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Introduction
Business leaders are becoming increasingly aware that environmental factors affect their profits in significant ways. As a result, Environmental Management Accounting (EMA) has emerged as a mechanism for assessing the extent to which organizational activities affect the environment in addition to how the underlying costs influence their businesses. EMA aims at achieving sustainable business practices. Hence, it is crucial to critically evaluate the contribution of management accounting, specifically EMA, including the role that an environmental administrative accountant plays in ensuring sustainable development. Volkswagens (VW) Balanced Scorecard (BSC) will be used to show some of the best practices that can be adopted in line with lessons learned from EMA discourses.
Critical Evaluation of EMA
What EMA Entails
EMA denotes the intersection of administrative accounting and environmental management. However, the term carries varying definitions according to different authors. Gunarathne and Lee (2015) describe EMA as a source of information regarding the usage and flow of water, energy, and materials, as well as details on environment-related costs and revenues. However, Burritts (2004) definition seems detailed and explicit because it captures the issue of sustainability that is omitted in the description given by Gunarathne and Lee (2015). In particular, Burritt (2004) presents EMA as a field that entails the creation, analysis, and utilization of fiscal and non-fiscal information to optimize environmental and economic aspects of business toward achieving sustainability. Hence, from these authors, two broad categories of EMA, namely, monetary and physical are apparent. A study by Lisi (2015) offers the distinction between these two categories. While monetary EMA, shortened as MEMA, is concerned with environmental elements of corporate processes expressed in pecuniary terms, PEMA (physical EMA) addresses aspects of business functions conveyed in physical units.
Environmental Management Accountants and Sustainability Practices
Burnett and Hansen (2008) introduce an interesting observation that EMA has been adopted throughout the world, both in developed and developing nations, with particular emphasis in the manufacturing sector. Businesses are increasingly cognizant of the implications of their actions and products to the environment. In particular, Masanet-Llodra (2006) presents environmental risks as inherent components of any modern business. Although this author emphasizes the need to factor in such threats (Masanet-Llodra, 2006), Burritt (2004) reveals a worrying finding that businesses often ignore environmental costs in their financial reports. Instead, they regard them as part of general overhead expenses. Consequently, environmental management accountants find it difficult to manage these costs. While Christ and Burritt (2013) indicate the way such accountants are unaware of the existence or potential implications of these expenses to business operations, Schaltegger, Gibassier, and Zvezdov (2013) explain that most accounting management tools significantly overlook the cost of unsustainable environmental behaviors.
The above observation reveals that indeed environmental management accountants have contributed minimally to accounting for sustainable developments. As a result, Lisi (2015) identifies energy usage as an obvious scenario. Confirming this assertion, Webb, Hawkey, and Tingey (2016) present a recent report published by the UK government indicating the extent to which companies exceeded energy utilization expectations by 30% annually due to inefficient environmental management accounting practices. Christ and Burritt (2013) discuss a multi-dimensional framework whereby corporations can place and assign various techniques of EMA such as environmental cost accounting. However, Burnett and Hansens (2008) models, specifically, the Environment-Related Management Accounting Pyramid, seems effective because it has been tested and proven resourceful not only in evaluating EMA practices but also assisting in the design and implementation of new systems.
The Significance of EMA
EMA helps not only in the identification of cost-saving alternatives but also in the performance of Environment Health and Safety (EHS) activities. Researchers such as Masanet-Llodra (2006) have recently found that EMA can be used during investment assessment sessions. Through venture appraisals, Masanet-Llodra (2006) clarifies that organizations can make sound strategic decisions. While analyzing the return on investment, organizations should identify environment-related costs that affect the overall operation. However, such a procedure may require a scenario analysis carried out by the appropriate experts. EMA can also be used to assess investment projects, including costs related to the products and materials used. According to Gunarathne and Lee (2015), the assessment of products is known as the Life-Cycle Assessment (LCA) that allows several organizations to perform information aggregation to identify mistakes within the production process. Gunarathne and Lees (2015) view of the LCA is not exhaustive because it does capture the supply chain as part of organizational elements. Schaltegger, Gibassier, and Zvezdov (2013) include this aspect in their explanation of the LCA. According to them, the aggregation of EMA-type information can help to improve Supply Chain Environmental Management (SCEM) (Schaltegger, Gibassier & Zvezdov, 2013).
Different organizational levels require proper decision-making mechanisms for enhancing continuous development. Through EMA, the concept of Environmental Performance Indicators (EPI) was created to help in making informed decisions. It is imperative to note that EPIs may be physical or monetary, although both forms can be deployed in the collection of information (Masanet-Llodra, 2006). Most management practitioners assert that EMA can be used to perform external reporting to the appropriate stakeholders. Despite the popularity of internal reporting, Gunarathne and Lee (2015) reveal the extent to which modern-day business ethics calls for prompt relaying of important information to stakeholders. Through the application of EMA, financial information and environmental performance reports are presented to investors. The consideration of the environment has come at a time when organizations are faced with myriad challenges in dealing with pollution. Such issues mostly emanate from legislators, the community, and customers among others.
