The European Accounting Review 2000, 9:1, 31-52 Environmental management accounting in Europe: current practice and future potential Matteo Bartolomeo Fondazione ENI Enrico Mattei, Milan, Italy Martin Bennett Cheltenham and Gloucester College of Higher Education, UK Jan Jaap Bouma Erasmus University, Rotterdam, The Netherlands Peter Heydkamp IBM Germany, Stuttgart, Germany Peter James University of Bradford, UK Teun Wolters EIM Small Business Research and Consultancy, Zoetermeer, The Netherlands ABSTRACT This paper reports and analyses the results of a trans-European project to inves- tigate the present and potential future links between the environmental management and management accounting functions of a company or business. A taxonomy of four broad but distinct approaches to environmental accounting is identified from the literature: external financial reporting; social accountability reporting; energy and materials accounting; and environmental management accounting. This project focuses on the latter - the generation, analysis and use of financial and related non-financial information, in order to support management within a company or business, in integrating corporate environmental and economic policies and build- ing sustainable business. The research involved interviews with accountants' and Address for correspondence Dr J. J. Bouma, Erasmus University, Erasmus Centre for Environmental Studies, P.O. Box 1738, 3000 Rotterdam, The Netherlands. E-mail: bouma(gfsw.eur.nl Copyright © 2000 European Accounting Association ISSN 0963-8180 print/ISSN 1468-4497 online Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA 32 The European Accounting Review environmental managers at eighty-four companies in Germany, Italy, The Nether- lands and the UK, and detailed case studies of fifteen companies in those four countries. The paper summarizes the findings of the research and their implications for four core hypotheses, goes on to discuss international differences, and concludes by reviewing the implications of the results for likely future developments. 1. APPROACHES TO BUSINESS-LEVEL ENVIRONMENTAL ACCOUNTING The academic and practitioner literature on environmental accounting at the level of the individual company or business spans several different approaches, and the term 'environmental accounting' is itself used loosely and ambigu- ously. In order to position a specific project within the literature, and define at least broad boundaries within which empirical work can be carried out, some taxonomy is needed. The different approaches to environmental accounting are most directly distinguished in terms of their differing emphases on, first, the content of the activity - the balance between financial and non-financial data; and, second, the primary purpose, in particular the well-established accounting distinction between primary target audiences - how far the principal objective is internal decision support for management, or external reporting. The need for such a structure to be defined at the outset to guide research is indicated by the lack of consensus in the literature on terminology and definitions - for example, on what should be encompassed within the defi- nition of'management accounting'. The official definition of the UK's Char- tered Institute of Management Accountants, for example, claims that, as well as reporting internally to management within an entity, 'management accounting also comprises the preparation of financial reports for non-man- agement groups such as shareholders...' (CIMA, 1996) whereas some stan- dard texts (Drury, 1996) restrict its scope to providing information only to 'people within the organisation'. The CIMA definition also refers to 'infor- mation used by management to plan, evaluate and control ... and assure appropriate use of and accountability for its resources' - implicitly including non-financial as well as strictly financial measures and performance indicators. Few would deny that an organization's financial performance is likely to be dependent on its performance in operational and strategic areas which can best be measured by non-financial indicators, but some non-accountants would challenge a definition which can sometimes be perceived as an attempted assertion of professional ownership. This is particularly relevant in environmental accounting and performance measurement, where much of the process of data capture and information generation is, in practice, managed by graduates of natural science disciplines which would themselves claim a long pedigree of measurement expertise. Environmental management accounting in Europe 33 INTERNAL DECISION SUPPORT FINANC ENVIRONMENTAL MANAGEMENT ACCOUNTING ENERGY AND MATERIALS ACCOUNTING .lAL DATA FINANCIAL REPORTING EXTERNAL • REPORTING SOCIAL ACCOUNTABILITY REPORTING FINANCIAL AND NON-FINANCIAL DATA Figure 1 Four approaches to environmental accounting at the level of the firm Boundaries between subsets of environmental accounting are definable only broadly, and it would be counter-productive to attempt to apply these rigidly. The structure reflected in Figure 1 was adopted by the members ofthe project to be used as a pragmatic framework to guide the empirical research and regular frequent debates between members as the project proceeded, over which business activities could most usefully be classified as elements of environmental management accounting, were a continuing demonstration of the need to see it as such. Figure 1 distinguishes four broad approaches to environmental accounting at the level ofthe individual company or business - external financial reporting; social accountability reporting; energy and materials accounting; and environmental management accounting. External finaneial reporting The environment-related aspect of this is concerned with assessing the fin- ancial effects (returns and risks) of environmental factors on companies, in order to inform investors, lenders and other financial stakeholders, as distinct from reporting on environmental performance for its own sake. Environment- driven financial risks can be considerable - for example, liabilities associated with a need to clean-up contaminated land. It has been estimated that Amer- ican industry may be under-provided for 'Superfund'-related clean-up liab- ilities by up to a trillion dollars (Schoemaker and Schoemaker, 1995). The scale of environment-driven liabilities is less in the UK and other European countries because of differing legislative and regulatory regimes, but can 34 The European Accounting Review be significant for some individual companies and may become more so as environmental legislation becomes more rigorous. Financial regulators such as the Securities and Exchange Commission and the accountancy profession on both sides of the