Environmental management accounting applications ...

Journal of Cleaner Production 14 (2006) 1262e1275 www.elsevier.com/locate/jclepro

Environmental management accounting applications and eco-efficiency: case studies from Japan Roger L. Burritt a,*, Chika Saka b,* a

School of Business and Information Management, The Australian National University, Canberra, ACT 0200, Australia b School of Business Administration, Kwansei Gakuin University, Japan Received 21 June 2004; accepted 16 August 2005 Available online 12 October 2005

Abstract This paper explores the links between environmental management accounting and measures of eco-efficiency in Japanese business. Environmental management accounting is a relatively new environmental management tool initially designed to trace and track environmental costs and physical environmental flows. In the paper, first, the recent development of environmental management accounting is considered; second, the links between environmental management accounting and eco-efficiency measurement are examined. Recent case studies in environmental management accounting from Japan are used as a basis for the analysis. It is concluded from the analysis that the practice of linking eco-efficiency measurement with environmental management accounting information is underutilised, diverse and in need of further promotion if EMA is to help Japanese business move production processes and consumption of its products towards sustainability. Ó 2005 Elsevier Ltd. All rights reserved. Keywords: Environmental management accounting; Eco-efficiency; Ecological-efficiency

1. Introduction Environmental management accounting (EMA) is a relatively new environmental management tool initially designed to trace and track environmental costs and physical environmental flows. This paper explores the links between environmental management accounting and measures of eco-efficiency in a number of Japanese companies. In Section 2, the recent development of environmental management accounting is considered. Links between environmental management accounting and eco-efficiency measurement are examined in Section 3. Section 4 outlines recent case studies in environmental management accounting from Japan, while it is concluded in Section 5 that the practice of linking eco-efficiency measurement with environmental management accounting information is underutilised, diverse and in need of further promotion if * Corresponding authors. The Australian National University, Canberra, ACT 0200, Australia. Fax: C612 61 25 4310. E-mail addresses: [email protected] (R.L. Burritt), saka.chika@ anu.edu.au (C. Saka). 0959-6526/$ - see front matter Ó 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.jclepro.2005.08.012

EMA is to help Japanese business move production processes and consumption of its products towards sustainability.

2. Development of environmental management accounting In the last few years there has been movement towards the development of a comprehensive framework of environmental management accounting to reflect the following: A focus on internal as well as external users of environmental accounting information [1]; An increasing number of attempts to define environmental management accounting [1e3] (see Table 1 for some representative definitions); Identification of the need for monetary and non-monetary information about the environmental impacts of and on organizations to be gathered and tracked by management [3e7]; and

R.L. Burritt, C. Saka / Journal of Cleaner Production 14 (2006) 1262e1275

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Table 1 What is environmental management accounting? Source

Definition

Graff et al. (Tellus Institute) [2]

Environmental management accounting is the way that businesses account for the material use and environmental costs of their business. Materials accounting is a means of tracking material flows through a facility in order to characterize inputs and outputs for purposes of evaluating both resource efficiency and environmental improvement opportunities. Environmental cost accounting is how environmental costs.are identified and allocated to the material flows or other physical aspects of a firm’s operations. [Environmental management accounting is.] the management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices. While this may include reporting and auditing in some companies, environmental management accounting typically involves life-cycle costing, full cost accounting, benefits assessment, and strategic planning for environmental management. Environmental management accounting serves as a mechanism to identify and measure the full spectrum of environmental costs of current production processes and the economic benefits of pollution prevention or cleaner processes, and to integrate these costs and benefits into day-to-day business decision-making.

International Federation of Accountants (IFAC) [3]

UN DSD EMA Initiative http://www.un.org/esa/sustdev/ estema1.htm accessed on 19 December 2002 Schaltegger and Burritt [1]

Bennett and James [4]

.environmental management accounting is defined in a narrower sense to include only the environmentally induced financial aspects of accounting that help managers to make decisions and be accountable for the outcome of their decisions. The generation, analysis and use of financial and non-financial information in order to optimise corporate environmental and economic performance and to achieve sustainable business.

Emphasis on a pragmatic approach to environmental accounting for decision-making by different types of managers throughout the organization [7]. The pragmatic approach recognizes: the multiple, interrelated internal management stakeholders responsible for environmental impacts of and on organizations; the need to consider long and short run information needs; flexible reporting that should address routine and ad hoc information demands; integration of past, contemporary and future orientations in decision making for environmental impacts; and environmental return and risk relationships for business [8].

3. Are environmental costs significant for particular organizations [9]? In the process of providing answers to these questions environmental costs have been classified in several different ways. Five classifications seem to have received particular attention based on: 1. Analysis of conventional cost accounting methods and measurement [1,10] e job and process; direct and indirect; historical and standard; fixed and variable; ordinary and extraordinary; 2. Extending the classification of costs [11] e to include conventional, indirect hidden, less tangible, contingent; and societal costs (negative externalities); 3. Quality costs and the environment [12] e analysis of prevention, assessment (appraisal), control (internal failure) and external failure environmental costs; 4. Life cycle and activity costs [13]: life cycle e research and development, design, production, etc.; activity based e unit, batch, product sustaining and facility level costs based on a wider set of cost drivers than conventional management accounting recognizes; and 5. Target audience [1,7] e internal (managers and employees); external (shareholders, tax agencies, environment agencies, suppliers, creditors, general public, local communities, NGOs, etc.).

