Introduction to Environmental Accounting

Introduction to Environmental Accounting

By Rabiu Aminu, PhD, FCNA, FMNES

Environmental accounting also referred to as Green Accounting is a field that identifies resource use, measures and communicates costs of a company’s or national economic impact on the environment. It is a subset of accounting, its target being to incorporate both economic and environmental information. It is a means of integrating environmental considerations into financial decision-making. Therefore, environmental accounting is a vital tool to assist in the management of environmental and operational costs of natural resources.

Environmental accounting is the practice of incorporating principles of environmental management and conservation into reporting practices and cost/benefit analyses. It includes the processing of both financial and nonfinancial information regarding environmental and ecological impacts.

One of the key principles of environmental accounting is the concept of "true cost accounting." This approach involves accounting for all costs associated with a product or service, including those that are typically externalized, such as pollution or resource depletion. An environmental accounting system consists of environmentally differentiated conventional accounting and ecological accounting. Environmentally differentiated accounting measures effects of the natural environment on a company in monetary terms.

Classifications of Environmental Accounting

Environmental accounting is organized in three sub-disciplines: global, national, and corporate environmental accounting, respectively. Corporate environmental accounting can be further sub-divided into environmental management accounting and environmental financial accounting.

The diagram below shows the classifications of environmental accounting.

Classifications of Environmental Accounting

Global Environmental Accounting

Global environmental accounting is an accounting methodology that deals with energetics, ecology and economics at a worldwide level. It is a statistical framework that provides a systematic approach to organizing and analysing environmental and economic data to answer policy and other questions. The System of Environmental-Economic Accounting (SEEA) is a framework that integrates economic and environmental data to provide a more comprehensive and multipurpose view of the interrelationships.

National Environmental Accounting

National environmental accounting is an accounting approach that deals with economics on a country’s level. It is a branch of accounting dealing with activities, methods, recordings, analysis, and reporting of environmental and ecological impacts of defined economic systems. Internationally, environmental accounting has been formalized into the System of Integrated Environmental and Economic Accounting, known as SEEA. SEEA grows out of the System of National Accounts.

Corporate Environmental Accounting

Corporate environmental accounting focuses on the cost structure and environmental performance of a company. It is a field that identifies resource use, measures and communicates costs of a company’s or national economic impact on the environment. Costs include costs to clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies and waste management costs.

Corporate environmental accounting can be further sub-divided into environmental management accounting and environmental financial accounting.

 

Environmental Management Accounting

Environmental management accounting (EMA) is the identification, collection, analysis and use of two types of information for internal decision making. The first is physical information on the use, flows and rates of energy, water and materials (including wastes). The second is monetary information on environment-related costs, earnings and savings. EMA focuses on making internal business strategy decisions. EMA is an attempt to integrate best management accounting thinking and practice with best environmental management thinking and practice.

Environmental Financial Accounting

Environmental financial accounting is used to provide information needed by external stakeholders on a company’s financial performance. This type of accounting allows companies to prepare financial reports for investors, lenders and other interested parties.

References

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