Atlantic have been concerned to ensure that current financial reporting standards are adequate to capture the full scale of potential environmental liabilities (FEE, 1996), though an argument has been made that the current standards themselves are adequate provided that they are properly followed and enforced (ICAEW, 1996). Research into the attitudes of the financial auditing profession reports similar findings: that although there is a high level of awareness of the importance of environmental issues, at least amongst larger audit firms, there is a general lack of support for regulation and mandatory professional guidance (Collison, 1996; Collison et al, 1996; Collison and Gray, 1997). Social accountability reporting Much of the interest shown by academia, particularly in the UK, can be seen as an extension of the social accounting movement which flourished briefly in the 1970s. This aimed to broaden the scope of accounting from its traditional - and legally-defined - concentration on financial stakeholders, to a broader accountability to external stakeholders generally and to society as a whole (Gray et al., 1993, 1996, 1997). Although those initiatives failed to persist, the social accounting approach has influenced debate and practice in environ- mental reporting externally. In the UK, for example, its proponents have been central to the development of the Association of Chartered Certified Accountants' Environmental Reporting Awards Scheme (Owen et al., 1997). Anecdotal evidence based on feedback from environmental managers suggests that this is highly regarded in industry and is a valuable support for them in convincing sceptical senior managements of the value of external disclosure, and that it has been instrumental in encouraging improvements and inno- vations in the stand-alone voluntary published corporate environmental reports which are the most visible indicator of corporate accountability to external stakeholders (Owen, 1992). Gray et al. (1993) and others have pointed out that accountants and the accounting profession have much to contribute in this respect; specifically, their experience could be valuable in the generation, collection and analysis of data on resources consumed and other aspects of performance, much of which will be held within accounting records and systems; verification of data collection and analysis methods; and the reporting and communication of quantitative data. Energy and materials accounting Many environmental impacts are related to flows of physical substances (fuels, materials, water, gases, etc.). Hence, this is the basic data used for life-cycle Environmental management accounting in Europe 35 assessment (LCA). Some experts therefore advocate that, if management accounting is to take environment seriously, the tracking and analysis of this non-financial information should become as important as the tracking and analysing of financial information (Birkin, 1997a-f). This can also be seen as a logical response to the arguments for greater use of non-financial infor- mation in decision-making and performance measurement which have been made by Kaplan and Norton (1996), though this can again raise potential questions over the most appropriate professional ownership of non-financial performance measurement indicators. One particular activity in this area with clear relevance for management accounting is eco-balancing, since both offer a framework in which an holistic overview ofa business as a whole can be broken down into sufficient detail to be managed and controlled operationally (Becksmann, 1996; Jasch, 1999; Rauberger and Wagner, 1999). Mueller-Wenk, a Swiss engineer, is generally recognized as the originator of eco-balancing in the 1970s (Mueller-Wenk, 1978), and it has subsequently been widely implemented as an integral part of corporate environmental management in Germany, Austria and Switzerland. However, it is usually perceived as an engineering management process, organ- izationally located within production functions, rather than as an accounting process, perhaps reflecting deeper differences between Germanic and other (particularly Anglo-Saxon) management cultures. Environmental management accounting As environmental management in business has evolved, interest has grown in developing a better understanding of environment-related financial costs and benefits as an input to conventional management accounting. The main stimu- lus is growing evidence of the effect that environmental factors can have on the profitability and financial position ofa business (Cairncross, 1995; Schmidheiny and Zorraquin, 1996; DeSimone and PopofT, 1997), and the probability that these effects will increase in future through both public policy and market forces. Some manifestations of this include: high and increasing levels of capital and operating expenses for pollution control equipment as legislated standards are increased; additional costs incurred as a result of public concern over environmental issues, for example Shell's disposal of the Brent Spar oil storage platform at a much higher cost than had been originally anticipated; and the introduction in a number of countries of'eco-taxes' and other incentive-based forms of regulation. Several company initiatives have demonstrated the extent of environment- related costs, and opportunities to control and minimize these through appro- priate management action. Baxter International's 1996 corporate environ- mental financial statement demonstrated that, even when costs were matched against only those benefits realized in the current year, its environmental programmes almost broke even ($23.4 million of benefits compared to S27.6 36 The European Accounting Review million of costs); whilst there were a further $51.2 million of benefits realized in 1996 from costs avoided as a result of previous years' initiatives (Bennett and James, 1998c). The 'Green Ledgers' study by the World Resources Insti- tute also found that, by their definition, environmental costs comprised almost 22% of non-feedstock operating costs at Amoco's Yorktown refinery and 19% of the manufacturing costs of a Du Pont agricultural pesticide (Ditz et al., 1995). Similar findings have been reported in several European projects, particularly in the Netherlands (Dieleman et al., 1991; Wolters and Bouman, 1995) and the UK (Johnston, 1994). In the USA, the Environmental Protection Agency's Environmental Accounting Project has collaborated with organizations such as the Tellus Institute to summarize definitions; to develop a model for considering environ- ment in investment decisions ('total cost assessment', or TCA); and to develop research into trends and practices in industry in both specific industry sectors such as chemicals and electroplating, and in individual companies