ENVIRONMENTAL ACCOUNTING

Definition
 It is the practice of using traditional accounting and finance principles to calculate the costs
that business decisions will have on the environment.
 It allows a company to identify the cost of environmental conservation during the normal
course of business, identify benefit gained from such activities, provide the best possible
means of quantitative measurement, whether in monetary value or physical units or both,
and support the communication of its results.

Methods of Environmental Accounting

Environmental Financial Accounting
Environmental financial accounting deals with accounting for and reporting on
environmental transactions and events that affect, or are likely to affect, the financial position of
an enterprise.
Challenges:
1. To ensure environmental costs and liabilities are accounted for by following
relevant accounting standards or, in their absence, generally accepted
accounting practices; and
2. To ensure the meaningful disclosure of the environmental performance of an
enterprise is provided.

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.
This method of implementing environmental accounting addresses the information
needs of the managers for organizational activities that affect the environment, as well as
environment-related impacts which depend on the nature of its business. These management
information could include but are not limited to the following:
● Identifying and estimating the costs of environment-related activities
● Identifying and monitoring the use and cost of resources such as water, electricity
and fuel, so costs can be reduced
● Making sure environmental considerations form part of capital investment decisions
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● Assessing the likelihood and impact of environmental risks
● Including environment-related indicators as part of routine performance monitoring
● Benchmarking activities against environmental best practice.

Environmental Management Accounting helps a company get to know its business more by
understands its impact on the environment. By knowing how ones business operates, it is easier
to find ways on how to improve efficiency, reduce costs, and improve profits. These information
are important in order for a company to implement an effective Environmental Management
System (EMS).

Environmental Management System (EMS)

It is defined as a systematic approach to managing an organization’s impacts on the
environment. EMS can also help in the following:
A. defining environmental responsibilities for all staff, helping them to understand the
environmental impact of their activities and individual actions;
B. ensuring that all operations have procedures that minimize their impacts;
C. recording of environmental performance against set targets; and
D. Identifying opportunities to reduce waste, thus reducing operating costs.

It should be noted that the implementation of EMS is voluntary, but organizations with such
system will be provided with a framework (ISO 14001) through which its environmental
performance can be improved, but the certainty to this is not guaranteed. Accidents and
incidents can still happen, however, EMS allows for quick detection, mitigation, and if
necessary, remediation of any pollution incident.

The following are the potential benefits of implementing an Environmental Management System
(EMS):
A. Financial
● Identification of ways to reduce waste, thus reducing raw material, utility, and
disposal costs.
● Increased profits.
● Reduced risk of fines for non-compliance with environmental legislation.
B. Productivity
● Improved process control.
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● Reduced use of raw materials and consumables.
● Less waste.
C. Sales and marketing
● Improved products.
● Competitive advantage.
● Increased sales through promotion of greener credentials.
D. Management
● Structured approach to environmental issues and continual improvement.
● Keeping ahead of environmental legislation.
● Better relations with regulators.
E. Public relations
● Improved relations with local community and environmental groups.
● Improved public image.
F. Personnel and training
● Improved working environment.
● Reduced potential for environmental incidents.
● Increased employee motivation and environmental awareness.
G. Peace of mind
● Conforming to legal requirements.
● Avoiding penalties for pollution.
● Avoiding bad publicity from pollution incidents.

The above mentioned potential benefits can only be achieved once the Environmental
Management System (EMS) has been effectively implemented. It is therefore essential to know
what an EMS should include in order to achieve successful implementation. The best way to an
effective EMS is remembering the ‘three (3) Cs’. This refers to the following: commitment,
continuity, and continual improvement.
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Conceptual Framework of Environmental Accounting

Functions and Roles of Environmental Accounting

Internal Function
As one step of a company’s environmental information system, internal function makes it
possible to manage environmental conservation cost and analyze the cost of environmental
conservation activities versus the benefit obtained, and promotes effective and efficient
environmental conservation activities through suitable decision-making.
External Function
By disclosing the quantitatively measured results of its environmental conservation
activities, external functions allow a company to influence the decision-making of stakeholders.

Qualitative Characteristics of Environmental Accounting and Reporting

Relevance
Environmental accounting should provide a valid information related to a company’s
environmental conservation costs and benefits from associated activities which contribute to the
decision-making of stakeholders.
Reliability
Environmental accounting should eliminate seriously inaccurate or biased data and aid
in building the trust and reliability of stakeholders.
 Faithful representation, substance over form, neutrality, completeness, prudence
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Understandability
The disclosed information is should be easy to understand for stakeholders, and the
wording should be made as simple as possible. No matter how complex the content might be, it
is necessary to disclose all essential information.
Comparability
Environmental accounting makes it possible for a company to make year-on-year
comparisons. Information provided should be comparable with different companies in the same
sector.
Verifiability
Environmental accounting data should be verifiable from an objective standpoint.
Verifiable information is data for which the same results can be obtained when using premises,
standards, and methods identical to those used by the party which created the data.