A set of 16 possible focal points of attention for a comprehensive environmental management accounting is presented in Table 2. The monetary tools, termed MEMA (Monetary Environmental Management Accounting), are presented in boxes numbered 1e8; the second set of tools, termed PEMA (Physical Environmental Management Accounting), is presented in boxes 9e16. Qualitative information is also provided by EMA tools, but this is not specifically considered in the framework shown in Table 2. This MEMA and PEMA framework differs from the framework for conventional management accounting. A fundamental ‘environmental’ criticism of conventional management accounting is that it largely ignores separate identification, classification, measurement and reporting of environmental information, especially environmental costs, when providing relevant information to management for decision making, planning and control purposes. Given the prior tendency of corporations not to highlight their environmental costs various studies have tried to answer the following questions:

Various reasons have been given as to why more managers are becoming interested in environmental management accounting information [12,14e17]:

1. What are environmental costs [6]? 2. Which classes of environmental costs are potentially important to business [4]?

Environmental regulations impose requirements on companies and information needs to be recorded in order to demonstrate compliance;


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Table 2 Proposed comprehensive framework of environmental management accounting [7] Environmental management accounting (EMA)

Past Oriented

Monetary environmental management accounting (MEMA)

Physical environmental management accounting (PEMA)

Short term focus

Long term focus

Short term focus

Long term focus

Routinely generated information

1. Environmental cost accounting (e.g. variable costing, absorption costing, and activity based costing)

2. Environmentally induced capital expenditure and revenues

10. Environmental (or natural) capital impact accounting

Ad hoc information

3. Ex post assessment of relevant environmental costing decisions

4. Environmental life cycle (and target) costing

9. Material and energy flow accounting (short term impacts on the environment e product, site, division and company levels 11. Ex post assessment of short term environmental impacts (e.g. of a site or product)

Post investment assessment of individual projects Future Oriented


Ad hoc information

5. Monetary environmental operational budgeting (flows)

Monetary environmental capital budgeting (stocks) 7. Relevant environmental costing (e.g. special orders, product mix with capacity constraint)

12. Life cycle inventories

Post investment assessment of physical environment appraisal

6. Environmental long term financial planning

13. Physical environmental budgeting (flows and stocks) (e.g. material and energy flow activity based budgeting)

14. Long term physical environmental planning

8. Monetary environmental project investment appraisal

15. Relevant environment impacts (e.g. given short run constraints on activities)

16. Physical environmental investment appraisal

Environmental life cycle budgeting and target pricing

There is an increase in voluntary acceptance (self regulation) by managers of the importance of managing business environmental impacts and information needs to be recorded as part of the responsibility accounting process; Promotion of environmental management accounting is being undertaken by international, national and local government bodies and some educational institutions. These bodies need to identify best practice cases as a basis for increasing the take-up of environmental management accounting; Environmental management accounting tools are increasingly available to help in the management process, thereby reducing cost and technological barriers to the introduction of EMA systems, as well as promoting the benefits flowing from EMA; and Eco-efficiency improvement is being adopted by a growing number of businesses as a logical driver for management and a way of enhancing strategies that promote, maintain or repair social legitimacy. The paper now turns to the latter reason, eco-efficiency improvement, to encourage the adoption of EMA by business. 3. EMA and eco-efficiency Schaltegger and Burritt [1] point out that in practice, the term ‘‘eco-efficiency’’ has been given a range of different

Life cycle analysis of specific project

meanings (see, e.g. [18e22]) and, as a result, has little precision. Therefore, it is very important to clarify the dimensions of eco-efficiency being discussed as these have a direct bearing on the type of EMA information that a comprehensive system needs to provide. In general, efficiency measures the relation between outputs from and inputs to a process. The higher the output for a given input, or the lower the input for a given output, the more efficient is an activity, product, or business. As the purpose of economic behaviour is to manage scarce resources in the best possible manner, emphasis is placed on the need for managers to seek efficient outcomes. Efficiency is a multi-dimensional concept, because the units in which input and output are measured can vary. If inputs and outputs are measured in financial terms, efficiency is commonly referred to as profitability or financial efficiency. Typical measures of profitability include: contribution margin percentage, return on sales, economic value added and return to equity on assets employed. Economic efficiency indicates whether, and for how long, social activities can be sustained in economic terms. Accounting and finance staff provide expert advice about the calculation of financial efficiency. If inputs and outputs are measured in technical terms, emphasis is usually placed on physical measures such as kilograms. Technical efficiency is also called productivity. Measures of productivity include: output per hour and output


per employee. The difference between the best possible efficiency ratio and the efficiency ratio actually achieved is described as X-efficiency. The concept of X-efficiency is useful because it suggests that in practice organizations do not appear to be cost minimizers (using the latest technology); rather they are more inclined to imitate their rivals in various policies and to follow industry norms and targets. To the extent that this occurs these organizations are technically inefficient. Xefficiency measures the extent of this technical inefficiency. Efficiency, because it is expressed as a ratio between a measure of output and a measure of input, is not bound to a financial or technical dimension: different dimensions can be combined by calculating cross-efficiency figures such as shareholder value created per employee. As efficiency, in general, is the ratio between output and input, ecological efficiency can be interpreted as the relationship between a measure of output and a measure of environmental impact [20]:

