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Prof Breggie van der Poll - Facilitating a Greener Environment Through Management Accounting

Prof Breggie van der Poll | UNISA SBL

The world’s most prized natural resources, such as coal and water, deplete with each passing year.  As the demand for natural resources reaches critical levels, it is paramount for companies to explore steps to minimise the negative impact they have on these vital resources. Innovative management accounting is a powerful tool that enables corporations to rationalise resource usage.

According to the United Nations, there will be as many as 1,800 million people living in regions suffering from absolute water scarcity by 2025.  Two-thirds of the world’s population will live in water-stressed conditions. There is an urgency for companies to use natural resources sparingly and responsibly, and to limit waste production that is created as a result of resource usage.

While triple bottom line reporting has assisted companies and shareholders to have a better understanding of issues of sustainability and the impact that business has on natural resources, traditional accounting systems are not able to provide detailed financial data associated with resource usage and waste creation. In contrast, management accounting systems – including tools such as environmental management systems (EMS) and environmental management accounting (EMA) – make it possible to capture highly detailed and specific information on these areas.  This can assist companies in converting resource-management knowledge into new realities, increasing the effectiveness of interactions between business and resources.

Management accounting systems refer to a range of financial management tools that establish a monetary value for sustainability, by drilling down into the specificities of product, process and output. They are able to highlight polluting activities and activities that do not add value due to having greater negative, rather than positive, impact from an economic, social and environmental perspective.  Through identification, these activities can be limited or altogether eliminated, therefore reducing a company’s environmental footprint.

Eco-efficiency can be established through the use of activity-based costing (ABC) to reduce inputs (such as materials, water and energy) and non-product outputs (such as waste and emissions). ABC makes this possible by enabling the identification of different environmental cost-drivers so that accurate costs can be allocated to specific activities, and the true cost of a product can be ascertained. A highly efficient management accounting tool, ABC can indicate where processes should be improved or where re-engineering opportunities could be considered.

While resource management and waste reduction are important, these activities should not detract from the company’s value generation for its shareholders. The use of management accounting practices makes it possible for companies to gain a competitive advantage through saving on costs as well as minimising on waste.  This is especially true if energy and resource efficiency is taken into account during the product development and production phases.

The Material Flow Cost Accounting (MFCA) is a powerful system concerned with waste materials, emissions, and recycling materials. The system can trace both the flows of final products and emissions (waste) in processes and recognise emissions as a product. The MFCA terms actual products as the “positive products” and emissions as the “negative products”. By identifying the waste produced in the manufacturing process with the help of MFCA, the company can identify those specific “products” that have no value due to their negative impact and can seek to eliminate these from the production process.

The area of management accounting and its supporting tools can assist companies in adopting sustainable business practices by raising sustainable business as a strategic issue; incorporating sustainability information and analysis into all decisions; collecting, analysing, and measuring environmental and social data; and lastly, developing a reporting strategy and approach that integrates sustainability issues.

Management accounting makes it possible for every decision-maker in the company to have access to decision-relevant insight and analysis, allowing them to focus on their social and environmental duties. Beyond being simply viewed as a reporting tool, management accounting is positioned to play a key role in today’s companies by enabling robust, action-based resource management.