Structural Elements of Environmental Accounting

Environmental Conservation Cost
Environmental conservation costs are the investments and expense measured in
monetary value related to the prevention, reduction, and/or avoidance of environmental impact,
removal of such impact, restoration following the occurrence of a disaster, and other activities.

Scope of Environmental Conservation Cost

Whether a specific individual cost can be categorized as an environmental conservation
cost depends on the objective standards. Objective standards are those criteria for extracting
cost that has been spent for the purpose of environmental conservation. The scope of cost
outlayed for environmental conservation are the ones where efforts with the objective of
environmental conservation made within that range (e.g. “end of pipe” equipment or facilities
attached to an emissions terminus, clean production efforts for the reduction of environmental
impact).
Investment amounts are expenditures on depreciable assets allocated during a target
period for the purpose of environmental conservation. Expense amounts refer to the expense or
losses recorded under financial accounting standards resulting from the consumption of goods
or services for the purpose of environmental conservation. It shall include depreciation costs for
depreciable assets.

Environmental Conservation Cost Categories

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1. Business Area Cost.
Business area costs are for activities to reduce environmental impact which occurs
within the business area due to key business operations, or cost associated with environmental
conservation. The business area is the region where the company can directly manage
environmental impacts. It is divided into three categories:
(1) Pollution prevention cost: Those costs made for efforts to reduce environmental
impacts, such as equipment or facilities attached to an emissions terminus (“end of pipe”) for
the purpose of preventing pollution.
(2) Global environmental conservation cost: Those costs associated with negative
environmental impacts on the global environment or a wide portion of it, resulting from
human activities.
(3) Resource recycling cost: Those cost outlays made for sustainable cost
circulation.
2. Upstream / Downstream Cost.
Upstream cost is a cost for efforts to reduce the environmental impact that is created
prior to the input of goods and services into business areas, as well as the cost related to such
efforts. While downstream cost is a cost for efforts to reduce the environmental impact that is
created after goods and services have been output from business areas, as well as the cost
related to such efforts.
The difference in cost between goods and services procurement and purchasing
methods that contribute to reduction of environmental impact (such as environmentally
conscious products and so-called “green purchasing”) and typical goods and services
procurement and purchasing methods
3. Administrative Cost.
Administration cost is a cost for management activities conducted by companies and
other organizations for environmental conservation activities.
4. Research and Development (R&D) Cost.
The cost constitutes spending for research and development activities allocated to
environmental conservation.
5. Social Activity Cost.
Social activity costs is a cost for environmental conservation efforts consisting of social
activities with no direct relationship to the business activities of the company or other
organization.
6. Environmental Remediation Cost.
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Environmental remediation costs are allocated for recovery of the environmental
degradation due to business activities.

Method for Aggregating Environmental Conservation Cost

Environmental costs are classified as direct cost or grey area cost. Direct costs are
those directly associated with the environment, while grey area costs are those that fall into a
gray zone, partly environmental and partly not.
Grey area cost or also called complex cost are aggregating in the following order:
First: Difference aggregation. Costs other than environmental conservation cost that has been
deducted.
Second: Rational cost aggregation. Costs are allocated proportionally depending on the
intended use. This is determined based upon the expenditure goals.
Third: Simple method cost aggregation.
(1) When environmental conservation cost accounts for a sufficient portion of a particular cost.
(2) When the major portion of a complex cost is recognized as an environmental cost the total
amount is classified as an environmental cost.
(3) When the cost clearly represents a minor portion of total environmental cost This cost
category need not be aggregated.

Environmental Conservation Benefit

Environmental benefits obtained from the prevention, reduction, and/or avoidance of
environmental impact, removal of such impact, restoration following the occurrence of a
disaster, and other activities are measured in physical units.
Categories of Environmental Conservation Benefit
(1) Benefit corresponding to key business area cost and upstream/downstream costs is
applicable to the environmental conservation benefit related to resources input into business
activities.
(2) Benefit corresponding to key business area cost is applicable to the environmental
conservation benefit related to waste or environmental impact originating from business
activities.
(3) Benefit corresponding to key business area cost and upstream/downstream costs is
applicable to the environmental conservation benefit related to goods and services produced
from business activities.
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Economic Benefit Associated with Environmental Conservation Activities

Benefits to a company’s profit as a result of carrying forward with environmental conservation
activities are measured in monetary value.

