The Greening of Accountancy

The Greening of Accountancy The Profession After Pearce by Rob Gray

RESEARCH REPORT

17

The Chartered Association of Certified Accountants

THE GREENING OF ACCOUNTANCY: The Profession After Pearce R.H.Gray BSc(Econ), MA (Econ), FCA. Reader in Accountancy University of East Anglia {From 1 September 1990: Mathew Professor of Accounting and Information Systems University of Dundee}

Certified Accountants Publications Ltd, London: 1990

The Chartered Association of Certified Accountants considers this study to be a worthwhile contribution to discussion, but does not necessarily share the views expressed, which are those of the author alone. No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by the author or publisher. Published by Certified Accountant Publications Ltd for the Chartered Association of Certified Accountants, 29 Lincoln's Inn Fields, London, WC2A 3EE

© Chartered Association of Certified Accountants 1990 ISBN No. 1 85011 044 1

"I find it very difficult to sit idly by while certain aspects of conventional economic theory persist in jeopardising [our children and grandchildrensl chances of a reasonable existence on this planet. To fail to see the urgency of our situation; to fail to reconsider the way in which we account for our natural resources and to fail to have the courage and the vision to take a precautionary approach, is to fail our descendants. The chances are they would never forgive us" HRH The Prince of Wales on BBC1 Television and quoted in Radio Times 19 May 1990 p4.

CONTENTS Page 0.

Executive Summary

1.

Introduction 1.1 - The coming of the green 1.2 - The Pearce Report 1.3 - Social responsibility and reporting: Learning from past mistakes. 1.4 - Structure of the report.

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Ecology, Economics and Ethics: What are the real issues? 2.1 - Introduction 2.2 - Ecology: some history and some evidence. 2.3 - An introduction to systems thinking 2.4 - The accountants' systems view 2.5 - The economists'view & its failures 2.6 - Ethics and the environment 2.7 - Conclusions.

21 22 26 29 32 35 39

The environmental pressures for organisational change 3.1 - Introduction 3.2 - Profit and the environment 3.3 - Markets I: Consumers and employees 3.4 - Markets II: Resources, products and eco-sphere 3.5 - Markets III: The financial sector 3.6 - Government and EC influence 3.7 - How business sees the situation 3.8 - Conclusions

41 42 44 47 51 53 54 59

2.

3.

1

7 10

4.

What has the environment to do with accountants , 61 4.1 - Introduction 62 4.2 - The accountant as professional 64 4.3 - The abilities of the accountant revisited 67 4.4 - Reporting to stakeholders 68 4.5 - The Pearce Report and accounting 4.6 - Environmental accounting, auditing and information systems 69

5.

Green Accounting I: Internal accounting & information systems 5.1 - Introduction 5.2 - Organisational change 5.3 - The environmental department 5.4 - Environmental policy 5.5 - The role of information systems

71 72 73 76 78

Page 5.

Green Accounting I: Internal accounting & information systems (COMM) 5.6 - The compliance report and audit 80 5.7 - The ethical audit 82 5.8 - The waste audit 83 5.9 - The energy audit 85 5.10- The emerging issues audit 86 5.11- Environmental impact analysis 87 5.12- The general environmental audit 88 5.13- The financial environmental audit 89 5.14- Other forms of audit - collection of information 91 5.15- The environmental budget 92 5.16- The environmental investment rate (inc. BPEO & BATNEEC) 93 5.17- Environmental asset maintenance 96 5.18- Resource-flow input-output analysis 100 5.19- Conclusions 103

6.

Green Accounting External reporting 6.1 - Introduction 6.2 - The external social audits 6.3 - A brief history of experiments in environmental self-reporting 6.4 - The UN initiative on external environmental reporting 6.5 - Discussion of the UN initiative 6.6 - Further developments 6.7 - A brief reconsideration of the nature of assets 6.8 - Conclusions

7.

Conclusions, recommendations and the way forward? 7.1 - Introduction 7.2 - The environment: crisis or credulity? 7.3 - Experimentation 7.4 - The sharing of experience and ideas 7.5 - Ways of thought 7.6 - Further research

104 106 110 115 120 123 124 127 129 130 131 134 134 135

Appendix A: A Review of the Pearce Report Appendix B: Further information and contacts Appendix C: Annotated Further Reading Appendix D: A note on some law and EC Directives.

137 152 157 159

References and Bibliography

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THE GREENING OF ACCOUNTANCY: The Profession After Pearce EXECUTIVE SUMMARY CHAPTER 1: INTRODUCTION * Reviews the major reasons why environmental issues are now so important on the political and business agenda; * Summarises the present UK government's stated policy on environmental issues, outlines the stated commitment to environmental issues from the Secretary of State for the Environment and summarises the influential Pearce Report; * Compares the rise in environmental accounting with the interest in and experience with corporate social reporting in the 1970s - and warns that this is accounting's second opportunity to take an important innovative stand on a crucial issue. We may not get a third. CHAPTER 2: ECOLOGY, ECONOMICS AND ETHICS * Reviews the main environmental issues currently facing the planet and concludes that much of the 'light green' response is insufficient; * Recalls that all the major ecological problems were known about 20 years ago - only very few chose to listen then; * Introduces systems theory and employs it to link accounting with environmentalism. This demonstrates the limitations of the accounting perception of the world, the problems this causes and what must be done to overcome it; * Shows that traditional accounting is rigidly tied to an economic view of the world; * Demonstrates some of the social, environmental and ethical failures of modern economic thought.

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THE GREENING OF ACCOUNTANCY

CHAPTER 3: THE ENVIRONMENTAL PRESSURES ON ORGANISATIONS

* Reviews such evidence as exists for the impact on organisations of green consumers, employees, products, suppliers, taxes, investors, laws; * Summarises the Touche Ross and the CBI surveys of business attitude to green issues; * Finds that neither the pressures nor the reactions are especially profound seemingly because either (a) people do not know what to do and/or (b) people do not really believe/care that it is possible that the planet may soon cease to support life. CHAPTER 4: THE ENVIRONMENT AND ACCOUNTANTS

* Argues that if accounting is to become a profession, issues like the environmental crisis must be given a high priority; * Argues that accountants probably over-rate their talents to attach financial numbers to things but under-rate their talents with information systems and evidence, as well as our potential for communication, integrity, independence etc.. Thus, with a change in perspective, accounting may be much better able to cope with environmental accounting than it is with accounting for brands, for example. * Re-examines the central feature of the Pearce Report - the notion that capital needs to be split between man-made capital and natural capital in order recognise substitution of one for the other to maintain inter-generational equity. This idea is well accomodated within the activities of asset accounting and capital maintainence which are both central to traditional accounting practice. The accountant must be able to contribute here. CHAPTER 5: GREEN ACCOUNTING I

* Suggests ways in which internal accounting and information systems may be able to contribute to organisations seeking to be more environmentally sensitive - these are summarised in the following Figure 0.1.

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EXECUTIVE SUMMARY

FIGURE 0.1 A SUMMARY OF THE CHAPTER 5 PROPOSALS . SOME POSSIBILITIES FOR MORE ENVIRONMENTALLY SFNSTITVE INTERNAL ACCOUNTING AND INFORMATION SYSTEMS * Development of an environmental department * Development, adoption and communication of a detailed Valdez Principles represent a good first stage. * Institution of regular monitoring, reporting and auditing of legal compliance. * Development of the compliance audit to encompass the ethical * Institution of regular and systematic identification, monitoring, reporting and audit of waste. Consider re-definition of waste as by-product for re-cyclin Develop the energy audit Consider the possibility of a full * Monitor emerging issu * Develop a regular mechanism for conducting environmental impact analysis and incorporating the results into all board and senior management decisio Consolidate the foregoing (Plus other strategies into a full environmental audit specific to each organisation: * Establish the regular and systematic financial recognises the new and emerging price structure. * Consider other possibilities 'elated to the third world response to ethical investment; etc., etc. tal budgets for activity cen * Introduce environmental hurdle rates for new investments. Recognise the reality of BPEO

and BATNEM * Develop a new classification of assets to recognise man-made natural and critical capital. Denlop environmental asset accountin,g and maintenance ,

* Consolidate this all with the development of Resource-fiow input-output analysis.

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FIGURE 0.2 A SUMMARY OF THE CHAPTER 6 PROPOSALS SOME POSSIBILITIES FOR MORE ENVIRONMENTALLY SENSII1NE EXTERNAL ACCOUNTING AND REPORTING SYSTEMS * Note that if one's own organisational reporting is not sufficient one may find oneself the subject of =mai social audits. * There is a very wide range of previous experiments from which to learn and upon which to build further experiments * The current United Nations initiative offers a practicable and realistic policy option upon which external environmental reporting could be based. The initiative suggests that each organisation might include in its Annual Report # the organisation's environmental policy; # the capitalisation of environmental expenditures; # specific identification of environmental contingent liabilities relating to (a) bringing the organisation into line with current regulations and (b) future potential liabilities such as site clean-up costs; # disclosure of current period expenditure on environmental protection # disclosure of anticipated environmental expenditure in excess of that classified as contingent liabilities -'both voluntary expenditure and that designed to satisfy current and future regulations; # disclosure of organisational activity and performance. * A more specific approach to the disclosure of activity and perfonnance would be the production and disclosure of a systematic compliance-with-standardreportwhere standards would consist of (a) legal standards; (b) anticipated legal standards plus EC directives not yet incoTorated into UK law; (c) industry best practice standards; (d) the organisa.tion's own ethical/code of conduct standards where these are in excess of (a), (b) and (c). * If reporting is to reflect the extent of the environmental issues and to fully operationalise the Pearce Report, then it will be necessary to re-define the nature of assets and to disclose (a) man-made, natural and critical capital assets; (b) transfers between categories of assets; and (c) data on the main*Pnance of critical and other natural capital assets:

EXECUTIVE SUMMARY

5

CHAPTER 6: GREEN ACCOUNTING 11

* Examines the experience with corporate social reporting and with the external social audits; * Reviews recent proposals from the United Nations and makes some proposals based upon this. These are shown in Figure 0.2 (above). * Returns to one theme of Chapters 4 & 5 namely the need to re-define capital and the implications this has for types of assets. Again see Figure 0.2. -

CHAPTER 7: A WAY FORWARD

* Experimentation seems urgent because so very little is currently known about the organisation/accounting/environment interaction and the matters are pressing ones. Organisations are encouraged to begin experimentation urgently and to work closely with a range of researchers on these issues to enable a wider monitoring of the processes and their effects and to provide a semi-independant input (and perhaps even a transparency) to the process. * It is recommended that the professional accounting bodies continue - and firmly establish - the processes they have started: in encouraging research into environmental accounting; in the formation of working parties to consider environmental issues; and in the arranging of conferences on accounting and the environment. These issues require as wide a range of minds on them as possible and must be as fully integrated as possible into conventional ways of thinking. * It seems essential that new ways of thinking - first about traditional accounting practice and second about how accounting can begin to incorporate environmental matters - be explored and incorporated into the accounting orthodoxy. This report has offered one such starting point. * The dearth of knowledge about the issues speaks clearly in support of the desperate need for research into the field.

PREFACE The publication in 1989 of the Pearce Report and its endorsement by Chris Patten, Secretary of State for the Environment, represented a major milestone in Britain's environmental policy. The Chartered Association of Certified Accountants not only recognised this but further inferred that full implementation of the Pearce Report might not be possible without both a voluntary response from organisations and, especially, some new environmental accounting systems to support them. A meeting with the very busy Professor Pearce was arranged early in January 1990 and the Association's broad inference was recognised as probably correct. Some possible ways in which accounting might respond were discussed. As a result, ACCA commissioned research at the end of January 1990 to broadly answer the question - "how can accounting contribute to the implementation of the Pearce Report?" with a second, more reactive question underlying it "how is this increasingly green world going to affect accountants?". This Report is the result. There are many individuals whose assistance I would like to acknowledge. Anthea Rose, Mary-Louise Wedderburn and, especially, Roger Adams of the Association have given considerable help and support throughout the four months of this project. Dinah Thompson worked as the researcher on the project and her considerable expertise, insight and energy were essential to the completeness and breadth of this report. She is responsible for much of the literature summarising and, in particular, prepared briefing papers on such matters as the legal aspects that appear in Appendix D. I must express my continual gratitude (and astonishment) to Sue Gray who read each draft and commented fully on both the structure and the detail of the project. Finally, my thanks to Kerry Turner who gave such supportive advice early on in the project and to Peter Carty for bringing various developments to my notice. I would finally like to acknowledge the impact of Peter, David, John, Lyn and Daniel without whom the report would have been finished very much earlier but without half the fun. At the risk of sentimentality I would like to dedicate the report to Michael, Christopher, Rachael, Kate, Graham, David, Lois, Rhiannon, Katy, Michael, Geoffrey, Alexa, and all the other children from whom we have borrowed this world and who might well wonder whether there will be anything left when we hand it back to them.

CHAPTER 1 INTRODUCTION 1.1 The Coming of the Green In 1988, one would probably have been hardpressed to have found anyone in the UK - other than active environmentalists of one sort or another - to whom the adjective 'green' meant much beyond the colour you get when yellow and blue are mixed. By the end of 1989, 'green' had entered the common parlance and now meant something like 'environmentally friendly'. And suddenly everyone was 'green' - there were green votes to be had; green consumers popped out of the closet; products were green; advertising went green; ethical investment trusts got a green dimension; Britain got a green Minister of State for the Environment, a green Bill, the possibility of green taxes; and Mrs Margaret Thatcher, the UK Prime Minister gave a speech to the Royal Society in September 1989 in which she became green too. What had happened? Where had it come from? Was it all hot air to be ignored until it floated away? Had anything really changed? And most particularly, had this anything to with accountants and if so, what? Whilst there was undoubtedly a considerable amount of 'hype' surrounding the apparent escalation in green consciousness, the sheer volume of concern suggested that something had changed in the UK. It was as though the UK had finally woken up to the facts of the environment and realised that the ozone layer, global warming, acid rain, the disposal of both toxic and nonhazardous waste, deforestation, the decline in bio-diversity, the threat to habitats and so on, were neither isolated phenomena nor phenomena which would go away if ignored. It seems that there were four, closely related, key

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manifestations of a genuine change in consciousness. * FIRST: worldwide concern about environmental issues had been growing for over thirty years. The most visible manifestations of this were the Club of Rome's commissioning of the Limits to Growth study in 1968 1; the UN Conference on the Human Environment in Stockholm in 1972; the 1987 European Year of the Environment; plus the publication of the UN's "Brundtland Report" of the same year 2. At a more subtle level it seems that the increasing scale of environmental disasters - Bhopal, Chernobyl, Exxon Valdez etc., - had been slowly raising general awareness of the scale of man's impact on the environment and the inter-related nature of environmental incursions. This seems to have been amplified by both the developments in Eastern Europe as well as by a growing recognition of the desperate inequality between the developed and developing nations. Finally, and more specifically, for many countries throughout the world, environmental awareness had been steadily becoming a way of life and this was bound to spread to the UK eventually. * SECOND: Britain was to join the single European market in 1992. The EC

in general and many of the member nations in particular had established much higher environmental standards than was the case in the UK. Britain's membership would require a considerable reappraisal of her environmental position.