Ecological efficiencyZ

Output Environmental impact added

Environmental impact added is a measure of all environmental influences that are assessed according to their relative environmental impact [23]. Two kinds of ecological efficiency measures can be distinguished: ecological product efficiency and ecological function efficiency. Ecologically efficient management of a company is characterized by a high ratio between products sold, or functions accomplished, and the associated environmental impact added. Ecological product efficiency is a measure of the ratio between provision of a unit of product and the environmental impact created [1,23] over the whole, or over a part, of the product’s life cycle. Company managers tend to illustrate environmental improvements by communicating their total product efficiency or a part thereof (e.g. the number of cars produced per unit of energy consumed). Product efficiency can be improved by implementing pollution prevention techniques or by introducing end-of-pipe devices, reduced use of inputs per unit or through substitution of resources. Although, in principle, improvement of product efficiency is desirable, some products will never be as ecologically efficient as others in providing a certain service. For example, a car will always be less ecologically efficient than a bicycle. The second formula for ecological efficiency, ecological function efficiency, takes a broader view, by measuring how much environmental impact is associated with the provision of a specific function in each period of time [1,23]. A function could, for instance, be defined as the painting of one square metre of sheet metal or the transport of a person over a certain distance. The alternative that causes the least environmental impact in fulfilling the specific function has the best ecological function efficiency. Ecological function efficiency is, therefore, defined as the ratio between provision of a function and the associated environmental impact added.

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Ecological function efficiency can be improved by substituting products that have a low product efficiency with highly efficient products (e.g. a bicycle instead of a car), by reducing the amount used to fulfil the function (e.g. carpools lead to a decreased demand for cars), by prolonging the life span of products (e.g. longer corrosion guarantees on cars), and by improving product efficiency. Environmental interest groups often prefer to measure the environmental record of a product according to its overall function efficiency (e.g. the ecological function efficiency of a car in transporting a person over a specific distance compared with the efficiency of a bicycle, or public transport). Both measures of ecological efficiency are useful, and their adequacy depends on the purpose of the investigation. The two ecological efficiency ratios can be applied at different levels of aggregation, such as a unit of product, a strategic business unit, or total sales of a firm. In this context it is important to consider the total output and the absolute environmental impact: a large number of ecologically efficient products can be more harmful than a small amount of ecologically inefficient items. The cross-efficiency between the economic and the ecological dimension e economic-ecological efficiency e is the ratio between the change in value and change in environmental impact added. Economic-ecological efficiency is often referred to as eco-efficiency [1,20]

Eco-efficiencyZ

Monetary Value Added Environmental impact added

Any measure of eco-efficiency requires financial information, for calculating the numerator, and physical information about the environment, for calculating the denominator. Accounting and finance staffs provide key financial information about the numerator in eco-efficiency calculations and link this with physical information. They rely on physical information provided by natural scientists. Hence, for eco-efficiency measures to be calculated, and to add corporate value, it is essential for them to integrate conventional accounting and financial management with natural science (physical) measures such as provided by ecological accounting [1]. Fig. 1 provides a set of possible, plausible indicators of eco-efficiency. They reflect different levels of aggregation, with lower levels of aggregation shown to the right of the diagram. Eco-efficiency measures that are focussed on the activities that are of interest to the specific level of management can be related to a benchmark or standard as a basis for assessing effectiveness and improvement. For example, top management are concerned about the regular assessment of annual performance of the business and may examine income/environmental impact added; site management regularly assess the site they are responsible for and would consider return on capital employed/environmental impact added; project managers assess capital investment projects in terms of net present value/net present environmental impact added, etc.


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Purpose: improvement of ...

Overall corporate eco-efficiency

General eco-efficiency indicators

Economic performance figures (numerator)

- Income - Shareholder value - ...

- Net revenue - ...

Possible links to eco-efficiency indicators Environmental performance figures (denominator)

1

5

- Environmental impact added - NPEIA - ...

6

Specific eco-efficiency indicators Output Input - Sales revenue of product X - ...

- Labor costs - ...

7 2

- Greenhouse warmth contribution - ...

3

- CO2 emissions - ...

4

- Consumption of oil - ...

Source: [1] Examples of absolute figures, NPEIA = net present environmental impact added, arrows show possible links for deriving eco-efficiency indicators, the width of the arrows suggesting the extent of the plausibility that the given combination will produce a useful indicator.

Fig. 1. Systematic collection of eco-efficiency information.