such as AT&T and Ontario Hydro (McLaughlin and Elwood, 1996; Bennett and James, 1998b). This is supported by academic and applied research such as a survey of practice by Epstein (1996), supported by the USA Institute of Management Accountants; the work of Bailey and Soyka (1996); and the Green Ledgers study (Ditz et al., 1995). Tuppen (1996) has also analysed the USA situation from a European perspective, as part of a study to identify possible environmental management accounting initiatives which British and other European companies could consider adopting. Although empirical work in Europe would appear to be less developed than in the US, there is a growing literature. Schaltegger et al. (1996) have provided an overview of the field from a European perspective, and much of the practical work in Europe has been in the Netherlands, driven by that country's advanced environmental policies and its move towards incentive-based regu- lation (Braakhuis et al., 1995; Wolters and Bouman, 1995; Bouma, 1998). There has also been work on the development of typologies of costs and benefits as an outcome of a number of waste minimization schemes in the UK (Johnston, 1994; Business in the Environment and Environment Agency, 1996). Finally, Bennett and James (1998b, 1999) have collected articles reflect- ing the current state of the art from both Europe and the USA. 2. THE 'ECOMAC'2 RESEARCH PROJECT In 1996 the present authors commenced a European Union-funded research project on links in European companies, and the potential to develop further links, between management accounting and environmental management. The objectives were to generate empirical data on the current status and to analyse these in order to identify opportunities for further development. The design adopted a conscious and deliberate managerialist stance. Environmental management accounting in Europe 37 reflected in its definition of environmental management accounting for the purposes of the project: the generation, analysis and use of financial and related non-financial information in order to integrate corporate environmental and economic policies, and build sustainable business. Although there are other approaches which are reflected in the literature, these were decided to be outside the scope of the project, which focused on the potential to develop links between environmental management and management accounting which could be mutually beneficial even in con- ventional business terms. The project therefore focused on the north-west quadrant of Figure 1, i.e. environmental management accounting, and adopted a narrow definition of data - that which is either already expressed in monetary units, or of direct relevance to financial analysis - and an internal audience/decision support perspective. The research work was undertaken by four academic partners: Fondazione ENI Enrico Mattei (FEEM) in Italy, TNO and Erasmus University in the Netherlands, and the UK Centre for Environment and Economic Devel- opment (CEED). The project also had an industrial partner, IBM Germany, and undertook demonstration projects in three Dutch-based companies or facilities, Auping, Hercules and Xerox. The project's four main hypotheses were that: 1 Logical relationships between management accounting and environ- mental management can be established through existing production pro- cesses and products. 2 The linking of management accounting to environmental management will help to demonstrate the financial superiority of pollution prevention measures relative to end-of-pipe measures. 3 Internal costs to a business resulting from emissions to the environment are often not identified within conventional management practices. As a result, cost savings relating to environmental pressures frequently remain hidden. 4 Activity-based costing (ABC) is a promising approach to remedy the 'black box' nature of overheads. It can be applied so as to quantify systematically the cost-saving effects of environmental measures. These were tested through a questionnaire survey, administered by interview, of eighty-four companies in Germany, Italy, the Netherlands and the UK; and fifteen detailed case studies. The survey sample was stratified by size, divided equally in each country between larger companies and small to med- ium-sized enterprises. It was also focused on industries where environment is a significant strategic issue such as chemicals, pharmaceuticals, energy and printing. For nearly all companies, both an environmental specialist and a 38 The European Accounting Review financial specialist were interviewed. The survey findings are described in detail in Bouma and Wolters (1998). Some of the questions replicated those in a similar American exercise by the Tellus Institute on behalf of the US Environmental Protection Agency (White and Savage, 1995). However, the comparative results need to be interpreted with caution as the samples were different. In comparison to the Ecomac project, the USA exercise was based on a larger number of firms and respondents, had less control over the identity of respondents, and had a greater proportion of responses from medium-sized and large companies. The case studies for the research were of the German subsidiaries of IBM, Philips and Sony; AGIP, Cartiera Favini, Italiana Petroli and SGS-Thomson in Italy; Auping, Hercules, Meerssen Papier and Xerox in the Netherlands; and Baxter, Xerox, Zeneca and an anonymous company (referred to as 'XYZ pic') in the UK and Ireland. They covered a variety of themes, including 'costs of non-environment', product costing, waste minimization, environmental costs in product development, and end-of-life disposal costs. They also pro- vided a mix of both 'problems', where the research objective was to reveal problems and demonstrate a range of alternative possible solutions, and 'solutions' where companies had already taken successful action. 