1

See Meadows et. al. (1972).

2

See United Nations (1987), Our Common Future.

CHAPTER 1: INTRODUCTION

9

* THIRD: The UK government had appointed a Minister of State (Chris

Patten) at the Department of the Environment (DoE) who was publicly committed to an improvement in the UK's environmental position and who had appointed as economic advisor, Professor David Pearce, a man long committed to the cause of environmental protection and enhancement. The publication of Blueprint for a Green Economy (The Pearce Report) with the endorsement of the DoE, the subsequent Environmental Protection Bill, the many public utterances by Patten in support of environmental protection and enhancement, the many DoE and Department of Trade and Industry (DTI) initiatives encouraging environmental protection and the promise of a significant Environmental White Paper in the autumn of 1990 all lent considerable support to belief that a change of some significance was in the wind. * FOURTH: In addition to the vast increase in words expended in the media

and elsewhere on all matters green, there were many substantive additions to the UK's green landscape. Magazines such as New Consumer and Green Magazine were launched; the Green Party became more visible and the Green Alliance was born; green ethical investment funds were launched; organisations such as John Elkington's Sustainability took off; and by 1990, the British Institute of Management, the Confederation of British Industry, the Chartered Association of Certified Accountants, the Chartered Institute of Management Accountants (to name but a few in addition to all the government sponsored schemes) all had serious green initiatives running. The sheer substance of all this effort strongly suggests two things -

10


(i) many people and organisations appear to believe that either the environmental issues are crucial or that it is crucial to be seen to so believe; and (ii) all this effort seems bound to produce substantive change of some sort, whether such change was desired by the initiators or not. Either way, it would seem that environmental issues are now firmly on the agenda and the relevant questions must therefore be what do we do about it? This report attempts to begin to answer this question. And is all this anything to do with accountants? Chapter 4 will address this question in some detail but the existence of this report and its sponsorship by ACCA rather suggest that the answer to that question must be "yes". Just as a crude indicator, it is interesting to note that the UK professional accountancy press have carried 20 explicitly 'green' articles (which I know about) in the last twelve months or so. One would struggle to find that many in total in the previous twenty years! And, in addition the efforts of ACCA, LIMA and ICAEW suggest that this time the issues will not be left to wither away. But more of this in section 1.3 below.

1.2 The Pearce Report "The market and political pressures on bu..sirtess to be green are petvasive. It is the .depth and breadth of this pressure which tells you clearly it is not going to go away. It is not a passing fad. Indeedi am quite confident that it will continue to gather momentum".. = Source: Chris Patten, Secretsry of State for the Environment, speaking at the Business and the Environment Conference organised by Coopers & Lybrand Deloitte and The Times, March, 1990.


11

In the commentaries on the rising greening of the UK, it has been recognised that the combination of Chris Patten and David Pearce is probably the most crucial factor. Patten's commitment to environmental issues seems substantial. Its first major public manifestation was the publication of the UK's environmental policy and objectives. The policy aims are summarised in Figure 1.13. The policy aims - and the measures designed to implement them - have a considerable emphasis on discussion, awareness, research, persuasion and voluntary efforts whilst less emphasis is placed on regulation and direct intervention. And it is within this framework of policy that Chris Patten appointed David Pearce as his personal economic adviser. Professor Pearce has a considerable experience in environmental economics and, with his conventional attachment to traditional economic market solutions, made an ideal choice for the DoE. Pearce was commissioned by the DoE to produce a report on environmental economics with suggestions as to direction for the future. Blueprint for a Green Economy (The Pearce Report) is the result. The Pearce Report has attracted considerable media, business and academic attention and looks set to be an especially influential document in the immediate future. Both its main thrust and its recommendations have been widely endorsed by Patten and there seems every chance that much of the Report will find its way (eventually) into law. The main themes of Blueprint for a Green Economy are shown in Figure 1.2 below and a more substantial review of the document is provided in Appendix A at the end of this report.

3

Figure Li is adapted from Sustaininzpur Common Future (London:DoE) 1989. Pearce, Markandya and Barbier (1989).

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FIGURE 1.1 UK GOVERNMENTS ENVIRONMENTAL POLICY AIMS Sustainable Development ... To-give practical effect to policies based on sustainable development. Raising Awareness: - To continue to encourage rising levels of awareness, especially on the need for policies of sustainable development - in an informed and balanced way - throughout all sections of society, both domestically and internationally. Institutional Framework To take steps to ensure that environmental considerations are fully reflected in economic policy-making across the range of UK government policies as well as internationally. - To support the urgent strengthening of the UN Environment Programme and the on-going work of the Intergovernmental Panel on Climate Change and other environmental activities within the UN. Clir'nate Change: - To support efforts to reduce uncertainty about the nature and consequences of climate change. - To promote efforts to introduce effective internationally-agreed response measures to constrain climate change, in the light of emerging scientific and other data. Tropical Forests: - To support efforts to arrest the destruction of rainfore.sts. To direct more UK overseas• aid to encourage the wise and sustainable use of forest — resources in developirig countries. - To support the Tropical Forestry Action Plan and the International Tropical Timber Organisation. ' To encourage additional forestry research, Ozone Layer: - To support efforts to phase out the production and consumption of CFCs and carbon tetrachloride by the end of the century and of halons by the year 2005; and to limit the production and consumption of methyl chloroform.


FIGURE 1.1 (Cont'd) UK GOVERNMENT ENVIRONMENTAL POLICY AIMS (Cont'd) Waste Management: - To promote efforts by industry, commerce and individual householders to conserve valuable raw materials, reduce damage to the environment and, save money, by minimising or preventing wastes, especially at source. - To encourage UK companies to adopt an environmental strategy which by use of appropriate techniques and technology minimises waste and pollution before, during and after the manufacturing process and which encourages recycling of process or product residues and ensures safe disposal of waste. - To encourage industrialised countries to become self-sufficient in disposing of toxic and other wastes. Energy: - To minimise the environmental impacts of energy production by:* seeking world-wide, consumer prices which reflect the full cost of energy production and use and the removal of artificial barriers (including subsidies and other distortions) to energy trade; * promoting energy efficiency, especially through the use of new'technology and better energy management; * stimulating research and development of clean combustion technology and the development and use of non-fossil fuel and low-carbon energy sources, particularly renewable and nuclear energy. Industrial Development - To stimulate enterprise and promote continuing growth consistent with the principles of sustainable development. - To raise the level of awareness of environmental issues within business. - To encourage firms, where appropriate, to include environmental considerations in their corporate strategy and management decision-making - To ensure that new environmental controls strike a fair balance between environmental benefit and economic cost, and that regulation works with the grain of market forces and good business practice. - To promote waste minimisation and efficient disposal of waste. - To encourage business to adopt an integrated environmental strategy for waste management, dean and low waste technology and pollution control. - To encourage the development of technologies and techniques enabling the cost effective implemenation of internationally agreed standards of environmental controls; improvements in those controls; and the development of safe substitutes for'known pollutants.

13

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UK GOVERNMENT'S ENVIRONMENTAL POLICY AIMS (COMM) Transport; - To support international efforts to mitigate the effects of transport on the environment, particularly with regard to the reduction of vehicle emissions, especially of CO2, to mitigate pollution and the 'greenhouse effect". - To minimise adverse environmental impacts in considering the choice of basic location and detailed alignment of road schemes. Agriculture; - To seek to achieve a reasonable balance between the interests of agticulture, the economic and social interest of rural areas, the conservation of the countryside and the promotion of its enjoyment by the public. North Sea: - To cooperate with the other seven North Sea, states to protect and improve the condition of the North Sea and to use it sustainably. Countryside and Wildlife Conservation: - To assist in safeguarding and enhancing the British landscape particularly in National Parlcs, National Scenic Areas and Areas of Outstanding "Natural' Beauty. To promote the conservation of the variety of British wildlife. Water Itesources: To secure the continuing provision of wholesome and sufficient water supplies, resources and to improve the quality of drinking water. - To maintain and improve the quality of fresh water, estu aries and coastal bathing -

Global Population: Helping countries identify ways to tackle - Encouraging the wmic of muldlateral and population pressure; - Promoting open international discuss'

ation issues; es on the links between environmental degradation issues in development

International Debt - Support for the internationally agreed debt strategy to encourage solid commitment to adjustment policies-that will bring economic growth and restore debtor countries to creditworthiness. "

. e

International Conservation of Species and their Habitats: Supporting international efforts to secure the sustainable management of threaten fauna and flora and their habitats.


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There are two elements related to the Pearce Report that should be highlighted at this stage. First, the report concentrates on market-based rather than regulatory mechanisms. Not only do many environmental economists argue that market-based mechanisms are more efficient than regulatory ones but they are ideologically preferred by the government as they, it is argued, enable choice and the free operations of markets to bring about the change in (for example) consumption habits. The most popular form of market-based mechanisms in this context are various taxation initiatives - of which more in Chapter 3 of this report. The second point worth highlighting at this point is the considerable influence which the report has on the Secretary of State. Chris Patten in various speeches - such as that reported at the Business and Environment Conference (see extract above) and even more obviously in a speech entitled "Ethics and the Environment" given on 12 March 1990 - has demonstrated a wholehearted endorsement for the approach, analysis and solutions laid in Blueprint for a Green Economy. To this, Patten has added commitments to 'green-labelling' of products, national environmental audits and business/government partnership initiatives but the essential message of Pearce has remained intact. (Chapter 2 will return to the role of economics in environmental protection. See also Appendix A). 1.3 Social Responsibility and Reporting: Learning from past mistakes Rising in parallel with, but rather less dramatically than, the rise in green consciousness has been a re-emergence of the issues of social responsibility

and alongside that, a relatively new development for the UK, a growth in apparent concern over business ethics. The conjunction of all three perhaps points to a significant change in attitude to organisational life or at least a

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FIGURE 1.2 THE PEARCE REPORT: ITS MAIN THEMES

The 'Pearce Report' is '.a revised version of a report commissioned by the UK Department of the Environment and distils the wisdom of twenty years research and discussion about the essential tension between economic growth and protection of the environment. For many environmentalists economic growth and environmental protection are incompatible. Pearce argues that this is not so and:explores the notion of 'sustainable development' and ways in which it might be achieved by 'market' solutions. Sustainable Development requires that we identify both man-made capital and environmental capital. Additions to man-made capital frequently involve diminution in environmental capital. Our national (and organisational) accounting systems do not account for this diminution in environmental capital and so we impoverish the natural world in our pursuit of accretions to man-made capital. Sustainable development requires that we account for diminutions in environmental capital and only permit such diminution when we can demonstrate that the loss of environmental capital for future generations is compensated by additional man-made capital. The major criticism of Pearce is on the question of whether environmental capital can be replaced by man-made capital - are there elements of the environment which must remain inviolate? Pearce's Proposals to prevent the erosion of environmental capital fall into three broad categories - the details of which are still being explored. First, there is a need to change the method of National Income accounting to account for changes in environmental capital; Second, there will need to be market interventions but which 'go with the grain of the market'. That is, Pearce argues that regulation of the market is 'inefficient' and that what is required is a menu of market:incentives (similar in nature to the differential tax on unleaded petrol).. These incentives would be based on the 'Polluter Pays Principle' and would include tax incentives and penalties„ stibsidisies and suchtbings as tradable pollution licenses. Third, the government will encourage 'organisations to undertake experimentation and initiatives through partnerships between government and private sector consultants and environmentalist groups. (Source: D.W.Pearce, A.Markandya, 'E.B.Barbier Blueprint for (London:Earthscan) 1989.

It

Green Economy


17

rising concern about a number of its less pleasant and more dramatic manifestations. Recent history would counsel a less sanguine response, however. The social responsibility debates of the early 1970s looked dramatic and appeared to signal a substantive reappraisal of organisational life but, leaving only a small legacy, the energy passed away quite rapidly. It is worth briefly rehearsing some of the experience of that period as a background to the present changes'. Serious questioning of the traditional role of business emerged in the mid 1960s in the USA and, in particular, of the business-society relationship 6. By the early 1970s in the States, social responsibility had become an important part of the landscape illustrated by: widespread debate on the subject; significant public figures arguing for and against the idea; major companies appointing vice-presidents for social responsibility; the development of codes of practice; the emergence of the issue in the business schools; the emergence of organisations such as the Council for Economic Priorities; all set in an atmosphere of serious ecological concern -especially the mid-1970s fuel crisis. The apparent seriousness of this atmosphere of change was emphasised by the calls for, and the eventual development of, "social audits". The experience of these social audits is perhaps the major legacy left for us by the social responsibility debates of the 1970s. (They will be considered in more detail in Chapters 5 & 6). The social responsibility debate was never as lively in the UK as in the States. It perhaps hit its peak (or hillock, more accurately) with the then Prime

5

This theme has been explored in more depth in Gray (1990d)

6

See, for example, Drucker (1965) and Davis & Blomstrom (1966).

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Minister, Ted Heath's "Unacceptable Face of Capitalism" speech. The depth and earnestness of the debate is best illustrated by the Confederation of British Industry's confident and bland The responsibilities of the British public company'. Concern did linger for a whiles, but there was little evidence of serious organisational change. (See Chapter 2, for more detail). Despite a widely-spread rhetoric (particularly concerning 'social audit') it left a very small legacy. Organisations sprang up, much like now, offering and encouraging social audits', and the concern for corporate social reporting (as it was, and is, more widely known) got as far as White Papers and Green Papers and, however briefly, even onto the agenda of the accounting profession'. The only real experience in the public domain from this time arose from the work of independent organisations such as Social Audit Ltd and Counter Information Services'. The briefest of examinations will show that voluntary corporate social reporting by UK organisations provides very little substantial experience from which to build future reporting methods. (See Chapter 6 for more detail). Speculation about why the social responsibility debate and the calls for and experiments with corporate social reporting had so little observable influence on the substance of organisational life and the society-business interface are beyond the remit of this report. However, in what follows, it would be well

7

Confederation of British Industry (1973).

8

See, for example, British Institute of Management (1977).

9

See, for example, Humble (1973) and Hargreaves & Dauman (1975).

10

11

See Cmnd 5391 (1973), Cmnd 6888 (1977), Cmnd 7654 (1979) and Accounting Standards Committee (1975). For more detail see Medawar (1976) (1978), Frankel (1978), Ridgers (1979), Gray Owen Maunders (1987, Ch.7).