The focus on business efficiency is subject to criticism. Neither conventional management accounting nor environmental management accounting are solely concerned with notions of efficiency, because other important issues such as inter-generational equity, social justice and effectiveness are also of concern. Ongoing debate exists in economics between those who argue that the social and environmental responsibility of business is to increase profits in an efficient way [24] and supporters of direct corporate social and environmental responsibility [25,26]. However, even critical thinkers such as Tinker and Gray [27] grudgingly admit that corporate environmental accounting and reporting has been a success story: Environmental reporting was probably a mistake by business e arriving unexpectedly and driven by engineers it sneaked out under the corporate PR radar and, indeed, it looked, initially innocuous. Companies soon realised that they had set a ratchet for themselves because it rapidly became apparent what a ‘‘good’’ environmental report would look like and, although there was real substance to the initial environmental reports, they were some distance from the ideal [27]. Environmental reporting has partly been a success because eco-efficiency improvement has a resonance with both environmental groups and businesses. It has been an important driver of corporate interest in environmental management accounting in the search for information about actions that will benefit the environment, the monetary bottom line and, implicitly, the business’s social legitimacy [1,16]. Hence, it is assumed that engagement of management in moves towards eco-efficiency have provided an important foundation for the collection of environmental information by business and the ratcheting of business towards better environmental performance. Bearing this focus on eco-efficiency in mind, a number of cases in environmental management accounting have been developed. The context in Japan is of particular interest as a new provisional standard and guideline for environmental management accounting and environmental reports have recently been

introduced. One recommendation is that eco-efficiency measures should be calculated and reported [28].1

4. Cases in environmental management accounting e the example of Japan At the outset, it should be recognized that case studies offer a low possibility of repetition and only a narrow and limited base for generalization [29]. However, they can provide rich descriptions, explorations and explanations of the phenomena being studied, and are of particular use where little prior study has been undertaken. Although the focus here is on Japan, a growing number of case studies have become available in environmental management accounting throughout the world. Burritt [30] reviews recent cases explored at EMA related conferences, workshops, expert group meetings, and literature e see representative cases in Table 3. The broad range of countries, large number of industry groupings and engagement with large and smaller organizations are all apparent from the studies. In this paper some recent studies in Japan are examined and comments made in relation to environmental management accounting and eco-efficiency. A number of projects and standards have been introduced in Japan over the last five years, as shown in Table 4. The MOE released the Guidelines for Environmental Performance Indicators for Business e Fiscal Year 2002 version e a revised version of the Guidelines for Environmental 1 The Japanese MOE guideline [28] states ‘Business related indicators, such as the value of production, and sales amount (sales turnover) of products/ services, are essential information as basic data to calculate the ratio between provision of a unit of environmental burden and the monetary value of product/service (eco-efficiency), the ratio between provision of a unit of product/ service and the environmental burden (ecological product efficiency) and so on. It is desirable to disclose these business related indicators which are generally accepted within the industry’.


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Table 3 Representative case studies in environmental management accounting Source

Number of EMA cases presented

Graff et al. [2]

39 Cases

Bennett and James. The Green Bottom Line [4] e various authors

ICAA, EA, VicEPA, Sydney, October 2002a

4 Australian

UN DSD EMA, Lund, Sweden, December 2002b

12 Austrian 1 Zimbabwe 1 South Africa 5 Costa Rica 1 Romania 1 Hungary 1 Slovakia 2 South Korea

UN DSD EMA, Bristol, UK, February [6] EMAN Europe, Bristol, UK, February 2002 Gago [31]

1 Canada 3 Slovakia 11 Austria 14 UK 11 Spain

EMAN Asia Pacific, Kobe, Japan, September 2001 Ditz et al. Green Ledgers [9]

3 Korea 1 Philippines 9 USA

Kokubu and Nakajima [32]/IMU

6 Japan

a b

USA Canada Switzerland USA UK

Sector/Industry/Name (if available) Private/Chemicals; metal finishing, fabrication; printing; electronics; paper; electrical utilities, others/24 capital investments; 9 product/process costing; 6 strategic planning Private/medical products and technologies (Cost-benefit analysis)/Baxter International Public sector/Ontario Hydro Private/Electric utility (Full cost accounting), machinery and engineering (Identification of environmental costs)/Sultzer Hydro Private/(Xerox Ltd/Packaging use by document company (Product life cycle costing) Private/waste disposal in agrochemicals division (Conventional tracking and allocation)/Xeneca Private/Education/Methodist Ladies College, Perth Private/Plastic Injection/Cormack Manufacturing Private/Internal services to divisions/AMP Services Private/Wool manufacturing e carbonising/Michell Group Private/Banking, Brewery, Energy, Pulp and Paper, Galvanising, Skiing, Water Treatment Private/Particle and fibreboard/Zimboard Mutare Private/Mining, e 4 sectors Private/Poultry, Labels, PVC products, coffee mill, pasta/Pipasa, Etipres, Resintech, Coopronarango, Roma Prince Public sector/Water authority Private/Chemicals/Nitrokemia Private/Cardboard production Private/Steel, health care/POSCO, Yuhan-Kimberley Private/Pulp and paper mill/Mackenzie paper Division, Abitibi-Consolidated Corporation Private/Pulp and paper; railway carriage repair; cardboard manufacturer Private/Pilot projects Private/Survey Private/Wood boards, bricks, wood pulp, oil refining/Co-generation of energy supply in unnamed companies Private/steel, electronics, chemicals/POSCO, Samsung, LG Chemicals Private/conglomerate/Lopez Group Private/9 companies in-depth (includes pollution prevention in four small companies). General Comment: ‘.the casework presented here avoids an explicit accounting of social costs.’ Private/Various/Material flow costing in: Nitto Denko, Canon, Tanabe Seiyaku, Takiron, Nippon Paint, Shionogi

Available at the Department of Environment and Heritage web site http://www.deh.gov.au/industry/finance/publications/project.html. Available by contacting the United Nations Expert Working Group through http://www.un.org/esa/sustdev/sdissues/technology/estema1.htm.