3. RESULTS OF THE RESEARCH The main themes which emerged from the research are summarized in Figure 2. The following subsections discuss these themes and consider their impli- cations for the project's initial hypotheses. Cross-functional goals and procedures A small majority of companies in the survey had formal environmental policy goals which were integrated into their business policy goals (53%). A large • Cross-functional goals and procedures • Emphasis on pollution prevention • Moderate but growing interest in environmental management accounting • Diverse sources of information • Limited allocation of environmental costs • Equivalence of environmental investments • Short-term decision-making perspectives • Limited use of externalities data • Problems of data reliability • Importance of organizational structure • Importance of organizational processes Figure 2 Themes emerging from the Ecomac project Environmental management accounting in Europe 39 majority also either already had an environmental management system in operation (56%) or were in the process of introducing one (24%). Over half of all companies (58%) had formal procedures to ensure that environmental staff were involved in capital budgeting processes. Emphasis on pollution prevention Most companies had recognized the superiority in principle of pollution prevention at source over 'end-of-pipe' solutions, and were seeking to prevent pollution by integrating environmental management into their normal decision-making. However, this was not evenly distributed across business functions: implementation was highest in production (74%) and R&D (61 %), but there is still room for further improvement in, for example, the product design, distribution, use/consumption or disposal stages of the life cycle, where less than 50% of companies had adopted this approach. Moderate but growing interest in environmental management accounting The case studies suggested that the financial benefits of introducing environ- mental management accounting do not usually justify major changes and are therefore better achieved by integrating environment into existing change programmes, such as the introduction into a business of activity-based costing. Realistically, therefore, for most companies, environmental management accounting will be an intermittent process in which periods of low-level, low-profile, activity are punctuated by bursts of considerable attention and innovation. These will often be triggered by changes such as the introduction of new internal accounting systems. However, most survey respondents did expect their environmental man- agement accounting activities to increase in the future. There was also sig- nificant activity in a few companies and considerable general interest in some specific applications, particularly amongst environmental specialists. These were asked to assess the usefulness, both currently and in the future, of seven areas or activities - the bookkeeping system, budget-setting, budgetary control, capital budgeting, product costing, financial performance measure- ment, and non-financial performance measurement. The area which was high- est ranked overall was capital budgeting, which 48% saw as having either considerable or crucial importance to environmental management currently, and which 61 % expected to be of either considerable or crucial importance in the future. The two aspects of operational budgeting - budget-setting and budgetary control - were also highly ranked, with 33-34% considering them to be either considerably or crucially important now, and 53-56% expecting that this would be the case in the future. Interestingly - in view of the topic's prominence to date in the subject literature - the lowest ranked of the seven 40 The European Accounting Review was product costing, with only 24% of environmental specialists ofthe opinion that this was of considerable or crucial importance to environmental man- agement currently, and only 39% for the future. Diverse sources of information This is one of the few areas of significant difference between the USA and Europe which emerged from the Ecomac survey. In the USA, 51% of com- panies stated that their financial and management accounting systems were their main source of data on environmental costs. This compares with only 19% of European companies, a far larger proportion of whom stated that the main source was operational management systems. In particular, operational data such as manufacturing process records emerged as being extremely important for most companies - often more so than data from accounting systems. Limited allocation of environmental costs Only 50% ofthe European companies were explicitly tracking any of a number of named environmental costs, compared to 83% in the US. The difference was especially marked at plant level, where only 18% of European companies were tracking environmental costs compared to 64% in the USA, with a slightly higher proportion of German companies allocating costs to processes and products than in the three other European countries. However, the differ- ence between the USA and Europe was less significant than it may appear, since even the American companies were tracking only a small proportion of the costs which might potentially be classified under this heading. In both countries, most companies were tracking obvious environment-related costs such as energy and waste disposal (although not always identifying them as environment-related), but paying little attention to others such as environ- mental fines or penalties, or insurance costs. The residual differences between the USA and Europe are probably explained by the higher levels of liabilities and penalties in the former. Given that many environmental costs are allocated to overheads, the for- mulae which then assign these into individual cost objects are of some sig- nificance. On both sides ofthe Atlantic the main basis for allocation is labour hours (55% of USA companies and 33% of European), closely followed by production volume (53% in the USA and 24% in Europe). Several ofthe case studies-for example, those on Cartiera Favini and Philips - demonstrate how this can result in environmental costs being allocated to processes or products which do not in fact generate them and which are therefore effectively being required to cross-subsidize other, dirtier, products and processes. Environmental management accounting in Europe 41 Equivalence of environmental investments The Ecomac survey showed that, whilst some urgent compliance projects might avoid conventional investment appraisal procedures, environmental investments are generally not treated differently to other proposed invest- ments. In Europe, 83% of companies have a common capital budgeting pool for both environmental and non-environmental investments - a very similar figure to the 86% of companies which do so in the USA. However, a quarter of all firms - and in some sectors a much higher proportion - used different assessment techniques for environmental projects. Short-term decision-making perspectives Most business decisions involve the commitment of resources; if significant, this will usually be subject to financial evaluation. The time-horizon adopted, and the selection of investment appraisal method, is therefore of great import- ance since the benefits of environmental investments are often of long-term impact. For these, the payback method can be particularly distorting both since it ignores the time dimension of cash fiows and also because, in practice in some companies, it is often based on very short payback periods (less than a year, for several of the companies interviewed). Conversely, discounted