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to learn from the 1970s and remember that all the rhetoric in the world, all the promises of legislation, are insufficient to actually achieve anything in the way of change. Of course, that may be precisely the purpose of the hoo-hah in the 1970s - all talk in order to do nothing. The same opportunity offers itself again. It would be foolish to let such an opportunity slip away a second time and, one rather suspects, the business world and the accounting profession are unlikely to get away with it quite so easily this time. 1.4 Structure of the Report This report attempts to suggest how accounting and the accounting profession may set about contributing to the urgent process of environmental protection. It is based upon two major assumptions: that accountants have much to offer in this field; and that, in general, the environmental debate has been held on too narrow a front. The report therefore introduces a fairly wide review of environmental issues in Chapter 2 before moving in towards organisations and then accountants in Chapters 3 & 4. Chapters 5 & 6 review the various possibilities open to organisations wishing to become more environmentally sensitive and, within that, the possible areas of involvement of accountants are considered. Chapter 7 provides a summary, a conclusion and some tentative recommendations for both policy-making and for future research.

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Gambling (1977) has called social responsibility The froth on society's coffee - an issue which rises in a time of plenty and disappears when recession or somesuch is mooted. The late 1970s in the UK were a time of purported recession and this could be used to explain away the decline in interest in social responsibility. At the time of writing, there is much talk of the UK heading into another recession.

20


The report is predicated upon a very positive approach to the issues. The assumption is that environmental issues are critical and the only question of relevance is "what can accountants do to help?". Whether or not this is our territory is of little concern when faced with the enormous importance of environmental issues. We, as accountants, will contribute - but how?

CHAPTER 2 ECOLOGY, ECONOMICS & ETHICS:1 WHAT ARE THE REAL ISSUES? 2.1 Introduction One popular view of man's history is as an attempt to create an independence from the constraints of physical nature - to see man's history as a struggle for technical solutions which will provide victory over - and freedom from - a hostile and limiting environment. It seems perhaps that man has always seen the environment as an alien, hostile force from which the species must wrestle, cajole and force the requirements for human physical life. To a degree, Western man has been successful. Our urban lives may now be lived with negligible regard for weather, night & day, distance, or location. Rich western man may partake of the same urban life at almost any point on the globe independent of the characteristics of the local environment and freed from any concern about food, shelter etc.. There is a sense in which man is the victor over nature. The victory is, however, very partial and will be very short-lived. How partial and how short-lived is ultimately a question of fact - how long will the species survive on planet Earth? is indeed an empirical question but not one that most environmentalists believe we should put to the test. And this is the essential

The title of this chapter is similar to that of a text of readings from Daly (1980). This chapter echoes many of the points made there and the book is recommended for further coverage. 2

See, for example, Dickson (1974) for exploration of this view.

22


problem in the discussion of environmental issues - how crucial (even only in terms of human survival) are the environmental warning signs? As with so many aspects of human debate, there are a great many views with differing perceptions on what constitutes relevant evidence and how that evidence should be weighted. This chapter will attempt to introduce some of this evidence and explore the ways we think about it. An important part of this is perception - the way we think about things crucially influences the answers we find. This chapter will argue (and assert, I suppose) that our thinking is greatly influenced by implicit concepts of economic life and ethical life and that these concepts both prevent us from reflecting upon the many of the essential issues and, when we do so reflect, lead us to only partial recognition of the issues'. Further, the chapter will suggest that we need to adopt a wider and softer perception of the systems of which we are part. 2.2 Ecology: Some History and Some Evidence

No citizen of the West in the late 1980s, early 1990s could be unaware that there are some significant environmental issues that need addressing. But how significant? The 'light green' response that seems to pervade government and business in, particularly, the UK and USA, suggests that the issues can be dealt with in much the same way as we deal with inflation or accounting for brands - something with which we can experiment and, eventually, get it right (enough) or else the issue will go away for a while. That is, something soluble without any radical re-think or re-structuring of the ways we do things. The 'deep green' response is that the human race, 3

This point is examined in detail in Tinker et. al. (1982).

CHAPTER 2: ECOLOGY, ECONOMICS AND ETHICS

23

including its future generations (if we have any), has only one chance to get this right, that chance may already have passed and the costs of getting it wrong include an awful lot of dead grandchildren. Consider the factors that we know about and (in general) appear to be able to agree about in principle': * there is a hole (s) in the ozone layer which surrounds the planet. The effects of this are disputed but it seems uncontestable that (a) this is not 'a good thing'; (b) it is getting worse and likely to carry on doing so for some time; (c) we cannot repair it, nor are we likely to be able to do so in the near future. * the planet appears to be warming up. This will probably affect weather patterns, have a profound impact on food production and lead to a rising in sea-levels. Whether this is the result of all the gases that we are pushing into the atmosphere and the resultant greenhouse effect or simply a cyclical abberation depends upon whom you believe. In either case, it is unlikely that man can do anything about in the immediate short term. * the planet is being deforested. Throughout man's history the proportion of the world covered by trees has dropped steadily. In the recent past this has risen to an almost exponential decline. Deforestation is related to, inter alia, the balance of gases in the air (notably oxygen and carbon dioxide and thus the 'greenhouse' effect), soil erosion and water tables. Reforestation is not something that can be achieved in the immediate short

4

These matters are covered, for example, in United Nations (1987). For more detail, there are many, many sources. For example, MacKerron (1988) and Ross et al (1984) cover global warming, Adam (1988) talks about eco-diversity in the Amazon, 'Rimer (1987), (1989) talks about wetlands, Krohe (1984), Magnet (1983) and Chester (1990) talk about acid rain whilst Bruce (1989) touches many of these topics together with deforestation, ozone layer and toxic waste.

24


term. The level of forestation also has a profound effect on bio-diversity. * bio-diversity is falling at an astonishing rate. It is currently estimated that one species of life now becomes extinct every hour. The range of habitats is being depleted at an increasing rate and each extinct species takes with it other species dependent upon it. Man is probably one of those species. Extinction of life cannot be reversed. * toxic and radioactive waste are growing in quantity. There is no absolutely safe way of storing such waste for the eons necessary to allow it to reach a life-benign state. This waste ensures that parts of the planet must remain inimical to life for the foreseeable future. * non-toxic waste is becoming a serious problem. What can one do with it? There is now so much generated by the developed economies that they are rapidly running out of places to put it. Storage of waste carries with it an opportunity cost in terms of the land and other facilities used (often on opportunity cost of nature). It also carries a possibility of further environmental damage arising from unforseen effects arising from, for example, chemical degradation or some unexpected chemical cocktail combination of disposed-of substances. * rain is increasingly inimical to life as it carries too high a concentration of acid from air pollution. The impacts of acid rain are considerable and irreversible certainly in the short term and possibly in the long term. * resource depletion, noise, desertification, low lying ozone, pollution corrosion of buildings, over-fishing, pollution of the seas, overpopulation, etc

etc.

Such lists can be expanded but the exercise is a depressing one. Now the


25

question is: is it simply excess gloom that encourages one to see these things as connected, crucial and critical? or are the issues of only marginal importance? There are commentators who believe that the environmentalists are 'crying wolf' and/or that normal market activity will resolve the issues'. On the other hand, the recent recognition of the above list of problems should not distract us from the fact that many environmentalists have been saying that these things were problems for 20 or 30 years. That is, just because they arrived upon the agenda in 1989 does not mean that these are new problems - every environmentalist knew about these things 20 or more years ago. This means two things: those who predicted the problems we now face, although marginalised until very recently, have been largely proved right so far; and if they were problems 20 years ago they must be critical now. Environmentalism has been around for very many years' but it was not until the 1960s that it became recognisable as a 'movement'. A growing general awareness appears to date from the publication of a series of seminal books throughout the 1960s and early 1970s - books which are as urgent today as they were then, which have proved to be prophetic, and which, in retrospect, seem eminently cautious and well-reasoned'. These writings See Jones (1974) and more particularly Simon (1981) and Smil (1987). 6

7

John Stuart Mill, one of the founding fathers of modern economics, spoke in favour of the steady state (no growth) economy and recognised the limitation upon a desirable human life that would result if all of nature was subjected to actions measured exclusively in terms of their economic consequences (J.S.Mill, 1857). More recently, but still 40 years ago, Kapp was arguing about the destruction of the environment and the depletion of non-renewable resources (Kapp (1950/1978). Environmentalism is usually dated from Rachel Carson's Silent Spring (1962) which was closely followed by Ward's Spaceship Earth (1966). Other significant publications include Boulding (1966), Commoner (1971), (1972), Ward & Dubos (1972), MIT (1972). Schumacher is perhaps the best known of the characters of this period (see, for example, 1973). The matter is perhaps given context by reference to Goldsmith's excellent Blueprint for survival (1972) of which The Sunday Times said "Nightmarishly convincing...After reading it nothing seems quite the same any more" and The Observer said ".. an extraordinarily important document". In a wider sense, its influence has been negligible.

26


were marginalised, often trivialised as the work of a 'doom and gloom' brigade and their impact on government and business, in the UK particularly, has been small. Presumably because environmental issues are quite unlike any other kind of problem, because the critical manifestations are relatively slow to emerge in an increasingly speedy world, because they seem difficult to think about and because addressing them requires an acceptance that (a) the evidence is evidence and (b) our lives will have to change (to some degree) to solve the issues, environmental issues have been dismissed from serious debate. It would probably be a tragedy if that were to happen again. One way to try and prevent that lies in the way we think about issues. This is addressed in the next few sections. 2.3 An Introduction to Systems Thinking

Systems theory is primarily a way of thinking about the world, about problems, about activities, about things. It has two principal characteristics. First, one recognises that all things are connected and thus total understanding of any one thing requires a complete understanding of all other things. Second, one recognises that such complete understanding is impossible and that issues must be addressed through the consideration of bounded sub-systems - a complex process by which the universe of all possible events or things is reduced to more manageable systems, at a higher level of resolution. The selected sub-system is chosen by reference to the question of influenceability:- given the issue of concern, what are the major sources of influence upon it and what are the major elements in the environment upon which the issue in turn has influence. This process, inevitably involves leaving issues of significance outside the systems


27

boundary and a major concern of systems thinking is attempting to identify the violence done to perception through the essential limiting of the elements considered in any subsystem'. Systems thinking has had a major influence on ecology and environmentalism and whilst it has had only a slight influence on accounting there are sufficient articulations of the accountants' perspective from a systems point of view for us to draw the two together for comparison'. The ecological view is perhaps best illustrated by the photographs of planet Earth brought back from the US space missions and which image (of 'Spaceship Earth') has been used by Ward and by Boulding 10. The image of the Earth hanging in space illustrates the way in which our 'habitat' is finite and whilst It is not a 'closed system' (subject as it is to, principally, the sun and the moon) it can be so considered for most purposes. That is, the Earth is a subsystem of the universe and whilst there is influence between the two, examination of most (for example) human issues from a planet-based level of resolution is unlikely to represent a serious limitation on any analysis. The sub-system Earth is a complex inter-reacting set of systems which support life. There are various sub-systems of rain, cloud and water; of

There is a considerable literature on systems thinking. Some of the early, seminal work by von Bertalanffy (1950), (1971), Boulding (1956) and books of readings edited by Emery (1969) and by Beishon & Peters (1972) still make good reading. Perhaps the major theorist in the field is Checkland (see, for example, 1981) and a more recent, lively text is Carter et al (1984). g

See also Burritt and Maunders (1990) who make this link between the ecologist' and accountants' view rather more strongly.

1°

And, more cynically, by The British Conservative Party in recent party political broadcasts.

28


birth, growth, death and decay; of creatures and species interdependence; of species and habitat dependancies; and so on. Removal or interference with one of these elements will influence many, if not all others. For example, and rather simply, the extinction of one species allows the flourishing of a species upon which the extinct species grazed and the possible extinction of another species which depended upon the extinct species for its food. Such a break in the ecological chain can happen for many reasons - loss of habitat, use of insecticide, etc. but it takes little imagination to see that once started, the process is irreversible and will, potentially, accelerate. The process of extinction is now happening at an awesome rate. We do not know how to stop it and neither do we know whether any ecological harmony will ever be possible again without man's constant interference to deal with excess manifesations (such as algae bloom, for example) or to artificially preserve habitats and species. That this is happening at an increasing rate is not in dispute. The only question is about how fragile is the ecology of the planet. It appears to be more robust than was originally feared but there must be some limit to what it can stand. We may only discover that limit the hard way. FIGURE 2.1 THE FOUR PRINCIPLES OF ECOLOGY

* Every, separate entity is connected wall the rest *.::Everything has to go somewhere * You cannot get something for nothing from it * Nature knows best. Source: B. CoMmoner 'The social use and misuse of technology' in Benthall J. (ed) (London: Longman) 1972 (pp335-362)

Ecology: the shaping enquiry


29

The ecological emphasis, however, is not only upon the biological systems and their interaction, survival etc.. Interacting with the eco-systems are the human social, technical and economic systems. The interaction between all these systems is complex but (the message of systems theory) you cannot look at one without considering the others. In the following sections an attempt will be made to examine briefly some of the interactions between these systems in three stages. First the accountants' perspective will be considered, then that of the economist and finally the ethical dimension will be touched upon. 2.4 The Accountants' Systems View Whilst accountants use systems terminology (in particularly MIS and audit see Chapter 5) there have been only a few attempts to take a wider systems perspective of the accounting activity. One such view is given in Figure 2.2a'. Figure 2.2a is no more than a re-interpretation of what the accountant traditionally does. His/her world centres around the organisation (the accounting entity') which can be seen to be located in a 'substantive environment'. (The word 'environment' does not necessarily have ecological connotations in this context). This 'substantive environment' is bounded with reference to only those events which the accountant traditionally recognises - those economic events which can be described in financial

11

12

The Figure 2.2a and subsequent figures are based upon the excellent work of Lowe (1972) and Lowe and McInnes (1971). These ideas are summarise and employed in a financial accounting context by Laughlin & Gray (1988). A very good critique of systems theory is provided by Hopper & Powell (1985). Which is itself a system made up of various sub-systems. See Laughlin & Gray (1988) for more detail.

30


terms. For simplicity, the flows that the accountant records can be categorised into three sets of inflows (debits) and three sets of outflows (credits) represented by information (e.g. debtors, creditors, ownership claims), funds (all receipts and payments) and physical resources/goods and services (e.g. labour, plant vehicles, buildings, materials, sales). ,

This perspective can be used to capture all the accountants' bookkeeping and financial reporting activities but one of the major benefits of this view is that it makes explicit the very limited view we take of the world. In Figure 2.2b, a simple representation of the social world is introduced. Now we can see the accountants' perspective rather more clearly. The organisation is a complex web of interactions drawing from and contributing to the social world in many ways (both positive and negative). Because many of these interactions are either implict, and/or embedded into the very fabric of the society (e.g. the question of personal and group rights) and/or are matters of interpretation and perception they are not made explicit in a way that the price system - and therefore traditional accounting practice can recognise. Traditional accounting therefore largely ignores them". Our present concern is with environmental issues, and these are introduced into the model in Figure 2.2c. The activities of the organisation in creating material well-being draw off

13

As does the traditional neo-classical model of economics as we shall see. It is almost certainly the case that accounting ignores these interactions because of these omissions by the underlying economic model.

