Factories belched toxic smoke into the air, waste was dumped in lakes and rivers, and forests were torn down. Finally, near the turn of the 20th century, President Theodore Roosevelt set aside huge tracts of land as national forests, and the first steps toward environmentalism were born.

Today

Today, there is a growing movement toward environmental and social accounting. That is, businesses and government leaders are increasingly adopting methods of economic ledger keeping that consider humankind's impact on the environment as part of the calculus of assets and liabilities.

This new set of accounting principles is of enormous importance in today's business environment. Businesses increasingly face a thicket of environmental regulations, and must make efforts to reduce their impact on the planet. Thus, environmental accounting isn't just a political fantasy — these days, it's just good business.

The Basic Principles

Traditional accounting like Venn Accounts works according to a certain set of principles, among them the concept of a business as a going concern and the method of double-entry book keeping. That is, they assume that the business can be expected to continue to exist in the immediate future, and also that every transaction generates a credit and a debit, value owed and value owned.

The environmental side of this new accountancy tries to transform the environmental impact of business, as much as possible, from an externality whose costs are imposed on others and do not appear in the business' books into a set of assets and liabilities for the business itself.

This method of recordkeeping has the added benefit of garnering the business good publicity and political goodwill. Corporate behavior is increasingly subject to judgment in the 24-hour news cycle and subject to government regulation. Maintaining a positive image in the public eye benefits the company enormously.

Nature and Society

Sustainability is the consumption of finite resources so they are depleted as slowly as possible. The measurement of sustainability provides business management with an empirical basis for evaluating its impact on the environment.

It encourages business to be as efficient as possible in using resources by limiting consumption, minimizing waste, reusing what they can, and investing in green methods and technologies. Sustainability measurement can also be applied in the social sphere, a point of particular importance in international business, where the corporate impact on vulnerable populations is most strongly felt.

The social side of this new accounting extends its principles into the social sphere. It requires business to consider the costs of its activities on all concerned parties, including workers, consumers, local communities, and other businesses, and considers anyone whose fortunes are impacted by business to be a legitimate stakeholder in that business. Social accounting makes society part of business' bottom line.

Metrics

Environmental and social accounting needs metrics just as much as conventional accounting does. A number of systems have been envisioned by which a business' concept of cost and benefit can be broadened to encompass society and the environment.

The Global Reporting Initiative (GRI), for instance, is an Amsterdam-based international organization that has drawn up a framework businesses can use to measure their environmental and social footprint, as well as demonstrate compliance with applicable laws. It offers training and membership to businesses interested in social responsibility.

Another possibility is the International Organization for Standardization's ISO 14000. It represents both the very latest and the highest standard in environmental and social accountability.

A prime example of these metrics in action was the Kyoto Protocol, an international treaty aimed at curtailing the emission of greenhouse gases. It required national governments that signed the treaty to work in collaboration with industries that emit greenhouse gases so they could find ways to curtail emissions without compromising profitability.

Conclusion

There is a large and growing demand for the new accounting standards, the professionals who administer them, and the software the professionals use. We live in a world that is being drawn ever closer together by trade. For anyone interested in making this commerce as socially and environmentally friendly as possible, and reaping the myriad rewards associated with doing so, environmental and social accounting should not be ignored.