cash fiow methods do take account of longer-term returns, although their significance depends upon the discount rate applied and the time-horizon over which costs and benefits are recognized. In practice, most of the European firms surveyed used the payback method as one of their assessment techniques and 35% used it as their primary one, making it the most popular assessment technique. This contrasts with the US study, which found return on investment (ROI) to be the most common main investment technique. It does, however, correspond to other research on management accounting practice generally (Drury et al., 1993). Although the European companies in the sample who were using the payback method were, on average, basing their decisions on longer threshold periods than were their American peers, it is none the less notable that it is so prevalent. This is particularly true of companies in Italy and the UK, which placed even greater emphasis on this method than did their Dutch and German equivalents. Limited use of externalities data Conventional management accounting - like conventional financial report- ing-aims to report and analyse only costs incurred internally within the business, though there have been several recent calls for a more strategic and externally-oriented perspective (Simmonds, 1991; Wilson, 1997). The parallel to this in environmental accounting is the argument that the scope should include not only the internal environmental costs, but also the external costs 42 The European Accounting Review imposed on society and the environment outside the boundaries of the organ- ization itself. This - it has been argued - is not only a recognition of the company's responsibility for the full range of its impacts, but can also provide an approximate leading indicator of future internal costs, as environmental legislation becomes more stringent, particularly if this is through market- based public policy instruments such as eco-taxes and tradable emissions permits. However, the survey and cases found only a small number of companies with any interest in externalities data, though the XYZ pic case study found that calculation of externalities can be, at the very least, a useful marketing tool for new products and services which reduce environmental impacts such as road transport requirements. This might be further increased if more data were available - there is currently a lack in respect of several key environ- mental parameters, such as the use of alternative types of raw materials, or many forms of toxic emission. One reason for this relative lack of interest is doubts about the credibility of long-term projections of environmental cost. Although many companies expect these to increase, few attempt to quantify them-for example, by considering current levels of externalities and how these might be internalized in future - in a way which can be used in decision-making models. More work is therefore necessary both to generate additional data, and to study cost- effective and feasible ways of signalling such trends to business. Data reliability Some of the project's survey interviews and case studies revealed considerable doubts about the reliability of much environmental and environment-related cost data within companies. One reason is that direct measurement of many environmental parameters is often impossible or unduly expensive, so that data have to be derived from other parameters; for example, by measuring inputs and outputs to estimate losses, or by applying a conversion formula to estimate the carbon dioxide emissions of fuels. The margins of error are often considerable and can sometimes outweigh any trend variations. Variations in definition can also create difficulties. The problems of ensuring reliability are particularly pressing in large organizations, which are often collecting data at different levels - for example, at the levels of the corporate centre, of the division, and of an individual business unit or site - as well as at multiple locations in different countries. These problems are partly attributable to a lack of standardization of terms and techniques, which is hampering development. Although the maxim 'different costs for different purposes' is equally relevant in environmental accounting in supporting objectives and programmes which may be unique to the particular organization, a higher degree of standardization would be Environmental management accounting in Europe 43 valuable for other purposes such as in benchmarking exercises, and to support the preparation of national statistics. Relevance of organizational structure The most fundamental aspect of structure is the degree of decentralization within the organization. In highly decentralized organizations the fun- damental decision-making centres will be business units below the level of the corporation as a whole, and large sites also may enjoy considerable autonomy. The Ecomac project's cases and survey found several examples where this autonomy translates into the operation of different accounting systems which produce problems of data compatibility between business units. Decentralization does offer an opportunity for local initiatives to be intro- duced on a small-scale basis, for example in response to particular environ- mental circumstances. If successful, these can then be extended across the rest of the organization. However, a high degree of decentralization can also make it difficult to take any action which requires co-operation between different business units. Often too, these units have a less well-developed strategic perspective than does the corporate centre, and may therefore be less per- suaded by arguments about long-term pressures such as the likely future internalization of costs which at present are external. On the other hand, centralization can encourage a 'convoy' approach to environmental man- agement and a stifling of local initiative. Several corporate environmental managers in the survey noted the importance of these factors and the practical difficulties which they created for both environmental management and environmental management accounting. These issues are particularly pronounced for local subsidiaries of trans- national enterprises, where the extent of decentralization can range from very limited to almost complete autonomy. In particular, ownership by an American parent can be an important driver of environmental management accounting, as corporate initiatives developed in the high environmental cost context of America are made either mandatory for, or available to, local subsidiaries. This was the case with Baxter's development of a site-level environmental financial statement for its Irish Manufacturing Operations plant, for example. The global perspective and management