Figure 2.2a A Systems View of Accounting, Organisations and the Environment

rimmumwmmwmnimmumminsimismisimmemuninimiimmui The accountant's Transformation I I "substantive 4 Feedback r I environment" The I Loop I Organisation II ...*-------- . I I I Information I . I Information/ ' \,. I

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31

from the eco-sphere some things for which prices exist (raw materials) and some things for which no prices exist (landscape, sea water). The eco-sphere in most cases is diminished by this. The processes of producing the manmade capital and the (presumed) subsequent material well-being as well as the subsequent consumption benefits lead to waste (immediately or eventually). This waste is injected back into the eco-sphere - there is nowhere else for it to go! The accountants' model cannot recognise these interactions and so they are ignored. The problems this raises are graphically put in Figure 2.3. FIGURE 2.3 THE 'MACNAMARA FALLACY' "The first step is to measure whatever can be easily Measured. This is OK as far as it goes. The second step is to disregard that which can't be easily measured or give it an arbitrary quantitative value. This is ardficial and misleading. The third step is to presume that what can't be measured easily really isn't important. This is blindness. The fourth step is to say that what can't be easily measured really doesn't exist; This is suicide (Source: D. Yankelovich Corporate Priorities: A cunt mm study of the new demands on business (Stamford, Conn: Daniel Yankelovich Inc) 1972

The pictures painted by accounting must be very partial pictures - it can only recognise those things which can be measured, which can be measured in prices, and which are exchanged for prices. Insofar as accounting is an important source of information about organisations, this partiality may be very dangerous. The information from the accounting system is used in a whole range of management decisions . and is a major source of information to the external participants of the organisation. It not only forms part of the basis of important decisions, but far more importantly and subtly accounting helps define and measure the 'success' of actions and, ultimately helps

32


construct our concepts of organisation and of the world itself. Accounting is thus implicated in the construction of a 'social reality'. With regard to (for example) the environment it is obvious the accounting picture is one from which essential elements are missing and, if used as a basis for action and decision, must mislead. The present environmental crisis may well owe a lot to this narrow relationship betweeen accounting pictures and major decision takers. This limitation of accounting derives directly from the economic view of the world. This is briefly examined next. 2.5 The Economists' View and its Failures.' Although modern economics in general and environmental economics in particular have a long history" one has to go back many hundreds of years to get back to the idea that wealth has a biological foundation - i.e. real wealth is both tangible and ultimately 'natural" 7. Daly argues that the rise of classical economics and the industrial revolution moved from nature as the source of wealth to the view of neoclassical economics which saw net value as the result of individual want-satisfaction and, eventually, as something which could be measured by GNP. GNP thus became wealth'.

14

1

This point is especially well developed by Hines (1988), (1989).

' These matters are dealt with in more detail and with particular regard to the Pearce Report in Appendix A.

" See, for example, Fisher & Peterson (1976), Devarajan & Fisher (1981). " See Brown (1981). 16

Daly (1980, p3).

CHAFFER 2: ECOLOGY, ECONOMICS AND ETHICS

33

Whilst modern economics can recognise specific scarcity (a shortage of X or Y) it cannot recognise general scarcity as the assumption is that technology will always find a way to substitute new resources for old. This leads onto the notion that economics cannot deal with either ultimate ends (the ethical dimension, dealt with below) or ultimate means (the finite environment). Thus the recognition that there must be both physical and ethical limits to growth (the constant pursuit of 'more') and the desirability of 'more' for its own sake must be questioned. Furthermore, it was Boulding who pointed out that economics appears to have forgotten the "law" that 'goods' (the concern of economic analysis) and 'bads' are generated together - the generation of 'wealth' will, therefore, create (e.g.) some non-wealth, some negative wealth or some diminution in non-financial wealth'. This raises questions about the way we think about our world. Experience suggests (and as Mishan has argued) that notions of growth are embedded into our way of thinking and raising questions about it is unpopular. Daly argues that this is quite simply because the questions cannot sit within the mental frameworks (the paradigms) that we have grown up with. The suggestion is that economics has had a profound affect upon the way the nation thinks and believes - in terms of Chomsky's" arguments we can only think about those things for which we have words and our words and concepts have been dominated by the frameworks of neo-classical economics.

19

Boulding (1966).

20

See, for example, Chomsky (1968).

34


If this is the larger picture, what of the more specific world of the accountant? Basic economics deals with prices. Prices are generated through the exchange of property rights within a social framework which determines, inter alia, the generation of rights, what constitutes costs etc.. The analysis that flows from this can only, therefore, deal with those things over which there are property rights, whose property rights are exchanged and the element of those property rights which are presumed to be reflected in price. This is the accountants' world. As we have seen, our accounting accepts this world as given, recording only those things which are made manifest through price. Thus we reflect in accounting (a) the notion that property rights bestow upon the holder the right to destroy the thing owned. We reflect the principle that ownership does not have a concept of stewardship tied to it; and (b) only those things over which property rights exists can generate price and thus the commons (air, sea etc) and those aspects of the thing owned not reflected in the price (e.g. land's ability to support animal life) cannot be part of accounting's pictures. Attempting to link this world of the economist and accountant back to that of environmentalism we can see on each of these matters a profound disagreement. This crystalises in the dispute over solutions to environmental crisis: at its simplest the economist might see the prices as being wrong they fail to reflect some 'full' cost of the thing priced; whilst the


35

environmentalist might be concerned that the process which generates the prices so partially and selectively must clearly be fundamentally suspect and this might lead to questioning whether we really should be bothered with such dangerously selective things as prices at all. Traditional accounting can thus be seen to be greatly dependent upon the paradigm of neo-classical economics and must, therefore, inherit' its weaknesses (and, of course its strengths). In this context, the two quotes in Figure 2.3 from widely different sources illustrate the problem that we, as accountants, must face. The final problem which it appears arises from the economic perspective, which is present throughout our accounting and which is in conflict with environmental concern is the question of ethics. 2.6 Ethics and the Environment

Chapter 1 noted that the rise in environmental concern has occurred at a time of rising interest in business ethics. However, much of this interest in business ethics has been superficial and characterised by relatively bland analysis". Environmental questions raise wider and more fundamental issues of moral philosophy.

21

See, for example, Gray (1990d), Cartwright (1990), Malachowski (1990), Donaldson (1988) and Lehman (1988).

36


FIGURE 2.3 SOME LIMITATIONS OF THE ECONOMICS/ACCOUNTING VIEW OF THE WORLD "Under the peculiar logic of accountancy, the men of the nineteenth century built slums rather than model cities because slums paid" Source: J.M.Keynes "National Self-Sufficiency" Yale Law Review 22. 1933 (pp755-763).

"The "firm" was an innovation in bookkeeping techniques, just as the "corporation" was a legal gimmick. Both were man-made and both were imaginary; yet together with the industrial revolution they have made it possible, even likely, that we have already passed the point of no return in environmental pollution. • Establishment of the "firm" was a boolckeeping decision that in calculating profits by the subtraction of "costs" from "income", "economic costs" would be included but "social costs" would not be counted. [Industrial societies] use falsified accounting techniques and mistaken taxation methods, not only to encourage this process [of environmental decay], but to conceal from themselves what is really happening. The ultimate falsehood of our accounting is to be found in official and semi-official statistics on the American "standard • of living". Moreover, this whole system of false reporting on the condition of America is solidly sustained by the tax system since the upkeep and maintenance of the most destructive earth mover is tax deductible." Source: Quigley C. "Our ecological crisis" Current History 59(347) July 1970 (pp9-12).

Moral philosophers are, very broadly, concerned with identifying what constitutes 'right action' and 'good life' and they would generally identify three types of ethical reasoning: motivist, deontological and consequentialist. Very crudely, motivist refers to the value of an action lying


37

in the intentions of the actor; deontological refers to the value of an action lying in the act itself; and consequentialist refers to the value of an action lying in its consequences. An act could be ethical on all three criteria at once - one could have intended to do good, to have undertaken an action which was a good (usually harmonious 22) action; and, the consequences may be considered good. Economic reasoning is founded upon a particular form of consequentialism - utilitarianism 23. At its simplest all actions are evaluated by reference to the net benefit deriving from the action. Benefit and detriment are analysed in terms of the utility and dis-utility generated. Utility, however, is a very general term which, in the work of Mill had important philosophical, psychic and spiritual connotations. It cannot be measured. In modern economics (and thus in accounting) utility has become reduced to financial flows and thus the actions which generate the greatest financial wealth (i.e. the greatest GNP - see above) become, by implication, the most ethical. Without getting bogged down with the philosophical arguments, there are three internal weaknesses in this analysis: it is not possible to know all the consequences of any action; consequences must be evaluated by some common referent (in this case financial wealth or, more particularly, GNP); and not all actions have financial wealth consequences (in the short term at least)". On a wider note, the simple utilitarian analysis which informs much

22

23

Harmononious here is similar to Satre's notion of integrity and, in general terms, reflects a sense that all individuals and groups must act at one with their self and with their environment. Derived in principle from the work of John Stuart Mill and Jeremy Bentham - see the edited collection by Warnock (1962) and for some links with accounting, Gray (1989). There are many other major problems which relate, for example, to the form of democracy which underlies the analysis and the distribution of wealth and power in the society being evaluated.

38


economic and accounting thought would deny that there might be motivist or deontological 'rightness' in actions which did not generate increases in financial wealth. In environmental thought, the deontological 'rightness' is very important actions taken by man in harmony with his environment in general and with other forms of life in particular's. There are further dimensions. What rights do other forms of life have, if any? Simple utilitarianism would evaluate only human utility, what of the 'utility' of other life? How do we treat future generations (the inter-generational equity question as economists would call it)? And, perhaps most perplexing, is there an ethical dimension to a world without mankind and if so, how do we introduce this implication'? If one can be forgiven an unsupported assertion, the language of economics, politics, finance and accounting are steeped in the financial versions of utilitarianism. The above explanation of consequentialism is unlikely to sound exceptionable to most accountants" whereas the motivist and deontological approaches to ethics will probably sound alien if not rather fanciful. Yet if we are to seek to justify our actions and our choices (as professionals perhaps, see Chapter 4) and the apparent logic of

25

26

2'

This has been popularised in the Gaia hypothesis in the work of Lovelock - see, for example, Lovelock (1982), (1988). These matters are nicely touched upon in Turner's work - see, for example, Thrner (1987), (1989) and (forthcoming) and see also Daly (1980). Unless they are experts in the matter, in which case I apologise for the simplicity of the analysis.


39

utilitarianism no longer provides such a justification" we must seek elsewhere. Daly has said that the goal of moral philosophy (of which business ethics is a part?) has changed from defining 'how to live a good life' to 'how to live a good life on a finite earth' and, as we have seen, the neoclassical foundations of accounting are unable to cope with such a question. And yet, there is some evidence that ways of thinking are perhaps changing. Under simple utilitarianism, opportunities for wealth generation would always be taken - regardless of whether or not they conflicted with some ethical referent. However, as we shall see, green consumers, ethical investors and the use of 'best practicable environmental option' techniques in selecting investments are showing that profit is not the only motivator in markets and that the financial world may still function - albeit differently even when the ethical foundations have been rebuilt. 2.7 Conclusions The mental frameworks we (unconsciously) employ determine the world we see and therefore the problems we specify and the solutions we choose. The world of and the language of the economist has a very wide currency in the West. But this world has flaws". The environmentalist sees the world in a

28

29

There are many arguments that the justification of maximum pursuit of profit and personal wealth could never be an ethical justification and flounders badly on logical grounds anyway. Implicit in most accounting thought are the principle axioms that pursuit of self interest, informed by accounting numbers, will lead to the most efficient allcation of financial resources, which will lead to the most efficient allocation of real resources. This will ensure the achievement of maximum economic growth and this will in turn lead to the greatest benefit of the greatest number. There seems very little logical, empirical or ethical foundation for this view. (See, for example, Tinker, 1984a, 1984b, 1984c and 1985). Of course it has flaws. Any human vision of a complete world and human system is going to have flaws. The only probable source of omnipotence and infallibility has not chosen to comment recently unless, as one sometimes might be forgiven for believing, the source has been chatting quietly with modern neo-classical economists. (For more on this sort of thing, see Tinker 1984a)

40


totally different way from the economist - a very much more reflective, interactive, and flexible world - and that vision offers possibilities for preservation of life. Of course, however, the environmentalists vision is also flawed" but the possibilities of flaws seem more easily admissible within the environmentalist framework than they appear to be in the framework of the economist. The accountant works directly within the world of the economist. Only rarely is this made explicit and then, usually, as matter worthy of some congratulation. The drastic limitation placed upon the world in which the accountant works (and, thus, the world which the accountant creates) by the dedication to prices and property rights is rarely noticed and hardly ever considered. Environmental considerations stand no chance in such a framework. The prospect for the later chapters will therefore be to work towards: (a) a system of accounting which stays within the economist Pearce-world but starts to move environmental issues in a little; and (b) a system of accounting which embraces the environmental vision and thus moves outside the mental straightjacket of traditional economics.

30

See, for example, the Hopper & Powell (1985) critique of systems theory and the Sandbach (1980)

devastation of much 'environmentalism.

CHAPTER 3: THE ENVIRONMENTAL PRESSURES FOR ORGANISATIONAL CHANGE 3.1 Introduction "Companies ... are underestiMating the potential impact of future environmental legislation. They are aware of those problems which get media attention, but miss other environmental problems which impinge upon them. .... Companies are aware of some environmental issues but are failing to convert their concerns into positive actions" Source: Touche Ross Head in the clouds or head in the sand? UK managers' attitudes to environmental issues (London: Touche Ross) 1990.

As the Touche Ross survey found, the majority of companies are still treating environmental issues, if not as optional extras, then at least as something marginal to the organisation's main business. Such a view is so easily understandable from the media coverage of the issues - superficial, upbeat, immediate, it has all the appearance of yet another bandwagon a fad that will pass soon enough leaving a few vestigial traces. As Chapter 2 has attempted to show, environmental issues are a great deal more than this. Change will occur (change will have to occur), it is only a question of how much and when. This chapter will attempt to look at the environmental issues from the point of view of a moderately re-active (rather than pro-active) organisation which views the environmental issues in themselves as unimportant but which would like to be able to spot the threats and opportunities arising from this changing world. This is very much the line that is taken by the

42


government and CBI publications and by much of the business press and so it seems apposite to consider the changing organisational pressures in this light'. The chapter will briefly examine the possible relationships between profit and environmental sensitivity and then move on to look at the forces at work in the various markets in which an organisation deals. The chapter will then consider potential changes from the government and from the EC and overseas.