Performance Indicators for Business e Fiscal Year 2000 version. This Environmental Performance Indicators Guideline is interlinked with the Environmental Accounting Guideline and Environmental Reporting Guideline also issued by MOE. The Japan Environmental Management Association for Industry [JEMAI] conducted EMA research between 1999 and 2002, supported by the Ministry of Economy, Trade, and Industry [METI]. The result of this research was published as the ‘‘Environmental Management Accounting Tools Workbook’’ in 2002. After completing this project, JEMAI established the Environmental Accounting Research Center in May 2003. This centre provides general information to help companies promote environmental accounting. In the context of these developments, the following Japanese case studies are considered (see also Table 5 for their positioning in the comprehensive framework): cost analysis e material flow cost accounting e Tanabe Seiyaku;

environmental performance indicators for business e Nippon Oil, Ricoh, Canon Schweiz, and Hitachi; and environmental performance of the product e Hitachi, Fujitsu. 4.1. Site management e material flow cost accounting (Table 2, Boxes 1, 8, 9) 4.1.1. Tanabe Seiyaku Tanabe introduced material flow cost accounting into the pharmaceutical production processes at its Onoda Plant in fiscal year 2001 as part of the METI Environmental Management Accounting Project in Japan. By using material flow cost accounting, Tanabe was able to identify the waste processing costs and processes with large raw material losses. In fiscal year 2002, Tanabe moved ahead with a number of improvements, such as the installation of chlorinated solvent adsorption and collection equipment and changes to the on-site incineration of waste liquids.


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Table 4 Recent environmental accounting development in Japan Date

Project

1999e2001

Environmental Management Accounting Project (by METI) Developing Environmental Accounting Systems: year 2000 report (by MOE) Environmental Performance Indicators for BusinesseFiscal Year 2000 (by MOE) Environmental Reporting Guideline: 2000 version (by MOE) Environmental Accounting Guideline: 2002 version (by MOE) Environmental Management Accounting Tools Workbook (by METI) Guidelines for Environmental Performance Indicators for BusinesseFiscal Year 2002 (by MOE) Environmental Accounting Research Center (by JEMAI) Environmental Report Preparation Standard e Exposure Draft (by MOE) Environmental Reporting Guideline: 2003 version e Exposure Draft (by MOE) Environmental Reporting Guideline: 2003 version (by MOE)

May 2000 Feb. 2001 Feb. 2001 Mar. 2002 Jun. 2002 Apr. 2003 May 2003 Dec. 2003 Dec. 2003 Mar. 2004

METI Z Ministry of Economy, Trade, and Industry, Japan; MOE Z Ministry of Environment, Japan; JEMAI Z Japan Environmental Management Association for Industry.

As a result of the introduction of material flow cost accounting, the cost savings from environmental conservation measures reached 60 million yen per year and chloroform emissions will be drastically reduced. Tanabe uses this method as an effective tool to help make decisions about measures that increase corporate income and reduce environmental burden imposed by the corporation. In fiscal year 2003, Tanabe integrated material flow cost accounting into its SAP R/3 system and expanded material flow cost accounting to all of its factories. This integration facilitates the completeness and accuracy of data. It also makes an optimum allocation of resources and promotion of environmental conservation activities clear within the organization [33,34].

Comment: The developments at Tanabe Seiyaku provide a classical winewin situation for the site management. Focus is on the ex post development of an environmental management accounting data system that will provide relevant monetary and physical eco-efficiency information, rather than on the adoption of regular targeted or future orientated information. The importance of consolidated data for a total picture of material flow costs is highlighted. Also, the monetary advantages from investment in chlorinated solvent adsorption and collection equipment have been made apparent. 4.2. Top management e performance of the business 4.2.1. Nippon Oil (Table 2, Boxes 9 and 12) The Nippon Oil Group implemented environmental accounting as a general tool for information disclosure and business management to ascertain the efficiency and effectiveness of its environmental management. In fiscal year 2002, the Group expanded the scope of its environmental management accounting to include its 16 member companies. In line with this move, the Group began using value-chain-based environmental accounting to show the activities and environmental impact of all group activities. Nippon Oil has implemented an integrated evaluation of its environmental impact in order to make a comprehensive evaluation of its multifaceted environmental activities. An integrated view of environmental impact is used to evaluate the major processes through the oil product life cycle, from exploration and development, to refining, transport, and consumption. Nippon Oil uses the life cycle impact assessment method based on the endpoint modeling (LIME) method developed by the Research Center for Life Cycle Assessment, National Institute of Advanced Industrial Science and Technology (AIST) in cooperation with the LCA project (by the Ministry of Economy, Trade, and Industry [METI], the New

Table 5 Recent Japanese case studies in Environmental Management Accounting Environmental management accounting (EMA)

Past Oriented

Future Oriented

Monetary environmental management accounting (MEMA)

Physical environmental management accounting (PEMA)