Disclosure of Environmental Accounting Information

International Standards on Reporting Environmental Accounting Information
ISO 14000 is a series of environmental management standards developed and
published by the International Organization for Standardization (ISO) for organizations. The ISO
14000 standards provide a guideline or framework for organizations that need to systematize
and improve their environmental management efforts. The standard-setting process was set as
part of the Global Environment Initiative in 1992 in connection with the UN Conference on
Environment and Development. Some of the published standards under ISO 14000 are:
● ISO 14001 - Environmental ● ISO 14040 - Life-cycle Assessment
Management Systems (EMS) (LCA)
● ISO 14004 - Additional Guidance ● ISO 14064 - Greenhouse Gas
● ISO 14031 - Environmental Performance accounting and verification
● ISO 14020 - Environmental Labels and ● ISO 14063 - Environmental
Declarations Communication

Key advantages of ISO 14000

There are two key advantages of the ISO 14000 Standards.
The first advantage is to set environmental performance standards above regulation.
The second advantage is to set the company as environmentally alert where it puts the
company into an internationally competitive position in the markets.

Application in Internal Management

PUMA
Puma is one of the leading sports brands in the world. It offers a variety of sportswear
and has established many branches around the globe. According to the news article from BBC
News (2011), Puma was the first company to publish environmental impact costs that entails the
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detailed of the costs of its impact to the environment. Puma's Environmental Profit and Loss
(EPnL) is part of a wider move by companies to look at what is called integrated reporting,
which looks to incorporate the cost and benefits of environmental and social impacts into
financial accounts.

PHILIPS
Philips is a global company which delivers meaningful innovations that improve people’s
health and well-being. Headquartered in the Netherlands, they have a multinational workforce in
more than 100 countries worldwide. With its EPnL, Philips’ sustainability priority setting -
identifying the environmental hotspots of product value, include the chains and business
operations, to be able to choose the right focus for sustainability. Programs and product
innovation, customer communication: communicating on the environmental performance of
products, at the request of customers, green marketing: demonstrating certain environmental
benefits of products that might boost sales, and green branding that substantiating green
communications eventually help strengthen the brand and positively influence ratings and key
stakeholders (e.g. investors) decisions.

PHILIPPINE ENVIRONMENTAL LAWS AND REGULATIONS

PD 1586 Environmental Impact Statement System

Environmental Impact Assessment (EIA) - is a process involving predicting and
evaluating the likely impacts of a project on the environment during construction,
commissioning, operation and abandonment.
Section 4 of PD 1586 provides that no person, partnership or corporation shall undertake
or operate any such declared environmentally critical project (ECP) or area (ECA) without first
securing an Environmental Compliance Certificate (ECC).
Environmental Compliance Certificate (ECC)--is a document issued by the DENR/EMB
after a positive review of an ECC application, certifying that based on the representations of the
proponent, the proposed project or undertaking has complied with all the requirements of the
EIS System and has committed to implement its approved Environmental Management Plan.

PD 1152 Philippine Environmental Policy

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It defines the policy objectives and the strategies for the various aspects of
environmental management, such as air and water quality management, natural resource
management and conservation, land management, and waste management.

RA 6969 Toxic Substances and Hazardous and Nuclear Waste Control Act of 1990
Prohibits, limit, or regulate the use, manufacture, import, export, transport, processing,
storage, possession, and wholesale of those priority chemicals that DENR determined to be
regulated, phased- out, or banned due to the serious risks they pose to public health,
workplace & environment.

PD 984, Revision of RA 3931, The Pollution Control Law

A national policy that seeks to determine the location, magnitude, extent, severity,
causes, effects and other pertinent information regarding pollution of the water, air and land
resources of the country; take such measures on the effective means for the control and
abatement of pollution. The National Pollution Control Commission is established to issue
standards, rules and regulations to govern the approval of plans and specifications for sewage
works and industrial waste disposal systems and the issuance of permits and inspect the
construction and maintenance of sewage works and industrial waste disposal system for
compliance to plans.
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GUIMARAS OIL SPILL CASE PRESENTATION
Case Introduction
➔ Guimaras Strait is considered one of the richest marine resources in the Philippine
coast. It connects the Visayan Sea with the Sulu Sea—a rich fishing ground in the
Western Visayas Region. Guimaras is known for its marine sanctuaries, coral reefs,
mangrove forests and its boom in the tourism industry.
➔ The province was severely affected by what is now known as the “Guimaras Oil Spill”,
when the oil tanker MT Solar 1 sank approximately 20.5 kilometres (12.7 mi) off the
southern coast of Guimaras at around midnight of August 11, 2006.
➔ The 998-ton oil tanker M/T Solar 1, was carrying more than two million liters of bunker
fuel when it sank during a violent storm.
➔ About 500,000 liters (110,000 imp gal; 130,000 US gal) of oil to pour into the gulf, that
traveled up through the Guimaras Strait and Iloilo Strait.
➔ The vessel was owned by Sunshine Maritime Development Corporation and was
contracted by Petron Corporation.
➔ The vessel sailed off on August 9, 2006 to Zamboanga City to deliver P40 million worth
of bunker fuel to Western Mindanao Power Corporation.