3.2 Profit and the Environment The last year or so has seen a veritable avalanche of articles on why environmental issues will increase your profits/be good for business/offer opportunities/drive out the other fellow/cure haemorrhoids. These articles have covered: the generalised admonition that (e.g.) environmental protection will not stifle growth; the more striving company will lead society and grow; it is the non-green companies that will have to catch up; it will cost more to dean up later; there are plenty of profit opportunities in environmentalism; it reduces costs; etc., etc.'. Much of this is assertive and/or selective. That is, there is very little evidence offered and that which is offered sounds like a catalogue of specific examples of innovations that have produced profit as opposed to (i) the examples of innovations that did

To any environmentalist such a view would be extremely short-sighted. Furthermore it would seem curious that what is probably the greatest threat the race has ever known is really nothing to do with business. If this is the attitude, it deserves some rather careful - and urgent - thought. 2

For a selection of these see, for example, Wray (1987), Edgerton (1989), Ferguson (1989) Herberger (1974), Hargreaves & Dauman (1975), Heuer (1985), MacKenzie (1989),

CHAPTER 3: THE GREEN PRESSURES FOR CHANGE

43

not, and, more importantly, (ii) those innovations that have not been tried because they will not necessarily generate profit in the present climate. It is thus difficult to know what reliance to place on these examples. Evidence of a more formal nature and taken from wider sources is remarkably inconclusive on one issue but fairly straightforward on another. Several studies (typically in the USA) have attempted to see whether social and environmental activity or the reporting of social and environmental activity was related - either positively or negatively - with profit. No very strong relationship has emerged and so one could not say that the environmentally sensitive organisation is going to be more profitable but one could perhaps suggest that being relatively environmentally sensitive was unlikely to do irreparable damage to ones income number'. Of course this could mean that an organisation is unlikely to undertake environmental expenditure if it cannot afford it, (or if its bottom line cannot afford it) and only those who already have an adequate level of profit will spend the money on the environment'. This view is supported by more in-depth research which suggests that, in the end, in a conflict between profit and environmental enhancement/protection, profit usually wins'. The trick, therefore it is argued, is to make environmental and social responsibility pay - or at least make the appearance of such responsibility

3

See, for example, Bragdon & Marlin (1972), Bowman & Haire (1975), Aupperle (1984), Mintzberg (1983) and Mathews (1987). Obviously the corollary need not hold.

5

See, for example, Jones (1990), Isabella (1986).

44


pay' on the assumption that you can fool most of the people all of the time. To do this however, one must, as a minimum, be sensitive to ones markets. For convenience, markets can be divided into people markets, things markets and financial markets. 3.3 Markets I: Consumers and Employees The rapid rise in 'green consumerism' was probably the first manifestation

of growing environmentalism felt by many organisations. If the popular media in Britain is to be believed, the rise of the green consumer was ubiquitous and permanent. Certainly it was a phenomenon of significance. The popularity of 'green consumer guides'', the appearance of green consumer magazines', the emergence of new products - notably in aerosols and cleaning materials 9, and the new 'green' advertising' all gave the appearance of a changing world. For a number of companies there has been a significant change in that this has enabled companies which were already sensitive to the issues to come

See, for example, Anderson (1987), Stroup & Neubert (1987), Drotning (1972), Dewhurst (1989). 7

See Ellcington & Hailes The Green Consumer Guide (1988) - more details given in the references and in Appendix B. See, for example, New Consumer. More details given in Appendix B.

9

On this see Bruce (1989), and particularly on aerosols see Kreitzman (1988) and Redmond (1988). The narrow focus of consumer response is perplexing and worthy of some reflection.

10 The green advertisments appeared to be dominated by the oil companies and the big supermarket chains but in 1989 for example one can find specifically green advertisements from, inter alia, Miele, Austin Rover, Citroen, British Steel, National Power, Varta, Saab, Heinz, British Telecom, British Nuclear Fuels(!), Rockwool, ReChem, Hertz, Honeywell, TSB, etc., as just an indication. The list would be a great deal longer than this.


45

out and take a lead'. However, for much of the green consumerism bandwagon there was a growing suspicion that (a) the relatively environmentally sensitive organisations were making more of it than was really justified and were thus seeking to control the agenda, and (b) for most organisations the 'greening' was simply a matter of image and marketing. Of course there was much in this - the cases referred to and upheld by the the Advertising Standards Board indicate this and common sense tells you that using unleaded fuel makes neither an automobile nor its fuel 'environmentally friendly', taking the phosphates out of washing powder says nothing about the environmental impact of the rest of the ingredients, the packaging and the production processes, etc. Although many surveys demonstrated that the British People were willing to pay more for environmentally sensitive products there is evidence of a falling off in green consumer interest'. It remains a matter for speculation whether this is a result of: the 'fad' effect wearing off; consumers becoming disillusioned with the performance of green products (as the supermarkets are suggesting); consumers becoming disillusioned with the 'hype' involved in green claims (as the Consumers Association would suggest); or whether the slow-down in consumer spending has made environmental sensitivity 'too expensive'. It will probably turn out to have been a combination of all these.

11

12

See articles by Papworth (1990a), (1990b), Foster (1989) and Ferguson (1989) for example which review some of these initiatives. Recent reports from the National Consumer Council and the Consumers Association suggest this. See report by Brooks in Observer April 21 1990 p4. Also the New Consumer magazine has had a slower talce up that it anticipated although its influence appears to be considerable and growing.

46


So while it may be appropriate to suggest that much of the rise in green consumerism was superficial, underneath the 'fashion' lies both a smaller but growing body of seriously committed green consumers as well as a more widespread residual change in attitude that is likely to be permanent. At least one factor in this is the difficulty the individual has in knowing what to do, how to do it and what to believe. It is impossible to predict what will happen next but there are signs that a slower but more serious set of developments are in process. The committment of some organisations, the requirement upon local authorities to explore re-cycling, the pressure from Europe (see below), the campaigns from (e.g.) Friends of the Earth to stop (e.g.) the mis-use of terms like 'environmentally friendly' and the committment of the DoE to the introduction of 'green labelling' of products suggest a greater structural change within which consumer behaviour will continue to change towards greater environmental sensitivity. It is my suspicion that the real impact of green consumerism is only just beginning. If this is correct, then those organisations who are congratulating themselves on having weathered the green storm should not be too hasty about getting back to their old ways - the best (worst?) is yet to come. Whilst the immediacy of the green consumer has apparently been falling off, there has been a growing awareness of another, more subtle influence the green employee. If, as commentators suggest, particularly young people are growing up with a heightened environmental sense, the environmental


47

posture of their potential employer may well be important'. In a world of shortage of skilled and quality potential employees, such concerns may be significant. In addition, any rising concern amongst the populace as a whole is bound to be reflected amongst ones employees who will seek, to some degree at least, greater environmental sensitivity from their employers. How significant this is, or might be, must be a matter for speculation but recent research from the USA on the ethical (as opposed to specifically, environmental) posture of employers has shown a growing importance in the minds of employees 14 and extrapolation of that concern to environmental issues in the UK does not seem wholly improbable. Whilst markets for people may have had the highest profile in the recent concern over green issues, they represent only one of the sources of presure on an organisation. We now turn to the markets for 'things'. 3.4 Markets II: Resources, Products and the EcoSphere If environmentalism is more than just a fad, then it is here that many of the real pressures will be felt by organisations. Impact will be felt in three areas: inputs to the organisation; the organisation's products and/or services; and other outputs. (See Chapter 2.4). Inevitably, the form and force of these pressures must be, at the moment anyway, matters of only speculation matters about which the organisation itself is much better placed to judge. It might, however, be possible to suggest the direction from which these may emerge.

13

14

See, for example, Houldin (1989). It also a line taken by Chris Patten (see Michael McCarthy's report on the Business and Environment Conference, The Times March 28, 1990 p28). See, for example, Cartwright (1990), Benson (1989), Bennett (1988), Baxter & Rarick (1989).

48


Chapter 2 has indicated some of the areas where pressure on organisational inputs may be felt. Absolute shortages in some resources, imposed restrictions on others, implied restrictions through (e.g.) public opinion and ethical considerations, plus the activities of suppliers and the new demands placed upon production processes and outputs must all be sources of uncertainty to be monitored as part of the organisation's strategic awareness. For the re-active organisation, the only real concern, however, will be with those changes which reflect in price" - a price purportedly determined by forces of demand and supply or a price 'distorted' by taxation. The strategic issue for this organisation will be attempting to steal a march on competitors by anticipating future price impact. The probability of things such as public opinion and pressure group campaigns focussing upon environmentally insensitive inputs seems fairly remote because information about inputs is so much harder to obtain for those outside the organisation. Only through educated ethical motivations or the increased 'transparency from new environmental accounting systems (see Chapters 5 & 6) is the reactive organisation likely to experience non-price pressure and estimation of whether that is likely to be a significant issue would be pure speculation. (The one exception to this might be energy usage. This is considered below). Pressures specifically upon the actual processes of an organisation are, similarly, unlikely to be particularly significant in the short run. Despite the encouragement from the DoE, DTI and CBI (for example) the reactive

15

See't'he Economist October 15 1988 (pp15-16) for a plea for common sense - much in the 'leave it to the market' sort of vein.


49

organisation is unlikely to respond unless there is some price advantage. No matter how earnest the government's attempts to persuade organisations to adopt greener processes they will continue as uninformed outsiders until H.M. Pollution Inspectorate is significantly strengthened'. As cleaner technology becomes available, prices or taxation changes alone may encourage its adoption. Whilst strategies exist (see Chapter 5), the reactive organisation is unlikely to follow them. Again therefore, it is primarily through educated ethical development or 'transparency' that any non-price led change may occur. The outputs of an organisation are an altogether different matter however. These are frequently visible to some degree or other and it is likely to be pressure here that will force back changes upon processes and inputs. For the reactive organisation the good news, however, is that much of the pressure here is likely to remain superficial for the short term. This is because any substantive change would require significant government backing or a sea-change amongst major commercial and public-sector customers. Neither of Britain's major political parties seem enthusiastic about the prospect of embracing other than a 'light green' vision and they thereby stand opposed to any structural change. Major commercial organisations seem content to play around the edges with a light green touch whilst the public sector has had more immediate matters to exercise it" - although there are some signs of change here (see Chapter 6).

' Whereas the inspectorate seems generally to have been weakened. See the report by Geoffrey Lean, The Observer 13 May 1990 p4. "

See the report from Specula in Public Finance and Accountancy 13 April 190, p27.

50


Whilst there will inevitably be some change in the environmental demands placed upon existing products and services and new opportunities (and threats) will open up , the major changes are forecast to happen in the areas of emissions (meeting existing and new regulations), waste (reducing it and deciding where to put it) and energy (more efficiency in the face of changing price structures and the global warming concern). Basically, organisations (including households of course) will have to find somewhere other than the commons of the planet in which to dump their waste. The reactive organisation will be faced with (inter alia): * rapidly rising costs of wastes disposal; * an increasing reluctance to handle some wastes; * a tightening of emmissions regulations; * the probable introduction of costly 'pollution licences'; * an end to dumping in the commons (a recent report stated that 75% of all the UK's industrial waste is dumped in the North Sea)"; * energy controls - notably through price or taxes; * closer control of habitat use; etc. And this is in addition to the much wider encouragement with which the government is trying to bring about voluntary greening in these areas - and from each voluntary action by one organisation will spread ripples of demand and expectation from employees, customers and local groups. Through this, the government appear to hope, will be brought about a general greening of organisations.

18

See V. Smart in The Observer, 2 August 1987, p5.


51

3.5 Markets III: The Financial Sector

In general the stock market and banking sectors in the UK have shown little interest in the environmental posture of the organisations they own and/or lend to. Research which has sought to discover any sign that the financial community is concerned by, interested in or influenced by environmental matters has been mostly inconclusive'. However there are now signs of this changing in two major dimensions: - ethical investment; and environmental liability. Ethical investment is a relatively new phenomenon in the UK although it has a longer history in the USA'. The principle is that specialist investment trusts enable investors to specify areas into which they do not wish their money to be placed (e.g. arms, apartheid, etc). This has been a growth area and whilst the original funds did not suggest that an ethical investor could earn the same returns as an 'unethical' investor there is an increasing number of claims that 'being ethical' need not leave the investor worse off financially'. More recently still, have emerged the 'green funds' which seek to invest only in environmentally sensitive organisations'. There is much anticipation that such funds will have a big influence on both the market 19

See, for example, Holman etal (1985), Mathews (1987), Aupperle (1984), Bowman & Haire (1975), Ingram & Frazier (1980), Shane & Spicer (1983), Buzby & Falk (1978), (1979), Bain (1987) but see also Owen et al (1987) and Cooper (1988).

20

The Dreyfus Third Century Fund was established in 1972 (see, for example Chastain, 1973). For more detail on ethical funds in general see, for example, Owen (1990), Windsor & Greanias (1984), Harte (1988), Edgerton (1989), Dunham (1988), (1990).

21

See, for example, Dunham (1990), Lander (1989), Antunes (1987), Dibben (1988), Which? (1989), Slaughter, (1989).

22

Such funds include the Merlin Ecology Fund (see Accountancy May 1988, p32), Merlin International Green Investment Trust (see Accountancy January 1990, p38), Commercial Union Environmental Exempt Pension Fund (see Accountancy February 1990, p34), TSB Environmental Investor Fund and Eagle Star's Environmental Opportunities Trust (see Accountancy August 1989, p32).

52


and corporate behaviour. Whether such anticipation is well-founded is difficult to say but when EIRIS (see Appendix B) claim that 10% of funds placed on Wall St have ethical ties' this must begin to tell. This principle that ethical investment can make a difference to organisational behaviour is behind the CERES project of the USA's Social Investment Forum which has claimed a powerful influence on companies. The project has been launched in the UK recently by the Green Alliance (see Chapter 5.4) and early fruits of this were reported in May as the National Association of Pension Funds flexed their green muscle and Local Authority funds moved into the field". One major problem inhibiting this burgeoning source of influence is the lack of realistic information upon which to base reliable decisions. This is returned to in Chapter 6. The second major influence from the financial sector has a more immediately pragmatic and self-interested sound to it. USA companies for some years have been facing the problems which arise from liabilities to clean up toxic sites. Under the so-called 1980 Superfund Act' organisations can be held liable for detoxification of sites in their ownership whether or not they put the toxic waste there. The USA Environmental Protection Agency has identified some 27,000 hazardous waste sites with an estimated clean-up cost of $675 billion. Even in the States this is significant and covers household names like Shell and Monsanto. This is having spin-offs.