of many trans- national organizations can also create another use of eco-management accounting, which is to analyse the costs and benefits of national regulations and compare these with those of other countries. Another aspect of structure is the extent to which the organization is based on strong and independent functional departments. Generally, a functional structure is more common in German companies - many American and Brit- ish companies have in recent years been using a variety of mechanisms to break these down and focus instead on process-based management. This has major implications for culture and processes (see below) and also determines 44 The European Accounting Review the role and objectives of the accounting and environmental management function (Becksmann, 1996; James et al., 1997). The Zeneca case provides an example of the influence of structure on environmental management accounting. The waste minimization initiative at the Huddersfield site was initially driven by the environmental department of one of the company's autonomous business units, and subsequently adopted by site staff. However, the case identified one significant factor in its success as the presence on the site of a corporate service function, Zeneca Manu- facturing's Process Development department, which facilitated the rec- ognition of the opportunities which could be generated through a 'cost of waste' analysis. Relevance of organizational processes The case studies suggested that effective and enduring cross-functional pro- cesses are vital for successful environmental management accounting, for three reasons. First, many actions require collaboration and concerted action by different functions, such as financial management and environmental man- agement. Second, some important opportunities - such as the ability to cap- ture new kinds of data or to reclassify existing data categories as a result of the introduction of activity-based costing - arise only at irregular intervals. If good relationships and understanding between functions are not already in existence, it can be difficult for such opportunities to be identified and implemented. Finally, an important underpinning of environmental man- agement accounting is mutual understanding and awareness: financial literacy amongst environmental managers, and environmental awareness amongst accounting staff. An important means to achieve this is regular contact and good personal relationships between individuals from these different func- tional areas. The project found only two companies which had generated new processes which brought together accounting and environmental staff to meet environ- mental objectives. Akzo had created a position of environmental bookkeeper' to co-ordinate accounting, environmental management and operational data, and Xerox UK's quality improvement team brought together accounting, environmental, logistics, packaging and other staff to focus on opportunities for packaging reduction. However, even in this case the original principal objective had been cost reduction rather than environmental improvement. Several case studies and survey interviews also demonstrated the suboptimal situations which can arise from the absence of such processes. At XYZ pic, for example, the case study involved the setting-up of an environmental workshop which brought together both the internal players involved with the product development process, and important external players such as disassembly companies. This was the first time that such a meeting had occurred, and participants subsequently reported that they had been helped Environmental management accounting in Europe 45 in developing an improved understanding of the role of environmental issues in determining the long-term feasibility and profitability of the projeet. The findings and the projeet hypotheses The first projeet hypothesis was that 'logical relationships between man- agement accounting and environmental management ean be established through existing produetion processes and products'. Contrary to the expee- tation of the researchers, this hypothesis was not supported by the results, since there was no apparent correlation across the companies studied between their methods of production and types of product, and their approaches to environmental management aecounting. The survey found considerable variations in practice. This may be partially explained by the finding that the aecounting function was not central to many environmental management accounting activities - more frequently these aetivities were driven by environ- mental and operational managers. This was related to the importance of operational data, such as job and process records, to cost reduction and other initiatives. In theory these may be within the remit of management aecountants, but in practice - as with Zeneca - this was frequently not the case. Where links were established between management aecounting and environmental management, they almost invariably took the form of modi- fication of some existing accounting processes, in particular of capital invest- ment appraisal processes. The second hypothesis was that 'the linking of management accounting to environmental management will help to demonstrate the financial superiority of pollution prevention measures relative to end-of-pipe measures'. This hypothesis was partially supported. Several of the case studies showed that when hidden costs were revealed they did indeed strengthen the case for waste minimization and similar initiatives, and this was also supported by the responses of a majority of survey respondents. However, the research also revealed that the mere identification of costs alone is not necessarily sufficient to make pollution prevention a financially attractive aetivity. If costs are not allocated to appropriate cost objects or budgets, they will not necessarily infiuence behaviour. And, if excessively high discount rates are used in investment appraisal techniques, then any long- term benefits and costs which are identified will be discounted to negligible amounts. The third hypothesis was that 'internal costs to a business resulting from emissions to the environment are often not identified within conventional management practices. As a result, cost savings relating to environmental pressures frequently remain hidden'. This hypothesis was supported by the research. Only half of the companies surveyed were first identifying and then allocating key environmental costs to processes or products, A large proportion of both accountants and environmental managers also believed 46 The European Accounting Review that more could be done to identify and allocate environmental costs, which was supported by the results of the pilot exercises at Auping and Hercules. Moreover, the