Through the application of EMA strategies, businesses effectively collect and analyze environmental cost information that guarantees their competitive advantages. According to Schaltegger, Gibassier, and Zvezdov (2013), EMA has helped many organizations that did not have systems capable of validly estimating environmental costs. Christ and Burritt (2013) assert that environmental costs are often debated in boardrooms due to their ambiguous nature. Through EMA, eco-control was introduced to organizations to help in the analysis of environmental performance. As such, environmental concerns are effectively addressed by the provision of incentives to the appropriate personnel. It is crucial to examine a company that can deploy EMA, specifically, the balanced scorecard, to boost its operations and, consequently, profitability.
VWs Sustainability Balanced Scorecard
According to Tsalis et al. (2015), the sustainability balanced scorecard (SBSC) has been developed as an improvement to the conventional BSC with the view of effectively addressing the ecological, economic, and social aspects of businesses. This section presents an SBSC that has helped VW to improve its practices concerning environmental management. In 2015, the company faced harsh criticism for deploying a defeat device that was designed to mislead the EPA concerning the actual amount of emissions from its cars (Patra, 2016). In the aftermath of this embarrassment that resulted in heavy penalties and reduced profitability levels, the company is making strides to not only repair its image but also promote sustainable business practices. According to Kaplan (1992), it can benefit from adopting a sustainable BSC that captures financial, learning, society, and process perspectives.
The monetary perspective entails goals that are set towards the manufacturing of electric vehicle models. As such, the financial department should channel resources towards achieving this agenda (Tsalis et al., 2015). The allocation of money to this segment will be done by conducting a comparison on the companys expenditure over the past few years beginning from 2015 when its profits went down following the impact of the emission scandal. Consequently, resources channeled to the diesel division will be redirected to the electric car segment to achieve the already set objectives. Regarding the learning perspective, it is imperative for VW to build its brand as one that promotes collaboration with local universities. Such partners can support networks via the companys cooperation with graduates who express their desire to work with it. The process perspective requires VW to seek positive partnerships with all its suppliers to remain competitive in the automotive industry (Patra, 2016). This strategy should then be promptly communicated to stakeholders to guarantee maximum support for its initiatives. Regarding the society-based perspective, VW should implement integrated mobility concepts from which customers can choose. Further, VW needs to work toward reducing emissions per car. Finally, it should consider using employees as image carriers to help in repairing its already tainted reputation.
Conclusion
In the recent years, discussions regarding environmental sustainability have been witnessed in various academic disciplines. Occurrences such as the Exxon oil of 1989 and the Bhopal chemical leak play a substantial role in influencing the need for incorporating environmental aspects in the field of accounting. With these growing concerns, companies are also striving to monitor their activities, which contribute to global environmental change. Developed and developing countries have adopted EMA in various sectors. The implication here is that they are aware of the role that EMA plays in making strategic decisions aimed at reducing operating costs. Through the application of SBSC, VW can optimize its operations while at the same time remaining competitive in the automobile industry.
Reference List
Burnett, R. & Hansen, D. (2008) Ecoefficiency: defining a role for environmental cost management. Accounting, Organizations and Society, 33(6), 551-581.
Burritt, R. (2004) Environmental management accounting: roadblocks on the way to the green and pleasant land. Business Strategy and the Environment, 13(1), 13-32.
Christ, K. & Burritt, R. (2013) Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production, 41, 163-173.
Gunarathne, N. & Lee, K. (2015) Environmental management accounting (EMA) for environmental management and organizational change: an eco-control approach. Journal of Accounting & Organizational Change, 11(3), 362-383.
Kaplan, R. (1992) The balanced scorecard -measures that drive performance. Harvard Business Review, 71-79.
Lisi, I. (2015) Translating environmental motivations into performance: the role of environmental performance measurement systems. Management Accounting Research, 29, 27-44.
Masanet-Llodra, M. (2006) Environmental management accounting: a case study research on innovative strategy, Journal of Business Ethics, 68(4), 393-408.
Patra, B. (2016) The deliberate deception: case study on Volkswagen emission scandal. Vilakshan: The XIMB Journal of Management, 13(1), 139-148.
Schaltegger, S., Gibassier, D. & Zvezdov, D. (2013) Is environmental management accounting a discipline? A bibliometric literature review. Meditari Accountancy Research, 21(1), 4-31.
Tsalis, A., Nikolaou, E., Grigoroudis, E. & Tsagarakis, P. (2015) A dynamic sustainability balanced scorecard methodology as a navigator for exploring the dynamics and complexity of corporate sustainability strategy. Civil Engineering Systems, 32(4), 281-300.
Webb, J., Hawkey, D. & Tingey, M. (2016) Governing cities for sustainable energy: the UK case. Cities, 54, 28-35.
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