Short term focus

Long term focus

Short term focus

Long term focus


1. Tanabe Seiyaku Ricoh Fujitsu Hitachi

2. Environmentally induced capital expenditure and revenues

10. Environmental (or natural) capital impact accounting

Ad hoc information

3. Fujitsu

4. Hitachi

9. Tanabe Seiyaku Nippon Oil Ricoh Canon Schweiz Hitachi Fujitsu 11. Fujitsu


5. Monetary environmental operational budgeting (flows)

6. Environmental long term financial planning

13. Canon Schweiz Hitachi

14. Hitachi

8. Tanabe Seiyaku

15. Hitachi

16. Hitachi

Ad hoc information

Monetary environmental capital budgeting (stocks) 7. Relevant environmental costing (e.g. special orders, product mix with capacity constraint)

12. Nippon Oil


Energy and Industrial Technology Development Organization [NEDO], and the Japan Environmental Management Association for Industry [JEMAI]). As shown in Fig. 2, Chart 1, the environmental impact from petroleum businesses has been steadily declining each year, with the exception of 2002. The greatest environmental impact comes at the product consumption stage, and in order to reduce this, more energy is needed at the refining stage. Nippon Oil is working to improve the quality of the product at the refining stage, and also is striving to suppress any increase in the environmental impacts from refining (see Fig. 2, Chart 2). Nippon Oil analyzed the relationship between the total amount of these environmental impact factors and production, and evaluated the comprehensive environmental efficiency of petroleum operations as follows: Environmental Efficiency Z

Production Volume Total Environmental Impact Factors

As shown in Fig. 2, Chart 3, with 1996 set as the base year for an index beginning at 100, environmental efficiency has improved throughout the eight-year period (see Fig. 2) [35].

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Comment: In this case the close connection between life cycle analysis and PEMA information is established. Across the total life cycle, since 1996, environmental efficiency, based on the above measure, has been improving. However, monetary impacts of environmental efficiency and, hence, eco-efficiency, are not explored. At this stage the potential for an eco-efficiency measure is only implicit in these calculations. The LIME approach aims to bring organizations towards life cycle costing and eco-efficiency measurement, but this remains to be developed. Finally, consolidation of information is, once again, an issue that needs to be resolved for complete data to be presented at the organizational level for all 16 companies. 4.2.2. Ricoh (Table 2, Boxes 1 and 9) Ricoh developed PEMA environmental management indicators to evaluate the level of its sustainable management and facilitate further improvement. Their indicators are based on the following two factors: (1) Economic efficiency of Environmental Conservation Activities. This factor shows whether an environmental conservation activity is conducted in an economically rational way (i.e. in a way that leads to net monetary returns).

Chart 1 Total environmental impact Chart 2 Total environmental impact (Drilling + transport + 7 refineries + (7 refineries only) consumption) (%)

Product consumption Refinery

Product transport Crude oil drilling

100

(%) Co2

SOx

NOx

Soot and dust

120 100

80

80 60 60 40 40 20

20 0

0

96

97

98

99

00

01

02

96

97

98

99

00

01

02

* Nippon Oil measures and manages CO , SOx, NOx, and soot and dust, as well as COD, benzene, toluene, xylene, and other wastes. 2 However, these are not shown in Chart 2 as each of these substances is only found in relatively minute amounts. Source: Nippon Oil (2003), Sustainability Report 2003, p.20.

Chart 3 Environmental efficiency (Group-wide) (%) 110

108.7%

105

100 0

96

97

98

99

00

01

02

Fig. 2. Nippon Oil: environmental impact and eco-efficiency [35].

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Economic Benefits Environmental Conservation Costs Economic BenefitsCSocial Cost Reduction Environmental Conservation Costs (2) Environmental Efficiency of Business Activities. This factor shows whether any income is made when a company conducts business activities (environmental impact/social costs2). Value Added Business Activities Total Environmental Impact ðPhysical or Monetary AmountÞ Based on these two factors, Ricoh calculates the following four indicators (see Fig. 3): Ratio of eco-profit (REP) Z Total economic benefit/total environmental conservation cost Ratio of eco-effect (REE) Z Environmental effect (total economic benefit C total amount of social cost reduction)/total environmental conservation cost Eco-index Z Gross profit (thousands of yen)/total environmental impact amount Ratio of profit to social cost (RPS) Z Gross profit/total social cost For the calculation of social costs, the environmental impact is converted into a monetary value by using the life-cycle impact assessment method. This is based on Environmental Priority Strategies in product design (EPS) Indicator Version 2000, which is an impact assessment method expressed in monetary terms. The reference figure used is V108/t-CO2 (tonnes of carbon dioxide) (U11,945/t-CO2). This figure is almost equal to the Ricoh’s reference amount (U16,000/t-CO2), which is calculated from investments to reduce CO2. Ricoh’s environmental accounting information is used by top management as a tool to measure eco-efficiency e the economic efficiency of environmental conservation activities and environmental efficiency of business activities of the company as a whole [36]. Comment: Calculation of economic efficiency and ecological efficiency in Ricoh precede the calculation of eco-efficiency via the Eco-Index. The period to period trend in eco-efficiency in the reported figures is transparent for the organization as a whole. However, eco-efficiency projections are not revealed. 4.2.3. Canon Schweiz (Table 2, Boxes 9 and 13) Canon is a large Japanese manufacturer of a wide range of products used in the home, offices and industry, including business machines, conventional and digital cameras, lenses, digital video camcorders, semiconductor production 2

Calculation of social costs. In Ricoh, environmental impact is calculated in terms of monetary value. The monetary value of environmental impact is termed ‘‘social costs’’ (the costs of negative externalities).

