© John Wiley & Sons, 2011 Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2eSlide # 1 Cost Management Measuring, Monitoring,

© John Wiley & Sons, 2011Chapter 17: Sustainability Accounting

Eldenburg & Wolcott’s Cost Management, 2e Slide # 1

Cost ManagementMeasuring, Monitoring, and Motivating Performance

Chapter 17

Sustainability Accounting



Chapter 17: Sustainability Accounting

Learning objectives• Q1: What are sustainability and sustainable management?

• Q2: What are sustainability accounting, sustainability management accounting, and sustainability reporting?

• Q3: What are the motivations and frameworks for external sustainability reporting?

• Q4: What management accounting tools are useful for sustainability management and reporting?



Q1:Sustainability and Sustainable Management

• Sustainability is defined as “activities and approaches that maintain or increase added value without creating long-term threats to economic environment or social systems.”

• Sustainable management is “the ability to direct an organization in ways that restore and enhance all forms of capital to generate shareholder value and contribute to the well-being of current and future generations.”



Q1: Overview of Strategic Management Process

Organizational

Vision

Organizational

Vision

Core

Competencies

Core

Competencies

Operating

Plans

Operating

Plans

Actual

Operations

Actual

Operations

Organizational

Strategies

Organizational

Strategies

Measure, Monitor, and Motivate



Q1: Overview of Strategic Management Process

Organizational

VisionOrganizational

Vision

Core

CompetenciesCore

Competencies

Operating

PlansOperating

Plans

Actual

OperationsActual

Operations

Organizational

StrategiesOrganizational

Strategies

Measure, Monitor, and Motivate

Sustainable Management involves addressing sustainability issues in each aspect of the strategic management process.

Triple bottom line: Economic, Environmental, and Social



Q1: Sustainability and Levers of Control

Belief Systems• Communicate vision for sustainable management

Boundary Systems• Prohibit specific activities

• Establish codes of conduct

Diagnostic Control Systems

• Motivate managers to engage in sustainable mgmt• Assign responsibility and reward sustainability goals

Interactive Control Systems• Reevaluate and revise sustainable management

strategies and operating plans



Q2:Sustainability Accounting

• Sustainability accounting is the systematic recording, reporting, and analysis of quantitative and qualitative information about sustainable management practices and performance.

• Sustainability management accounting involves activities to assist in the sustainable management process including: • designing business processes• budgeting and forecasting• implementing and monitoring internal controls

Internal Reporting

• Provides information for sustainability management decisions to support the strategic management process– Some issued regularly

(monthly worker injuries or volumes of waste)

– Others issued for one time use

External Reporting

• Distributed outside the company to various stakeholder groups

• Reports may be required– Compliance reports for

laws such as minimum wage or pollution levels

• May be voluntary and unregulated



Q2: Sustainability Reporting



Q2: Sustainability Reporting



Q3: External Reporting Motivations

Ethical considerations

Economic considerations

Reputation or brand

Innovation and learning

Employee motivation

Risk Management or risk reduction

Strengthened supplier

relationships

Access to capital or increased shareholder

value

Improved government relationship



Q3: Greenwashing?

• Greenwashing is when companies appear to spend significant resources on publicity about being environmentally friendly without making substantive changes in their environmental impact.

• Watch for: • Misleading words, visuals, and graphics• Vague and unproven green claims• Overstated or exaggerated environmental claims• Omitted or masked information to divert attention

from environmentally damaging aspects



Q3: Frameworks and Guidelines for Reporting

• Global Reporting Initiative (GRI) • Framework for disclosure on economic,

environmental, and social performance• 77% of FIRMS in KPMG 2008 study uses GRI

reporting guidelines

• ISO 26000 – Guidance for Social Responsibility• Will be released in 2010• Provides principles for sustainability reporting,

guidance for several major reporting areas, and recommendations for implementation



Q4: Sustainability Management Accounting Tools

• When fully integrated into an organization, sustainable management affects everything the organization does.

• Examples include:• Qualitative and quantitative information used in

decision making must also include environmental and social considerations

• Must recognize and measure the social and environmental costs in the accounting system

• More stakeholder groups need to be considered• Sustainability is incorporated into all control

systems



Q4: Relevant Costs for Decision Making

• Sustainability costs are often overlooked by traditional management accounting systems

• Timing of environmental and social responsibility costs often lag the related decision

• Five levels of sustainability costs• Conventional Costs• Hidden Costs• Contingent Costs• Image and Relationship Costs• Externalities



Q4: Material Flow Accounting

• Material Flow Accounting (input output analysis) is the process of analyzing the movement of all physical materials through an organization’s operations

• Inputs include:• Direct and indirect manufacturing materials• All forms of energy

• Outputs include:• Products• Waste• Emissions



Q4: Material Flow Cost Accounting

• Material Flow Cost Accounting is the process of analyzing and tracking the physical units and costs of materials and energies through a manufacturing process

• Similar to process costing (Chpt 6)• Costs are assigned separately to waste and

emissions (similar to abnormal spoilage)• Practice avoids burying the costs of waste

• All wasted materials are treated as negative product



Q4: Sustainability Life Cycle Costing

• Life cycle costing involves summing the costs of these activities throughout both internal and external value chains



• Incremental Operating Cash flows are often impacted by sustainable management initiatives

• These cash flows must be included in capital budgeting decisions– Waste and Emission Treatment– Prevention and Environmental Management– Non-Product Output

• Material Purchase• Processing Costs

– Environmental Revenues– Image Benefits and Costs

Q4: Sustainability and Capital Budgeting



• Assuming sustainable management is integrated into the strategic management process, then sustainability should be implemented into the balanced scorecard

• Three possible ways to integrate sustainability:• Integrate into the traditional four perspectives• Add a sustainability perspective to the scorecard• Create a separate sustainability balanced

scorecard

Q4: Sustainability Balanced Scorecard

Future of Sustainability Reporting

• Integration with Annual Reports• Stakeholder Dialogue• Linked to Strategy, with Targets/Goals• Process and Product Innovation• Less Focus on Business Case• Larger Audience• Global Standards with Assurance

Susan K. Wolcott, [email protected], AAA CPE Workshop, August 1, 2010 Slide # 20

Chapter 17: Sustainability AccountingEldenburg & Wolcott’s Cost Management, 1e

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© John Wiley & Sons, 2011 Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2eSlide # 1 Cost Management Measuring, Monitoring,