cases where environmental costs had been identified, such as Zeneca and Xerox, are widely acknowledged as exceptional, not least because of the effort expended in revealing hidden costs, and therefore not gen- eralizable to normal practice in the majority of companies. Several cases, such as that of Zeneca, also demonstrated that the costs of inefficiency could be the most difficult element of environmental cost to identify, but could also be the most significant. The final hypothesis was that 'activity-based costing (ABC) is a promising approach to remedy the "black box" nature of overheads. It can be applied so as to quantify systematically the cost-saving effects of environmental mea- sures'. The case of Meerssen Papier-where the introduction of ABC did reveal unexpected environmental costs - supported this hypothesis. However, activity-based costing was being implemented in only 18% of the companies which were surveyed (though it was being considered by a further 6%). Moreover, only a small proportion of interviewees considered that the benefits of introducing environmental management accounting were sufficiently high in themselves to compensate for the high costs of changing accounting systems. Hence, ABC is likely to be only one of the means by which environmental management accounting is introduced into business. In addition, little evi- dence was found to indicate that ABC initiatives automatically reveal environ- ment-driven costs. Substantial inputs by environmental managers and experts will almost certainly be necessary to ensure that this occurs. 4. INTERNATIONAL DIFFERENCES Some specific variations between European countries have already been noted. The research also suggests that there are some more fundamental differences, both between Europe and the USA, and between individual European coun- tries. For example, the argument that financial 'bottom-line' considerations will be major drivers of environmental improvement in European business can sometimes be exaggerated. In general, the fact that Europe does not have a US-style liability and environmental penalty regime means that direct environmental cost drivers are not as intense as in America. The Dutch cases, for example, found that — even in a country with one of the most stringent environmental regimes in Europe - direct environmental costs (so far as they can be accurately measured) still accounted for only around 2% of sales revenue of the chemical companies researched. On the other hand, European- based companies tend to face higher resource costs, particularly for energy, than do American companies, so that their 'costs of inefficiency' - the costs of buying and processing resources which ultimately become waste - will often exceed direct environmental costs. It could be argued that improvements here should not be considered as primarily attributable to environmental initiatives Environmental management accounting in Europe 47 since there is a clear profit motive, and that well-managed profit-seeking companies should be able to optimize their production processes even in the absence of any specifically environmental programme. However, the con- tinuing reports of effieiency gains, previously unrecognized, which are ident- ified through environment-driven audits and reviews, demonstrate the continuing potential for such initiatives, A broad, if crude, distinction can also be drawn between companies in terms of their basic ethos and philosophy: crudely, between primarily 'finance- driven' and 'stakeholder' organizations, 'Finance-driven' organizations have a primary focus on shareholder value and the bottom line, whereas a 'stake- holder' organization would see finaneial performance as only one factor in meeting the needs of a variety of stakeholders, which includes employees and local communities as well as shareholders. At the risk of stereotyping, a broad correlation has been observed with national differences, with finance-driven corporate cultures being more prevalent in the strong-capital-market contexts of the Anglo-Saxon economies of the UK and USA, and a broader stakeholder culture being more prevalent in Germany (James et al., 1997) as well as other continental European countries and Japan, The differences have important consequences for accountants and finaneial managers, who are usually central figures in the decision-making of Anglo-Saxon companies (to the point where finaneial training and experienee is a frequent background for those who become company ehief executives and chairmen) but are generally relatively less prominent at senior levels of continental European and Japanese enter- prises. These cultural differences are reflected in differences in the development of environmental management accounting. In British and Ameriean companies (and, usually, in their overseas subsidiaries also) the emphasis has been on 'finance-driven' initiatives such as waste minimization which offer immediate pay-offs. Although accountants have not usually been prominent in these, conventional accounting and financial techniques - such as the use of the payback method - have been frequently used. In Germany, by contrast, there has been more emphasis on eco-balancing, an activity largely conducted by engineers and scientists and focused as much on holistic understanding and long-term benefits as on short-term returns. This point was also eonfirmed by a US case study of the electroplating industry, which found that organizations with strongly finance-driven cultures tended to be more supportive of environ- mental management accounting (Environmental Protection Agency, 1997). However, this broad stereotype is becoming less valid. Economic difficulties are leading many eontinental European and Japanese companies to put greater weight on finaneial considerations, whilst eonversely there have always been several British and American companies who can fairly claim to have adopted a broad stakeholder philosophy. This is currently a topical issue in the UK in partieular (RSA, 1994), with declared government policy clearly in favour of encouraging a broad stakeholder responsibility by companies as a correction 48 The European Accounting Review to what is perceived by some to have been the excessively finance-driven climate of the f980s. 5. CONCLUSION S The Ecomac project frequently found that, although many companies claim some environmental management accounting activity, this often represents only a few isolated experimental projects rather than a systematic and com- prehensive implementation. One example of this patchy response was cited by the environmental manager of a major American corporation who reported that his corporation was well aware of the need to carry out thorough environ- mental checks as part of their 'due diligence' processes