23 See Lander (1989). 24

See Dobie (1990).

25

The Comprehensive Environmental Response Compensation and Liability Act of 1980 and amendment in 1986. See Newell et al (1990) for more detail and Bunker (1987) for illustration.

CHAPTER. 3: THE GREEN PRESSURES FOR CHANGE

53

Companies' merger and acquisition activity may buy an environmental liability", bankers may find their loans either secured on contaminated property or used to buy environmental liabilities', insurance decisions may be affected" and this has further influences throughout the whole real estate market". It is this more than anything which has ushered in the environmental audit (See Chapter 5). There are signs that these issues are begining to emerge in the UK'. As the financial sector has, on occasions, been accused of pursuing shorttermism and there seems little doubt that short time horizons have some connection with environmental insensitivity. It might therefore be rather apposite if one of the significant pressures upon organisations towards greater environmental sensitivity were to come from this direction.

3.6 Government and EC Influence Given the urgency of the environmental issues facing the planet, there would seem to be no point in leaving voluntary efforts alone to bring about the necessary changes - they need a significant urging from the State. The UK government has responded enthusiastically at the level of encouragement (See Chapter 1.2 and Appendix B) but have, to date, been

26

27

28

29

32

See, for example, Kiesche (1988), Finlayson (1987). See, for example, Kopitsky & Betzenberger (1987), Pierro (1989) See, for example, Haggerty (1986), Finlayson (1986a), (1986b), Donlan (1985), Anderson (1983), Edelstein (1983), Devine & Mandelbaum (1989).. See, for example, Thayer (1986), Gibson (1986), Bader (1985). See the report in Management Today December 1989 (p5) in which it is reported that insurance companies are less willing to pick up the tab for environmental disasters. Sedgwick, the insurance brokers, are offering environmental audit to assess the environmental liabilities of organisations. See also Austin (1986).

54


more reluctant to interfere directly. This is changing. The Environmental Protection Bill (1989) promises a greater involvement of the State with

environmental policies, (see Appendix D for more detail), 'green taxes' of one sort or another seem inevitable in the very near future', and there seems every likelihood of a greater influence from Brussels. As we saw in Chapter 1, the present government seems intent on following the recommendations of the Pearce Report and one could therefore attempt some sort of prediction of future indigenous developments. The pattern in Europe might suggest some of the ways that supra-national influence might take us - see Figure 3.1

3.7 How Business Sees the Situation Whilst the foregoing speculation and crystal-gazing is probably necessary it would be more valuable if some more direct assessment of influence on organisational environmental sensitivity was available. There have been many examples of, principally, journalistic reviews of and interviews with individual businesses", but these have the effect of giving only part of the story of how business is reacting to environmental issues. Taken with the 'mini case-studies' which have been popular in a number of publications from government departments and other sources" some sort of illustration of a limited 'best practice' perhaps emerges. However, there is obviously a need for a wider perspective on organisational response to the emerging environmental issues.

31

For a particularly useful review of 'green taxes' see Owens et al (1990).

32

See for example, Papworth (1990a), (1990b), Foster (1989), Ferguson (1989).

33

See, for example, Ellcington (1990), CBI (1986), DTI (1990), DoE (1990).


FIGURE 3.1 SOME RECENT ENVIRONMENTAL RESPONSES FROM EC/OECD COUNTRIES Australia: proposals for 'Polluter Pays Principle' laws. Belgium: proposals to tax waste water and solid waste Denmark (a) has a CFC tax and a tax on rubbish. (b) refundable deposits on drink containers, planned for car batteries. (c) new legislation to triple rubbish charge and increase cost of raw materials in process. Finland: (a) introduced a carbon-tax; (b)removed sales tax from 'green products'; (c) increases in taxes on single-trip containers, waste oil and phosphate fertilisers. France: (a) charges business for air and water pollution and uses the revenue to subsidise investments in pollution control by industry. (b) is considering redesigning water charges to discourage farmers from using nitrate fertilisers. Germany: (a) introduced tax incentives on catalytic converters on cars, plans to tax cars on noise and emissions basis not engine size; (b) charges for industrial pollution emissions -reducing the charge in the early years of the installation of pollution control equipment. (c) has more environmental economic measures than any other EC country (but less than Finland and Sweden). Holland(a) introducing a new environmental plan; (b) plans energy taxes and tax on carbon dioxide emissions. (c) recent call for environmental disclosure in financial statements.

55

56


FIGURE 3.1 (Coned) SOME RECENT.ENVIRONMENTAL RESPONSES FROM EC/OECD COUNTRIES (C.ont'd) Ireland:

been giving a lot of (politically unpopular) attention to a coal tax.

(a) introducing a range of taxes on non-bio-degradeable materials; (b) implementing new taxes on sulphur dioxide, particulates, plastic herbicides and non-biodegradable industrial waste; (c) taxes on airport noise pollution.

° ducts,

Norway: (a) raised tax on petrol and charge a toll in cities; (b)refundable deposit on oil and batteries; (c) tax on CFCs being introduced. Sweden: (a) recently increased taxation of pesticides and fertilisers; (b)VAT on energy; (c) specific taxes on carbon dimdde, sulphur and nitrous oxide emissions; (d) carbon tax introduced; (e) car-usage taxation;is rising and likely to rise much further. USA:

(a) an established Environmental Protection Agency; (b)required disclosure of compliance with federal emission levels and.associated costs; (c) have experimented for many years with forms of 'pollution licence? which, if not used by the, owning company, can be sold to another polluter. (For more detail see Appendix .D and also The Economist March 17 1990 ( 66-67) Owens et al (1990) and Bryce (1990).


57

Two surveys from the CBI and from Touche Ross go someway towards filling that need. The CBI survey is based upon 250 completed questionnaires'. Some of the main conclusions are shown in Figure 3.2. In general, the CBI survey found a not-too-excited response to the environment. The report was uncritical and took an 'upbeat' attitude towards companies' response to the environmental issues. The Touche Ross survey, on the other hand, is both less conciliatory and less formal than the CBI survey. It concentrates more on giving a flavour of what companies are doing and finds that, generally, they are not doing enough. The survey covers 32 UK companies plus a less detailed survey in 6 continental EC countries plus Ireland. Some results are shown in Figure 3.3. Putting these surveys together with the journalism continues to give much the same picture: organisations are aware of the environment as an issue in general which may or may not have much impact on their business in particular. Some organisations have adopted a very environmentally active posture - whether out of a genuine concern for the environment or as a measured piece of PR can only be speculated upon. However, few organisations have senior managers who seem to appreciate that 'business', 'growth', 'making profits' and 'efficiency' are somewhat redundant notions if the planet had reached a point where it will no longer support life and so most organisations continue to treat environmental matters as rather peripheral to the mainstream business of business. Goodness knows from where influence to change this will emerge.

34

This is a 10% response rate - a shade lower than is normally expected - and no representativeness of the sample can be claimed.

58


FIGURE 3.2 SOME RESULTS FROM THE CBI's SURVEY OF BUSINESS ATTITUDE TO ENVIRONMENTAL ISSUES * Responsibility for environmental issues rests at director level in over 90% of respondents; * Only 15% of respondents considered increase in concern for the environment to be 'marginal' (as opposed to (very) important); * The five major areas of concern (in order) were: air pollution; hazardous chemicals; rive r pollution; solid waste and water supply. * The major areas of problem (in order) emissions, wastes and public perceptions. * The way in which the report communicates the pressures upon business is unclear but it suggests that the most important influences on a company's environmental stance are government legislation, local authorities and corporate social responsibility. Significant but of lower influence came EC legislation, local community, pressure groups and media. Less than 40% found customers, public opinion or commercial pressures of significance. * 70% of respondents were confident that they had access to relevant environmental regulations - the proportion was much higher for the large than for the medium or small companies. * Having a formal company environmental policy seems to be highly related to a stated belief in the importance of the environmental issues. . * Formal company policy statements seem to be unrelated to actual events or reporting. They do not appear to be updated regularly. * 60% or more of companies had no formal structure for dealing with environmental issues. * More than 70% did not see environmental regulations constraining business development. * The actual costs to the company of environmental protection were not known in the great majority of respondents - where they were brown they were estimated, generally, at less than 10% of capital costs and less than 5% of operating costs. * Respondents expect Trade Associations to be the principal source of advice on environmental issues but wanted the CBI to 'advise legislators' and help shape regulations.


59

FIGURE 3.3 SOME RESULTS FROM THE TOUCHE ROSS SURVEY OF UK MANAGER's ATTITUDES TO ENVIRONMENTAL ISSUES Companies are underestimating the potential impact of future environmental legislation; * They are deficient in staff skilled in environmental matters; * Companies lack effective environmental focus at higher levels; * There is little in the way of written policies and firm corporate attitudes on environmental matters; * What constitutes an "environmental issue" is largely a response to media attention. More guidance is needed; * Nearly all have some environmental programmes, some energy saving programmes and some re-cycling and/or waste saving processes; * Little attention is given to the green posture of suppliers; * Financial institutions seemed unconcerned about environmental issues; * Nearly half were unaware of any environmental legislation hitely to affect them in the near future. * Response to environmental issues throughout the rest of Europe is far from uniform although Board involvement and recognition of the likely impact of legislation is higher than in the UK. Source: Touche Ross Head in the clouds or head in the sand? (London:' Touche Ross) 1990.

3.8 Conclusions. The range of potential sources of influence upon organisations at any one time is vast. Each of them has a potential to turn green in some way or other. Which of the emerging environmental pressures become effective influences upon the organisation will be dependant upon the market power of the factor and/or the organisational culture - and, in particular, the organisation's position on environmental protection. If the 'deep green' prognoses are correct any collective failure to respond fully and profoundly

60


to the current environmental crisis is likely to result in the very concept of 'business' becoming entirely irrelevant as the planet ceases to support life. The failure of organisations to publicly acknowledge this option is disturbing. I suppose one should put it in enterprise rhetoric and state that a failure to make strategic changes to our environmental posture will eventually ensure that the recruitment market will dry up, sourcing and supply will become extremely unreliable and all sectors will be faced with a terminally shrinking market for their products and services. It is the reactive organisation hypothesised in this Chapter that will engender this situation. On the other hand, if the 'deep greens' are wrong, there will still be two major themes of influence - there are still environmental problems to be dealt with; and there are an increasing number of individuals, groups and organisations who recognise this. Thus through all an organisation's markets and through the structural framework in which it operates will come a steady flow of impulses towards a more environmentally sensitive position. If the planet survives then it is the organisations who have anticipated and responded to the various light green pressures that will be most successful (as traditionally measured).

CHAPTER 4 WHAT HAS THE ENVIRONMENT TO DO WITH ACCOUNTANTS? 4.1 Introduction A significant theme in the corporate social reporting and social accounting debates of the 1970s was the question of whether or not this new accounting was really anything to do with accountants. Many objections to the accountant as 'social' were raised from many different points of view. There was concern that such accounting might not be 'objective'; that accountants only dealt with financial numbers; that accountants only dealt with statutorily required information; that we only report to managers and shareholders; that it would be more trouble than it was worth; that accountants did not have the skills; and, most importantly, social accounting probably was not important anyway and would eventually go away if ignoredl. To all intents and purposes social accounting did limp off the accounting stage but never quite left the theatre. There has remained a lingering interest in the subject amongst a few academics and a number of practitioners'. A major difference between the corporate social reporting debates of the 1970s and the present concern with environmental accounting is that oppostion to the notion has yet to emerge. Perhaps it

Some of the main elements of these debates can be found in Birnberg & Gandhi (1976), Campfield (1973), Churchill (1973), Perks & Gray (1979), (1980), Ullmann (1979), Francis (1973), Parker (1976), Mathews (1985). 2

See, for example, Barnett & Caldwell (1974), Brooks (1986), Renshall (1979), Corbett (1980).

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won't and the defensive posture, which is the habitual posture of the social accountant, may prove irrelevant. As stated in Chapter 1, this report is predicated upon a positive approach:the environmental issues are critical and the only question of relevance is "what can accountants do to help?". Whether or not this is our territory is irrelevant when faced with the enormous importance of the environmental issues. We, as accountants, will contribute - but how?

4.2 The Accountant as Professional Whilst reference to the 'accounting profession' is ubiquitous there is very little serious discussion about what the members of the accounting bodies mean by the term. The term 'profession' is itself widely debated (particularly amongst sociologists) but this debate appears to have had little effect on the way the practising accountant perceives his/her role. From a non-radical perspective, a 'profession' implies two major characteristics: a theoretical framework for the activities undertaken; and a concern with the public interest that transcends the immediate self-interest of the practitioner'. Concern has been expressed amongst many serious commentators that accounting fails to qualify on both of these characteristics. The absence of a conceptual framework, the lack of an intellectual, theoretical education for all accountants, the reluctance to consider a wider constituency and new forms of accounting and the failure to define and/or justify the concept of the public interest inherent in the accountants practice are all matters of

3

See, for example, Lubell (1978)

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import'. Such need not be, and probably should not be, the cases. This is clearly not the place to seriously reconsider these issues but if accountants are to contribute to the very broad and deep-rooted matters of environmental sensitivity, it seems likely that a shift in accountants' selfperception will be necessary. Chapter 2 attempted to show that the basis of the intellectual framework in which traditional accounting occurs lies in traditional economics thought and perception. We saw some of the limitations of this. Accounting is clearly more than some form of applied micro-economics and has very strong political, social and (we can now see) environmental aspects'. These factors form the initial framework of the accountants' theoretical framework' and, in so doing, show the activity to be a great deal more than some neutral and objective function founded upon the application of a set of value-free techniques. With this awareness, the link between the two characteristics becomes more apparent. The beginnings of this theoretical framework are sufficient to illustrate that our activity needs justification and that our selection of what does constitute 'accounting' from all possible activities must not be arbitrary. It is our interpretation of 'public interest' - itself a profoundly difficult and contested term - upon which our justification and selection must lie'. See, for example, Hopwood (1990), Lee (1989), Buckley (1980), Zeff (1987), Gerboth (1987), (1988)„ Armstrong & Vincent (1988), Cooper & Sherer (1984). 5

6

For a more radical, and significantly more rigorous analysis of these kinds of issues see Richardson (1988), Willmott (1990), Nutty (1990), Robson & Cooper (1990), Booth & Cocks (1990). For fuller discussion of the roles of accounting see Gambling (1974), (1977a), (1977b), (1978a), (1978b), (1985), Cooper & Sherer (1984), Burchell et al (1980), Armstrong (1990). Illustrations of this are given in Willmott (1990), Sikka (1987) and Sikka et al (1989).