equipment, television broadcasting lenses and medical equipment, employing over 100,000 people worldwide. Its Swiss subsidiary, Canon Schweiz, is one of the first Japanese related companies to use the Dutch Eco-Indicator 993 to identify the environmental burden related to sales, product maintenance and other aspects of its operations. This is a quantitative, integrated method for expressing the company’s environmental burden throughout the Group. Canon Schweiz uses this information to evaluate environmental activities and to set targets for improvement (see Fig. 4) [37]. However, at this point the parent company, Canon, has not yet adopted this integrated method. Comment: Canon Schweiz has developed a routinely generated, short-term eco-balance measure and target system for assessing environmental burdens of its products and operations. 4.2.4. Hitachi (Table 2, Boxes 1, 9 and 13) Hitachi introduced the ‘GREEN 21 factor’ in order to measure continual improvements and activity progress levels based on specific environmental activity evaluation standards. The factor replaced GREEN 21 Version 2 Sustainability Progress Indicator (SPI) in 2002 with the establishment of their new Environmental Vision e the Sustainability Compass. The distinguishing feature of GREEN 21 Version 2 is that its indicators are based on the Sustainability Compass: Eco-mind & Management, Nature-friendly Products and Eco-factories, Worldwide Stakeholder Collaboration, and Sustainable Business Models. The activity period specified for GREEN 21 Version 2 is fiscal 2002e2005. Hitachi has standardized the items for evaluation and the activity period for both domestic and overseas companies in accordance with the newly revised evaluation standards. The evaluation standards for GREEN 21 Version 2 are divided into 53 performance indicators spread over eight different categories, with each performance indicator graded on a scale from 0 to 5 (negative evaluations are also possible). Level 2 is awarded for achieving the previous year’s activity levels, Level 4 is awarded for achieving the targets set out in their Environmental Action Plan (fiscal year 2005), and Level 5 for implementing activities that exceed these targets. Finally, a coefficient is applied to the evaluation level awarded for each indicator. The full scale for each category is 100 Green Points, with a possible total score of 800 Green Points. The result for fiscal year 2002 evaluated using this system was 377 Green Points (see Fig. 5). In October 2002, Hitachi added environmental activity indicators to their performance evaluation standards, enabling GREEN 21 Version 2 to be used in performance evaluations. Hitachi’s performance evaluation standards provide an impartial evaluation of management results, and were established to measure the improvement of management rules and 3

At the request of the Netherlands’ Ministry of Housing, Spatial Planning, and the Environment, a team of environmental and LCA experts from the Netherlands and Switzerland was assembled to devise a system for measuring environmental impact. This team, working from 1997 to 1999, developed the LCA weighting method known as Eco-Indicator 99.


Fiscal 2000

Fiscal 2001

Fiscal 2002

Ratio of eco profit

1.27

1.21

1.58

Ratio of eco effect

1.61

1.95

1.81

Eco index

538.8

1,204.1

1,423.7

Ratio of profit to social cost

40.9

100.8

108.9

Gross profit (100 millions of yen)

6,133

6,999

7,453

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Fig. 3. Ricoh Group: changes in gross profit and environmental management indicators [36].

regulations and the degree to which organizational revitalization has been achieved. Performance evaluation indicators are a combination of both countable and non-countable items, including profitability, growth, and capital. Hitachi added ‘‘environmental activities’’ to the non-countable indicators to better assess social value. Based on this system, Hitachi conducts equitable performance evaluations for each of its business groups, and uses the results as an incentive to improve profitability and social value by the groups [38]. Comment: The scheme is similar to the Eco-compass. It uses benchmarked figures from the company’s action plan and a weighted scale to derive its green point rating. Furthermore, group performance is linked to the monetary information reported, a slowly emerging aspect of the use of eco-efficiency measures.

measures the volume of greenhouse gas emissions throughout the life cycle of a product and the resulting environmental impact and ‘‘Resource Efficiency’’ indicators, which measure the volume of resources discarded as waste as a percentage of the new resources used to manufacture a product. ‘‘Factors’’ measures the degree of improvement in the environmental efficiency of a product based on a set of bases established using the leading product for 1990, and provides an assessment of a product’s prevention of global warming and resource factors (see Fig. 6) [38]. Comment: Hitachi here uses PEMA information for assessing physical functional efficiencies of its products. Target PEMA information is used in product development decisions.

4.3. Environmental performance indicator for products e application of ‘‘Environmental Efficiency’’ and ‘‘Factors’’ indicators

4.4.1. Fujitsu (Table 2, Boxes 1, 3, 9 and 11) Fujitsu introduced the Eco-efficiency Factor to evaluate both environmental burdens imposed and changes in service performance. Service value is applied to the numerator while environmental burdens are applied to the denominator. Fujitsu measures the relative improvement in new products to past products as follows:

4.3.1. Hitachi (Table 2, Boxes 4, 13e16) Hitachi introduced ‘‘Environmental Efficiency’’ and ‘‘Factors’’ indicators to increase the efficiency of energy and resources used in the functions of its products. ‘‘Environmental Efficiency’’ indicates the value of a product achieved through reductions in environmental impact and resource usage, and is evaluated by testing the function and life span of a product. To help in evaluating the value of its products, Hitachi have developed two efficiency indicator items: the ‘‘Prevention of Global Warming Efficiency’’ indicator item, which

Fig. 4. Canon Schweiz: eco-balance [37].