Case Facts
I. Causes
★ As early as August 10, a day before MT Solar 1 sank, the Department of Science and
Technology (DOST) has been in the forefront of providing information on weather
conditions , it issued an initial gale warning due to southwest monsoon surge on that day
and on August 11, 2006. Despite the news, the vessel continued to sail.
★ Norberto Aguro, captain of the sunken M/T Solar 1, said that it was an accident beyond
his control. “I’m very sorry, kasi ang nangyari… ay force majeure," Aguro said. He
claimed that he tried to send a distress signal when huge waves brought by bad weather
battered the tanker, but nobody responded. He and his men then abandoned the tanker
when it started to sink.
★ Initial findings from a Board of Marine Inquiry investigation of the oil spill revealed that
the safety management certificate of Solar 1 had already expired.
★ Region 6 Coast Guard investigations showed that early in the morning of August 10,
crew members of the tanker already noticed that the ship’s chain locker, the
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compartment that holds the anchor, had taken in water and the ship itself had begun to
lean by about six degrees to the right.
★ Despite the observation, Aguro gave the order to sail toward Iloilo. At around noon, while
traversing the Iloilo Strait toward the open sea to Zamboanga, the ship leaned further to
around 10 degrees.
★ The BMI held Petron Corp. liable for overloading the vessel that resulted in a “loss of
residual stability.”
★ BMI chairman Rear Admiral Danilo Abinoja said Petron should have only filled 98
percent of its cargo but they exceeded by 0.7 percent. It was overloaded by
approximately 150 tons of Petron’s lubricant and fuel.

II. Effects
★ According to the Bureau of Fisheries and Aquatic Resources, US$1.14 million worth of
marine resources in fish cages and fish pens have been destroyed. The oil spill has
contaminated 245 kilometers of coastline and spoiled 1,143 hectares of marine reserve.
★ A study conducted by Silliman University said the damage to potential fish products,
which would have come from the mangroves, wood, and sea grass in the area, was
estimated at P32.8 million.
★ The oil spill affected 40,000 individuals, six wharfs, 13 resorts, nine fishing grounds, four
biodiversity spots, seven scenic views, and 23 barangays in San Lorenzo, Nueva
Valencia, and Sibunag towns in Guimaras. It also reached the shores of Iloilo and
Negros Occidental.
★ A villager from Barangay Lapaz, Nueva Valencia, Guimaras, became the first casualty
directly affected by the spill. He died after inhaling the fumes of the oil sludge caused
him to contract cardio-respiratory disease.
★ Dr. Jose Ingles, eco-region coordinator of the World Wide Fund for Nature in the
Philippines, Indonesia and Malaysia, said that the damage may be felt by at least two
generations. According to him, the worst hit would be the shorelines, the coasts and the
swamplands with mangroves. This will greatly impact the livelihood of the fishermen,
mostly living in poor conditions.
★ On a recent news article in 2018 (12 years after the incident), a 43-year-old fisherman
Hermando Gallo of Barangay Ligas said that, “If your job is fishing alone, you’ll go
hungry. You need to have more than one job,” he said. “The fish are scarce. If you really
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want to catch fish, you now have to go farther away from the shore.” He said fishing in
Guimaras is no longer profitable. Fishing alone could not possibly make ends meet.
★ The tourism industry in Guimaras and Iloilo has also slowed. The Department of Tourism
has projected US$71,400 worth of lost tourism revenue.

Case Resolution
★ President Arroyo formed the Task Force of Guimaras led by the National Disaster
Coordinating Council to oversee and monitor the operations in the incident.
★ Petron Corporation pledged to shoulder the cost of the containment of the oil spill and
retrieval of the ship.
★ Displaced fishermen were financed through a P200 per day "Cash For Work" Program to
help in the cleanup initiated by the Department of Social Welfare and Development.
★ Cleanup operations were composed of spraying oil dispersants and bioremediation--a
process used to treat contaminated media, including water, soil and subsurface material,
by altering environmental conditions to stimulate growth of microorganisms and degrade
the target pollutants.
★ Criminal and civil cases were filed against the two companies and the complainants are
seeking more than P200 million in damages for the tons of oil that spilled in the waters
off Guimaras
★ Long term plans for alternative livelihood projects are also being developed in close
consultation with those affected. Encouraging a shift from fishing to farming and even
entrepreneurship is being considered.
★ Gov. Samuel T. Gumarin said the oil spill has taught the people in the province a lesson
about dirty fossil fuel like oil. And this prompted them to declare a ban on coal and other
dirty energy sources like fuel in Guimaras recently.