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In the broader field of social accounting, collars became very heated in discussing what was or was not 'in the public interest'. With questions relating to environmental accounting the issues are very much clearer - that it is the public interest (any public's interest) to help reduce environmental degradation seems uncontestable. The only questions seem to be about the urgency and how to practically set about it. Therefore on the twin characteristics of professionalism, there seems to be no question: our methods of accounting are implicated in (and may even contribute to) the present state of environmental crisis; and it is clearly part of our duty in the 'public interest' to attempt to contribute to the reversal of that crisis (if such reversal is humanly possible). The issue will not go away this time. Just because it is difficult we cannot ignore it. It is too important to let issues of territorial rights interfere. What can we do? 4.3 The Abilities of the Accountant Revisited

A frequent objection to the notion of accountants becoming involved in social accounting was that our skills prepared us for neither attaching financial numbers to social phenomena (workforce data, contribution to communities or environmental impact, for example) nor dealing in the nonfinancial numbers that might better describe the social phenomena. The irony is that accountants qua accountants have little requisite talent in the more traditionally accepted activity of ascribing financial numbers to economic activity. Whilst the experienced management accountant comes to understand the economic processes of his/her organisation, the training as such gives no insight into real issues of (e.g.) chemical manufacturing,


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mining or the production of new financial instruments. Yet management accounting will claim to cost, appraise, report upon etc. just these activities. This is more obviously the case in financial accounting and auditing where statements of 'true and fair views' will be made about numbers generated from industrial, commercial or service-delivery activities about which the accountant qua accountant knows little or nothing. An accountant has no knowledge about, for example, the life of specialist machinery, the state of completion of a chemical plant, shipping law, net realisable value of inventories, or the fair value of a warehouse. And yet the accountant will attest to the numbers which purport to represent them. Furthermore, the profession has been demonstrating for some time that attaching financial numbers to intangible assets, or to anything in times of inflation, is not one of its strongest suits. It seems probable that we over-rate our talent in this direction and, by implication, under-value the very real talents we do employ. Underlying the systematic collation, sorting and recording of data lies a well-developed conception of information systems. In many regards, the most important talent of the accountant probably lies in the design of, recognition of, assessment of and control of the information systems in an organisation. That perception extends to information systems outside the organisation and, in putting these internal and external systems together, the accountant can generate data, evaluate its probable reliability and determine its appropriateness to the issues under consideration. It is the quality of the systems upon which he/she relies which determine whether or not that value, cost, accrual or provision is likely to be an apposite one. And so, in

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the same way that the accountant must rely on others for the valuation of inventory and fixed assets, work-in-progress and provisions, etc., so may the accountant equally rely upon others for the measurement of sulphur dioxide emissions, biological oxygen demand or site toxicity. The principles seem identical even though they are not part of current accounting convention. This ability to design and work with information systems would probably not be enough to explain the accountant's position'. The accountant also brings (a reputation for) a wider set of abilities relating to independence of mind; intelligence and innate intellectual capacity; experience; evaluative ability - particularly with regard to evidence; broad perspective; a logical and systematic approach; and experience in the communication of information. Such characteristics are hard-won and, one can only hope, are real abilities rather than just matters of reputation. If these aspects of the accountants' talents are realistic then not only does the profession have a considerable amount to contribute to the development of environmental sensitivity but there is no reason why the development into the environmental arena need been seen as more than a long-overdue re-appraisal of what the professional accountant really has to offer.

The importance of the accountant may, in fact, be due to deference shown to financial numbers and their complex manipulation. The importance attached to financial numbers and the widespread inability of nonaccountants to understand them lead Gambling (1977b) to characterise the accountant as a highpriest or witchdoctor. The apparent whimsy in this should not be allowed to disguise the probable wisdom of the suggestion.


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4.4 Reporting to Stakeholders

Since the early and mid 1970s the possibility of the reporting function of accountants extending beyond the basic financial statements for investors has been acknowledged - albeit reluctantly'. This possibility had two aspects - extending the information reported to investors and reporting information to groups other than investors. Neither aspect has become an established element of the accountant's role. However, studies have shown that investors are not completely indifferent to social and environmental information' and the introduction of the Value Added Statement' and the continuing interest in Employee Reporting and the Employment Report" have kept the issue alive - even if it still remains marginal in the accounting orthodoxy. The continuance of these possibilities at the margin of the accounting agenda, in addition to providing a continuing body of experience, could be taken as support for the principle of extending the accountants' role into newer areas. Of course, such issues would be more easily resolved if there were any agreed theoretical framework for accounting, (many of the possible frameworks could easily incorporate such extensions to the accountants's role). Until some agreement is reached, then support for any extension of the role must rest on pragmatic evidence such as that summarised here.

9

See, for example MA (1973), ASC (1975), AICPA (1977), Brooks (1986).

10

See, for example, Dierkes and Antal (1985), Firth (1984), (1978), (1979), Benjamin & Stanga (1977), but see also McNally (1982).

11

See, for example, Burchell et al (1985), Rutherford (1980), Meek & Gray (1988).

12

See, for example, Maunders (1981), (1982), (1984), Gray, Owen & Maunders (1987), Hussey (1979), (1981), Purdy (1981), Parker et al (1989).

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Leaving aside the theoretical issues on this occasion, I might say that I find any arbitrary restriction of reporting function indefensible and, within a framework of information rights and accountability, wholly unjustifiable'. It seems unexceptionable to me that the accountant can, perhaps should, and probably must, address the issue of reporting of environmental information to a wide constituency. 4.5 The Pearce Report and Accounting At a more immediate level, there is every reason to expect accounting to

respond to the issues implied in the Pearce Report and in the statements from the Secretary of State for the Environment. Once the government has decided that it will only work 'with the grain of the market', leaving (influenced) market forces to solve the environmental crisis within a macroeconomic policy framework, the extent of the nation's environmental response will depend greatly upon voluntary efforts of individuals, groups and organisations. Such is very much the tone of DoE statements (see Chapter 1 and Appendix B). Whilst macro-economic policy based upon the Pearce Report can achieve some impact, the central issue of the Report can only be addressed with organisational cooperation. The backbone of the Pearce Report is the critical distinction between man-made and natural capital - this is the basis for any decision about sustainability, (see Chapter 1 and Appendix A). The creation and consumption of man-made capital, and the depletion and degradation of the natural capital lies largely within the ownership/control of individual organisations. Therefore, for the Pearcebased policies to operate successfully, the DoE needs organisations to meet 33

See Gray, Owen & Maunders (1987), (1988), (1990), Gray (1983), (1990d).


69

them half-way. This is precisely what is intended by the DoE and DTI

publications (see Appendix B) and, within a Pearce-world, is where there is an implicit but urgent need for accounting activity. Whilst we do not always make the matter explicit - and when we do we tend to squabble over it - a significant proportion of accounting expertise is currently concerned (often indirectly of course) with measuring the capital of an enterprise and monitoring its growth or diminution. This is precisely what is needed for the Pearce-world to work - an accounting for the increases and diminution in man-made and natural capital and, most importantly, an accounting of the transfers between the two. Accountants should have considerable expertise to offer, in various ways, to the development of this accounting. 4.6 Environmental Accounting, Auditing and Information Systems

Whilst vestiges of cynicism may remain over the notion of extending the accountants' role into environmental matters", the combination of a concern with professionalism, the recognition of skills, the availability of experience and the needs of the Pearce-world all provide strong impetus to the process of accounting becoming more involved in helping to mitigate the environmental crisis. Furthermore, insofar as one can validly interpret the observation, there is probably something significant happening when a rash of articles on environmental accounting, auditing and information systems begins to appear in Accountancy, Certified Accountant, Management Accounting, and even students' magazines like PASS. 14

As was the case with social accounting - see, for example, Perks & Gray (1978), (1979).

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Given the positive note with which this chapter opened, there seems little point in further dwelling on the reactionary self-doubts of the accounting community. It therefore remains to try and see what sort of accounting, auditing and information systems we can build. This is what the next two chapters do, treating - as far as possible - the material in this chapter as axiomatic.

CHAPTER 5 GREEN ACCOUNTING I: INTERNAL ACCOUNTING AND INFORMATION SYSTEMS 5.1 Introduction This chapter examines some of the possible ways forward for accounting some of the ways in which the accounting profession can contribute to organisations becoming more environmentally sensitive. The emphasis in this chapter is upon the internal accounting functions and information systems. External reporting and accounting will be considered in Chapter 6. The different approaches suggested are offered as ideas for experimentation and, whilst they derive from previous experiences and experiments, the list cannot be exhaustive and the experiments are not fully tried and tested. In general it is obviously more difficult to establish in detail what organisations are doing and the effects of their experimentation than is the case with the more observable experiments in external reporting. For the accountant who will prefer to stick with his/her 'traditional' skills and role, the possible innovative contribution to increased environmental sensitivity is likely to be slight. As briefly mentioned in earlier chapters, there will be increased demands on the accountant in (for example) the business strategy, taxation, pricing and investment appraisal arenas. This chapter though, attempts to suggest more pro-active involvement of the accountant in the accounting and information systems of an organisation

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seeking to assess and minimise its negative environmental impact. These suggestions are predicated upon the characteristics of the accountant and accounting profession discussed in chapter 4. 5.2 Organisational Change It is important to recognise from the outset that the introduction of environmental concerns will lead to some (perhaps significant) change in organisation culture and the way in which the organisation goes about its business. Only if the changes are simply cosmetic will this not be the case and as discussed earlier, given the significance of the environmental concerns facing the race this is unlikely to be an options. A central question is whether accounting can achieve this organisational change, or whether substantial change must be brought to the organisation before accounting can play its part. Although there is evidence that changing accounting can change organisation behaviour', it seems likely that for the most effective change the two must work together. Alongside accounting changes, therefore, there must be a reordering of priorities and attitudes and the development of new information systems. Above all, the (new) social/environmental systems must be considered important in the organisation and must be seen to be important to the senior management in particular if any effect is to follow. The new culture must become an essential element in the decision-making and assessment and reward processes of the organisation - not just some peripheral afterthought'.

See, for example, Gray (1990d). 2

See, for example, Nahapiet (1988).

3

See Williams (1980) and Ramanathan (1976).

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None of this is easy of course. Willingness to consider the issues is widespread4 but the pressures on organisations and on accountants are essentially short-run and profit-orientated'. But a change in organisation culture is possible 6 and with such a change, real environmental change can occur. There has been a lot of research on, for example, 'ethical changes' the adoption of ethics, codes of conduct, social responsibility accounting and now green accounting - all of which points to the essential role of 'the tone at the top', the emphasis given by the board and the actions and attitudes of the CEO'. It therefore seems to be the case that top management is the place to start and from there, structural change must follow - starting with, in the present case, an environmental department. 5.3 The Environmental Department

In this case the 'environmental department' refers to the establishment of a seperate, identifiable part of the organisation to deal with the coordination, development and publication of the organisation's environmental response. Such a department must have board representation if it is to be successful and not marginalised and it must be able to address questions of internal organisation and structural change. The way in which the department is established and constituted will play an essential role in its success or failure. Organisation members will very quickly recognise that 4

Corson & Steiner (1974) found that 76% of companies attempted some social impact assessment although little change in social behaviour was apparent. Filios (1985) and Jones (1990) give information on the attitudes of British management and accountants to the issues.

5

See, for example, Drotning (1972).

6

See Ferguson (1989) and Holmes (1978).

7

See Harvey (1984), Antal (1985), Hogner (1982), Isabella (1986), Jones (1986), Kohls (1985), Logsdon (1985), Wartick & Cochran (1985).

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the organisation is not serious about its environmental response if the head of the new department is some old director who is being put out to pasture or some nuisance senior manager who must be kept away from anything important. Similarly if the membership of the department has neither credibility within the organisation as a whole nor the skills and access to the operational units necessary to examine practice and seek change, the department will be recognised as cosmetic and rapidly emasculated. In such circumstances, it does not take long for external stakeholders to recognise that the organisation is not serious about environmental issues. Such was largely the experience with US companies in the early 1970s. Many companies responded to public pressure with the appointment of 'vicepresidents for social responsibility' and the like but there appears to have been little substantive organisation change to accompany these appointments. They were rapidly recognised as empty public-relations exercises. There would seem to be an increasing cynicism amongst the British public about this sort of thing and, apart from the dishonesty involved, it would seem to have a reducing commercial values. An environmental department's role will be wide - monitoring issues and priorities, engaged in strategic questions - but a principal long term objective will be the integration of environmental awareness and sensitivity into every aspect of organisational life. Whilst it has been observed that such change can occur, little is known about why it does occur (and why

8

These sorts of matters are dealt with by texts such as Davis & Blomstrom (1975). A recent report from the National Consumer Council in Britain has noted a drop off in interest in 'green consumerism' mainly due, apparently to a dissillusiorunent with the claims of products but with no means of checking the validity of such claims.


75

it does not occur). Furthermore, there will be inevitably many points of conflict between environmental sensitivity and 'good organisational practice' whilst the department will be seeking to maintain its legitimacy within the organisation. It will not do this by seeking to introduce extreme measures. Therefore as a move towards a raising of environmental sensitivity the individual possibilities covered in subsequent sections broadly represent a progression from the less to the increasingly intrusive mechanisms. FIGURE 5.1 THE TEN STEPS TO ENVIRONMENTAL EXCELLENCE

1. Develop and publish an environmental policy. 2. Prepare an action programme. 3. Arrange organisation and staffing including Board representation. 4. Allocate adequate resources. 5. Invest in environmental science and technology, 6. Educate and train. 7. Monitor, audit and report. 8. Monitor the evolution 'of the green agend 9. Contribute to environmental programmes. 10. Help build bridges between the various interests. Source: J. Elldngton The Green Capitalists [with Tom Burke) (London: Victor Gollancz) 1989

The simplest approach appears to be to start with the discussion and adoption of organisational policy in the field followed by one of the

76


subsequent 'audit options'. More specific advice is given by John Elkington in Figure 5.1

5.4 Environmental Policy Interest in the whole notion of published policy statements to cover new and emerging areas of activity appear to be increasingly common in British organisations. They vary from Statements of Mission, through Codes of Conduct to more specific policies such as Employment Policies. If we assume such policies and their publication reflects genuine aspirations as to behaviour (rather than PR 'puff) then policies may serve many useful functions. Not only do they establish. the first approximation for the evolution of environmental objectives, they will reflect the particular orientation of the organisation; signal information to employees, customers and suppliers; as well as provide a hostage to fortune by announcing parameters of acceptable activity within the public domain. Of course, it would be naive in the extreme to imagine that high sounding policies will result in environmentally sensitive action or that, without considerable advances in information systems, the public can monitor what is and what is not environmentally sound behaviour. Nevertheless, most work in this area suggest this as a first step and, in some cases, the impact can be significant. The best known recent example is the 'Valdez Principles' which it is intended should be adopted by all companies with aspirations to being 'green'. The principles (see Figure 5.2) were derived by the Social Investment Forum in North America in the wake of the Exxon Valdez tragedy. The group claim

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77

the backing of many large investors who claim control of 150 billion dollars of assets. Corporations are invited publicly to sign the principles as a demonstration of their belief in them and their intended adherence to them. The large investors will only invest or continue investing in those corporations who have signed. The principles were launched in the UK by the Green Alliance in 1989 and we are just starting to see the impact, (see Chapter 3.5). FIGURE 5.2 THE VALDEZ PRIIsICIPLES

(in outline) We adopt, support and will implement the PrinciPies of; 1:trotection of the Biosphere. 2. Sustainable Use of Natural Resources. 3. Reduction and Disposal of Waste. 4. Wise Use of:Energy. S. Risk (to employees and communities) Reduction. 6. Marketing of Safe Products and Services. 7. Damage Compensation. S. Disclosure. 9. Environmental Directors and Manage's. 10.Assessment and Annual Audit Source: The Coalition for Environmentally Responsible Economies (CERES) project of the Social Investment Forum (USA): Launched in the UK by The Green Alliance, November 1989.