4.4. Performance management for product

Eco-efficiency Factor Z

Service ðNew product=Old productÞ Environmental Burdens ðNew product=Old productÞ

In fiscal year 2002, Fujitsu expanded its Eco-efficiency factor application to mobile phones and scanners. In the case of scanners, two types of scanners, fi-4110C and fi-4120C, were selected. fi-4110C was first introduced to the market in spring 1999 and fi-4120C was introduced in spring 2002. To quantify the value of the numerator, Service, the scanning function was chosen because scanners only have one definitive function, which is ‘‘scanning’’. In order to define the product function, three types of performance are selected: the optical, media processing, and data processing performance. For these three items, several sub-criteria are selected. Optical performance consists of two sub-criteria e basic resolution and readout speed. Finally, the ratio between the new and old products functions is computed. The figure for Service represented by comparing the scanning function of the new and old products is 2.47. To quantify the environmental burdens, CO2 emissions over the entire product life cycle were selected because CO2

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An example of the Hitachi Green Points evaluation: Category 4 —Eco-products (Manufactured) — evaluates the following: implementation ratio of product assessment, achievement rate of eco-products, achievement rate for the non-lead solder implementation plan, achievement status for the RoHS proposal, planning and achievement status for green procurement and purchasing, green supplier rate, and the reduction of environmental impact during transportation. Category 6 “Eco-factories (Resource Recycling) ” evaluates waste disposal and chemical substance management at operation sites. The indicator “waste disposal” includes: the volume of waste generated, plan for reduction and implementation status for the volume of waste for final disposal, promotion of zero emissions, recycling status for waste discharged from independent sites, and extensive implementationof correct disposal methods. The indicator “chemical substance management” includes: a structure for investigating new chemical substances before they are used, an achievement rate for target values related to the reduction of substances, and a structure for managing stock and its application.

Fig. 5. Hitachi: green points evaluation [38].

emissions are considered to be a proxy for energy consumption. Life cycle inventory analysis was conducted with functional units being based on the use of the scanners over a five-year period. The product life was divided into five stages: Material and parts input, Assembly, Transportation, Use and End of life. The results of inventory analysis undertaken for total CO2 emissions across the five stages, indicated that CO2 emission of fi-4120C were 16% higher when compared with fi-4110C e a factor of 1.16. Based on the CO2 emission ratio and value of the service ratio, the eco-efficiency factor is 2.13. (2.47/1.16) (see Fig. 7). In the fiscal year 2001, Fujitsu also calculated a laptop computer’s Eco-efficiency factor.

Comparison of a laptop manufactured in 2001 with one manufactured in 1998, indicated an Eco-efficiency factor of 7.8, which means Eco-efficiency improved by 7.8 times during the three-year period [39,40]. Comment: The ex post assessment of eco-efficiency is used in both a regular and ad hoc (product by product) way by Fujitsu to assess short run economic and environmental impacts. Given this range of introductory case studies in the context of eco-efficiency information used by Japanese companies it is possible to identify Boxes in the comprehensive EMA matrix that appear more regularly than others. Also, it is evident that examples of some situations are not evident in the sample of cases examined. The development of best practice


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Fig. 6. Hitachi: ‘‘Environmental Efficiency’’ and ‘‘Factors’’ indicators [38].

environmental management accounting and reporting in an eco-efficiency context would require further exploration of situations where EMA is used in Japan, so that all the Boxes in Table 5 could be completed. The tools in Boxes 2, 5e7 and 10 remain to be engaged.

5. Conclusion EMA is an emerging area of interest to the corporate sector. Eco-efficiency is a measure that brings together monetary and

physical information about the environmental performance of companies, and changes in performance over time. In Japan a provisional standard and guideline state that eco-efficiency information is an essential indicator and should be developed by an EMA system and produced in corporate environmental reports. As there is no generally accepted format as a basis for analysis and comparison of business or product eco-efficiency in Japan, at this point leading companies have developed their own ecological-efficiency and eco-efficiency indicators to evaluate their business segments, subsidiaries, processes and


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Example: Application of environmental efficiency factor to scanners The environmental efficiency factor of product B, launched in spring 2002, increased 2.1 times compared with that of product A, launched in spring 1999. (Both models are compact A4 two-sided color document scanners weighing under 4 kg.)

Transitions in values when A = 1 assumed

3.0

2.5

2.5

2.1 2.0

1.5 1.2 1.0 Factor Service 0.5

Environmental burden

0.0

A

B

Fig. 7. Fujitsu: eco-efficiency factors for scanners [39].

products. The government (METI) has introduced initiatives to develop and promote EMA and has now made free EMA tool software available. Tanabe Seiyaku, Ricoh and Canon were all members of METI project. The examples examined, taken from corporate environmental reports, relate to what may be considered leading companies that are developing and promoting EMA in Japan. It is concluded from the analysis in this brief survey of EMA cases in Japan that the practice of linking eco-efficiency measurement with environmental management accounting information is incomplete, and eco-efficiency information is underutilised. Practices are diverse and there appears to be a need for further promotion of EMA and the concept of eco-efficiency if it is to help business move production processes and consumption of its products comprehensively towards sustainability.

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