when mergers or acquisitions were contemplated, and invested substantial resources in this (including much of his own time). However, this same enlightened awareness was not equally found in other, more internal, processes such as new product development, although (in his opinion) these offered much greater oppor- tunities to generate long-term improvements in environmental performance. The project results suggest that opportunities exist for many companies, for both business and environmental reasons, to become more active and adventurous in environmental management accounting, and that the pressures on them to do so will increase. However, any actions need to be realistic and cost-effective and are more likely to involve incremental changes to existing activities rather than the introduction of compfetefy new processes. Seven areas, which are summarized in Figure 3, are likely to be the focus of this. The first two reflect a pragmatic recognition that it is likely to be easier to identify and implement potential improvements whose value can be dem- onstrated in short-term business terms as well as in environmental perform- ance, and that a demonstration of the early harvesting of some 'low-hanging fruit' might encourage subsequent receptiveness to more ambitious proposals. The other areas are more fundamental, with a longer-term significance, rep- resenting both occasional point decisions which can influence performance • Understanding and managing environmental costs • Introducing waste minimization schemes • Integrating environment into decisions with long-term implications on capital expenditure and product development • Understanding and managing life-cycle costs • Involving accountants in a strategic approach to environmental man- agement accounting and performance evaluation • Encouraging cross-fertilization of knowledge and ideas, through train- ing and organizational processes, between environmental man- agement and management accounting functions • Linking data beld by different business functions Figure 3 Environmental management accounting opportunities in business Environmental management accounting in Europe 49 over several subsequent years, and an opportunity to influence the evolution of organizational cultures. The final point - better integration of the data of different business functions - was an issue for several companies, particularly since in practice much environmental management accounting is initiated and carried out by people from outside the accounting function who do not always have easy access to accounting data, or are even aware of what may be available. Zeneca's cost-of-waste exercise, for example, was carried out by technical production specialists, largely on the basis of data that were available from manufacturing process records; however, it became apparent during the collection of material for the case study that the exercise could have benefited from access to standard accounting data also. Non-accountants frequently recognized the potential attractions of using accounting data - not only the economies in being able to re-use data which had originally been collected for another purpose, but also the perceived integrity of data collected through accounting systems with well-established internal checks and controls that are frequently absent from other information systems. A more ambitious initiative, but one which is less likely in the immediate future, is the use of external costs and benefits in business planning. This can be used as an indicator of environmental impacts and possibly also as a predictor of future internal costs, if environmental legislation becomes more stringent. The XYZ pic case study demonstrated a possible, if limited, role in certain circumstances, and several interviewees were interested in the concept and prepared to consider it. However, it was not clear how this concept could be adopted and used in practice in a way that would be credible, which awaits the development of suitable management techniques and tools. Fortunately, environmental management accounting is often comp- lementary to other current trends in business and accounting; as Bennett and James (1998b) have observed, in several ways it represents the application of many current developments in advanced management accounting to a particular area of business management. For example, environmental cost accounting (as a subset of environmental management accounting) can be seen in part as a specific application of activity-based costing (ABC) which focuses on the environment as a key cost driver; and environmental man- agement accounting's emphasis on end-of-life costs, and on other costs which are either downstream or upstream from the organization itself, reflects the growing emphasis on product-life costing in management accounting gener- ally. In companies where environmental performance is identified as a sig- nificant strategic variable, it can form one of the perspectives in a 'balanced scorecard' approach (Kaplan and Norton, 1996). Finally, environmental man- agement accounting's emphasis on future threats and opportunities mirrors the wider argument in management accounting that it should aim to become more strategic and less focused on short-term controlling and reporting (John- son and Kaplan, 1987); notwithstanding the widely recognized limitations of conventional investment appraisal techniques in dealing with uncertainty. 50 The European Accounting Review long-term strategic benefits and the evaluation of investments in intangible assets, which are also very relevant for many potential investments which offer to improve a company's environmental performance. However, environmental management accounting can also involve going beyond the conventional aims of management accounting. A central objective is to be a significant driver of action through demonstrating the long-term financial implications of sustainability and creating a vision of how this can be achieved. In this respect, it has what McAuley et al. (1997) have termed a 'narrative' role of making sense of a complex world, as well as a 'logico- scientific' role of developing an accurate representation of reality. NOTES 1 The term 'accountant' is used throughout this paper for simplicity; however, this should not be taken to indicate that this was necessarily a term in interviewees' job titles (alternatives such as 'financial controller' were frequently encountered) or that they necessarily held formal professional accountacy qualifications. 2 The name 'Ecomac' was originally adopted as an abbreviation of 'eco-management accounting', the term initially used within the team to refer to the area of study, now replaced by 'environmental management accounting'. 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