Green ledgers: Case studies in corporate environmental accounting

From the board room to the shop floor to the marketplace, business decisions are skewed when environmental costs are hidden. Common accounting practices hide these costs in two ways: by burying them in “non-environmental” accounts and by failing to link costs to the activities that spawn them. As a result, managers are forced to make crucial business decisions—what products to manufacture, what technologies to employ, and what materials to use – without command of all the relevant facts. Now, more than ever, these managers are on the line as regulation, public concern, and corporate commitments make it increasingly important to account for environmental costs.

The good news is that hidden in the shadows of the information failure created by conventional business accounting practices are unexploited opportunities to increase profits, use materials more efficiently, and protect the environment. What’s more, firms of any size and in any industrial sector can make such gains, given the accurate cost information that evolving environmental accounting practices provide.

Green Ledgers: Case Studies in Corporate Environmental Accounting offers an insider’s view of corporate environmental accounting. It is not about the information that firms report to the EPA or even to their stockholders, but about the information they gather for their own purposes and how they use it. To explore how different firms handle this task, WRI—together with teams of academic researchers and corporate staff—studies nine companies, including Amoco Oil, Ciba-Geigy, Dow Chemical, Du Pont, and S.C. Johnson. Derived from in-depth interviews and confidential information, the case studies demonstrate how a better accounting of environmental costs leads to better business decisions—critical since firms much continually look for ways to squeeze more product out of less raw material and energy.

What did the participating corporations learn about their own practices? For openers, once the case study teams teased environmental costs out of the sundry accounts they had been hidden in, the sum could be astounding. Du Pont, for instance, found that environmental costs accounted for more than 19 percent of the total manufacturing cost of one agricultural pesticide. Relying only on conventional accounting practices, managers might never have known. Other companies made similar discoveries.

More important, the case studies in Green Ledgers describe how companies can use environmental cost information to improve profitability and reduce environmental risk. For instance, managers at Heath Tecna, a composite materials manufacturer, found that by changing their production processes they make materials use more efficient, reduce hazardous waste generation, and reduce costs. At Cascade Cabinet, a decision to switch from nitrocellulose lacquer—a hazardous material and source of air pollution—to a more benign varnish cut manufacturing costs significantly. A better understanding of environmental costs can also affect pricing decisions: when Dow Chemical faced a stark choice between shutting down a product line or investing in cleaner technology, its industrial customers accepted slightly higher prices in return for a guarateed supply of the product. As befits a book about an emerging discipline that is edging toward the mainstream, Green Ledgers contains a how-to guide for introducing environmental accounting. Managers who want to reap its benefits will appreciate the authors’ practical advice about how to launch a pilot project, identify environmental costs, and integrate these activities into ongoing business processes. As the authors note, environmental accounting is not just about generating information, but also about putting companies on a track to being leaner and greener. This form of accounting makes it possible to hold managers accountable for the environmental costs of their decisions—no matter where in the firm these play out. Environmental accounting must become part of strategic planning and capital budgeting exercises, not a free-standing effort. This means infusing core business thinking with accurate perceptions of environmental costs. The case studies and analyses set forth in Green Ledgers complement the findings and recommendations presented in such WRI studies as Jobs, Competitiveness, and Environmental Regulation: What are the Real Issues?, Beyond Compliance: A New Industry View of the Environment, and Transforming Technology: An Agenda for Environmentally Sustainable Growth in the Twenty-first Century. Although Green Ledgers takes aim mostly at a business audience, academics, professional associations, and even regulators can use it to promote better environmental accounting on the part of the private sector.