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Naturally, at this level of generality, the principles provide little basis for monitoring, performance appraisal and audit and, in this, they are a somewhat stronger version of typical practice in UK organisations - a preference for the general and (if possible) the bland. To focus attention and ensure behaviour changes a more specific level of objective must be established.

5.5 The Role of Information Systems A central tenet in most of what follows is that information is necessary for change and, more importantly, that the provision of information (or a change in the information provided) will change behaviour and decisions. This would appear to work in two major ways. Whether or not it is 'rational' there is a lot of circumstantial evidence that actors will make some attempt to incorporate new information into their actions and, with the case of environmental information, this can be expected to have the effect both of making actors more environmentally aware and having a direct (if perhaps small) influence on decisions taken. The second major way in which information systems appear to affect actors is the 'information inductance' effect. That is, the information that an individual or group is required to report will influence the behaviour of that individual or group as the actors seek to produce actions which, when recorded by the information systems will appear benign. The classic case of this is in divisional performance evaluation where managers will produce different behaviour if they are reporting Return on Investment figures than if they are reporting Residual


79

Income figures'. Two fairly obvious points must be added to this. First, none of this suggests that there is (or can be) some simple functional relationship between all actors and any piece of information. Reaction is bound to be a very complex process about which we still know very little and which cannot be generalised without serious oversimplification taking place. All one can hope is that information systems carrying environmental information will encourage some actions in the direction of greater environmental sensitivity. The second point is that the addition of environmental information systems will be a great deal more effective if they are perceived as important and relevant to the organisation. The most obvious way of achieving this is to ensure that an element of individual and group rewards is closely linked to specific elements of the information in the new environmental information systems within a framework of performance appraisal which clearly values environmental peformance. The selection and design of the information systems will therefore be a complex and crucial element on the organisation's environmental response systems must be selected that can deliver believable information; of an understandable nature; relevant to the actors receiving or reporting the information; they must identify what is happening and what is not happening - selected from the universe of all possible activities - and action/non-action identified against yardsticks of acceptable action.

Prakash & Rapapport (1977) introduce this notion of information inductance and the basic elements of the general performance evaluation problem in divisionalised organisation is dealt with in many texts - see, for example, Emmanual & Otley (1984).

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The suggestions that follow, are predicated upon a belief in the need for such information systems. The simplest must be compliance-information. 5.6 The Compliance Report and Audit The compliance audit is probably a pre-requisite for the development of an organisation's environmental sensitivity. As Elkington says, such an audit is fairly simple but time consuming 10. The first stage is the identification of legal requirements (and quasi-legal requirements - industry standards, codes of practice and the pronouncements of quangos, for example) which are relevant to the individual units of the organisation - the lines of business, the sites and the departments. It is not unreasonable to expect all organisations to comply with the law (and to know whether or not they are complying) but experience suggests that very few organisations monitor this aspect in any systematic way. This is a job for the environmental department in consultation with the functional units of the organisation. An essential element in this is that, in the early stages at least, no penalty attaches to the manger who is either not aware of his/her legal compliance or who is breaking the law. The experience of the more successful companies in this field" has been that the company must recognise that the issue is a company wide one and managers must be assisted in correcting for deficiencies rather than being initially penalised for them. Otherwise, managers will be less cooperative and the information necessary for the audit more difficult (or impossible) to collect.

'° See Elkington (1990) and see also Franc (1989). 11

See, again, Elkingwn (1990) p15.


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An environmental compliance audit will have to cover such matters as air emissions, effluent discharges, noise levels, waste disposal, chemical and other safety hazards in the work place, product labelling and safety etc. and must cover unintentional actions (e.g. leakages) as well as normal functional activities'. Having identified the areas of activity and the levels required, the more difficult task of establishing systematic monitoring must be introduced. For many of the activities it may be possible to install relatively cheap, automatic technical means of monitoring. Then some degree of comfort can be gained from comparing the results with the occasional reports from, e.g., the Local Authority, Local Water Authorities, The Safety Inspectorate or HM Pollution Inspectorate. However, the pressure on these bodies means that their independent monitoring is not a regular or complete activity and cannot be relied upon as the sole source of information. Whether the organisation uses the environmental department to conduct periodic audits, adds the process to the role of the internal audit department or requires the individual functional departments to undertake more systematic monitoring will obviously be a matter for each organisation. The third stage will be deriving ways in which the collected information on standards and levels of actual activity - is reported to local and senior managers. The most obvious form is something like a monthly report along the lines of a traditional (standard costing) variance report but many possibilities exist and, particularly if such information must be integrated

12

A now somewhat dated but excellent text on these matters is Frankel (1978).

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with the general information systems of the organisation, the specific orientation of any organisation's overall information systems design makes any general suggestion here inappropriate. 5.7 The 'Ethical' Audit The whole area of 'business ethics' has been one of significant growth in recent years but the essential matters involved in what constitutes 'ethical' behaviour are especially complex' 3. In the present context the term 'ethical' is used at its most simple and specific to refer to non-legal but relatively precise codes of behaviour that an organisation introduces as the standards of behaviour which it expects, over and above the law, in all its activities. This would, most typically, derive from the organisation's Code of Conduct and would be wider than simply the environmental issues. In general, the purpose here is to add another layer of beyond-the-law compliance to the compliance audit. Such matters may well include better-than-the-law pollution standards; targets for accident rates; bio-degradability of products; protection of habitats and so on. In outline this might be an expansion of the Valdez principles. Having established the standards then the organisation and the environmental department would follow the stages for the compliance audit adding the additional requirements over time. This would also mean that the compliance and ethical audit would be a continually changing activity - reflecting a changing world - and would itself need to be subject to to periodic audit from a strategic standpoint.

13

For a particularly good introduction to the general area of business ethics, see Donaldson (1989). Ethical questions as specificaly related to accountants are covered regularly in Management Accounting (USA) and a good article is provided by Likierman (1989). A fascinating, if more radical, view is presented by Lehman (1988). See also Gray (1990d).


83

A final reminder though, 'ethics' are an especially subtle and complex matter. Despite the warm sentiments expressed in offical organisational publicity and in much business school rhetoric, there are quite likely to be a great many issues where what is considered to be 'the good and proper' life conflicts with what we currently consider to be good business practice. Whether these conflicts relate to environmental issues (the rapidity of the introduction of new technology, the phasing out of activities etc) or related wider social issues (nature of employment, relationships with developing countries, for example), an organisation seeking to develop an ethical audit must address - if only in the interests of honesty and integrity - where it stands collectively; with respect to its financial markets; its customers; its suppliers; its employees (collectively and individually, cf whistleblowing); its local communities; future generations and, most obviously in this context, all forms of life human and non-human. As was outlined in chapter 2, the environmental debate is largely an ethical debate which runs counter to our usual way of thinking about 'economy' and thus 'business' and accounting. Perhaps the most important role for the ethical audit and for the environmental department in general is enabling these issues to be openly and honestly addressed in each British organisation. 5.8 The Waste Audit

This is the major area within which the British government and British industry have been active recently. The theme from both the CBI and the

84


DTI is that cutting waste is good for business' - there is profit to be made from the management of waste. As we become more environmentally aware and the demands for environmental sensitivity rise so, it is argued, organisations will have to demonstrate genuine attempts to clean up their activities if they are to stay in their markets. More particularly, as the costs of both materials and waste disposal rise it makes obvious sense for organisations to minimise their resource usage. This rise in costs looks very likely. The depletion of natural resources will naturally drive up prices; as governments become more aware of the environmental disruption of extraction and manufacturing, greater requirements will be placed upon organisations in these activities in attempts to minimise irreparable damage to natural capital - including habitats and local eco-systems; as the dangers of unregulated dumping become more accepted, much tighter control will be exercised over waste disposal; and, for many forms of waste, simply finding somewhere to put it is becoming a problem, (especially when the sea and the air are no longer permissible dumping grounds). And this only relates to direct waste - packaging and product life-in-use have long been contentious issues which the present concern with the environment in general and public interest in recycling can only serve to increase'. As a first stage, the organisation must identify its wastes, the current costs associated with them and seek to identify areas of waste which can be

14

15

See the Confederation of British lndusties booklet Clean up - it's good business and the two more recent booklets from the Department of Trade and Industry Your Business and the Environment and Cutting your losses. Contact details are given in Apendix B of this report. See for example, Packard (1965). A particularly helpful article in this area, derived from the greater North American experience is Newell et al (1990)


85

recycled. The DTI and CBI booklets give many examples of companies finding profitable uses for their waste. This may well be the initial target but this is a reactive approach. As attitudes, prices and (most importantly) environmental exigencies change the organisation would be constantly seeking for new elements from which to profit. A Waste Audit, under the auspices of the environmental department must therefore identify all waste, associated costs (financial and environmental), their incidence, the ways they can be forecast to change and then examine alternative possibilities. With imagination, it seems highly likely that an organisation's existing accounting and management information system could easily be modified to take account of these matters - as a new category of flow-through is identified and reconsidered by the organisation. One of the most important elements in this will be the question of energy. 5.9 The Energy Audit Along with physical waste, the West's use of energy will probably prove to be the most immediately pressing of environmental issues'. Many large organisations are known to undertake fairly systematic energy audits and experience suggests that most organisations are constantly attempting to reduce their fuel consumption as a means of reducing costs". However, an energy audit (and energy accounting) can go a great deal further than this. The fuel crisis of the 1970s brought many experiments with energy audit and accounting which ranged from attempts to reduce direct variable costs,

16

See, for example, Spellman (1988).

17

See, for example, Selien (1980)

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through to significant long term investment appraisal of energy saving technologies. More recently, government recognition of the need to make Britain more energy efficient has led to discussions of a significant tax on the price of fuel. A full energy audit will attempt to account for the energy embodied in the organisation's goods and services - including energy in production and transport of both the product and the waste attached to it. Because energy can be reduced to universal measures (ergs, joules etc) a number of serious attempts to mirror a traditional accounting system with an energy accounting system have been made in the past. Such ideas may prove to have been ahead of their time and about due for re-examinationl". 5.10 The Emerging Issues Audit

Little need to be said about this. All commentators on the rise of environmentalism and business recognise that it becomes essential for all organisations to constantly monitor new issues which will affect them. The usual examples given relate to CFCs and 'environmentally friendly' cleaning products - happy was the company which was ready to respond to the rapid sea-change thus leaving behind 'ungreen' competitors 19. The message is that an organisation must recognise that environmental issues have become very significant elements of both Opportunity and Threat in SWOT analysis and the 'wise' organisation is one which treats the emerging issues as opportunities. A more subtle, but long term question relates to whether the organisation remains reactive in this field or seeks (genuinely) to lead.

n

19

See, for example, Banks (1977), Dick-Larkham & Stonestree (1977), Edwards (1978), Hewgill (1977) Of course, for environmentalists two great questions remain - why did the companies not introduce the environmentally sensitive products earlier? and how does one assess the environmental sensitivity of a product, its method of production, its container and its method of haulage?


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Recent events and general hearsay suggest that many organisations have environmentally sensitive products and technologies available to them but have yet to launch them as the profit profile (or somesuch) is not yet ripe. As with the ethical audit itself, there are very significant ethical questions attached to such decisions.

5.11 Environmental Impact Assessment/Appraisal/Analysis (EIA) One especially well-focussed aspect of an organisation's environmental response relates to the matters that arise with new projects which will require planning applications, public enquiries and/or are likely to generate public opposition. The rise of environmental considerations in planning applications in the USA has made it necessary for organisations to integrate EIA into their normal activities. Changes over the last few years in the EC suggest the same change is starting to occur in Europe. The principal notion behind EIA is that one needs to evaluate the whole of the possible environmental impact that a new project (a new factory, pipe line, road etc.,) will have. The reason for doing this, in the eyes of the organisation at least, is so that one can predict where one is likely to fall foul of environmental planning regulations (or pressure groups). The greater the regulatory or public objections to the project, the greater will be the cost of the planning permission (in terms of man-hours wasted and a delays in starting the project) and the greater will be the likely compensation required as part of the application. EIA will enable an organisation to assess these likely costs and to consider the relative costs involved in other project options (e.g. route for the road or pipeline, site of the plant).

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The costs involved in this, and the attendant savings, can be very significant indeed". In fact, the use of EIA is now being extended by organisations in the USA as it becomes increasingly apparent that environmental protection regulations are the most costly to comply with. Thus a 'hidden cost' of all existing activity - as well of each new activity - is that involved in meeting environmental regulations and this needs to be isolated, recorded and considered as part of all investment appriasal and post-audit. (See also section 5.16 below).

5.12 The General Environmental Audit The above list (which is far from exhaustive) may seem either too piecemeal or, perhaps, too expensive as a means of introducing environmental issues to the organisation. A broader brush approach has attracted a lot of support in recent months. This harks back to the external consultants of the 1970s who, although operating with no formal theoretical framework, brought a great deal of organisational experience and acumen to bear upon the issue of Social Audit'. It is probably along these lines that the Big 6 audit firms are operating and where part of SustainAbility's expertise lies. If there is a problem with this approach - apart from its cost - it may be that environmentalism is not a one-off issue. An organisation can not be just 'greened'. It seems the process must be constant and systematic with the

'° The material for this section is taken from two very clear articles by Elkington (1981), (1982) where more detail and sound advice can be found. 21

In this, I am referring to the consultants who conducted such audits on behalf of the organisation rather than, as with Social Audit Ltd and Counter Information Services, for example, despite the organisation Examples which still look interesting after all this time are Humble (1973) and Hargreaves and Dauman (1975). The role of the independent social auditor has been taken more recently by Friends of the Earth and by Greenpeace. An examination of reports from these bodies - or from Social Audit Ltd will put the bland and self-congratulatory style of much environmental reporting into a more brutal, if honest, context. This issue is revisited in Chapter 6.


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environmental department constantly seeking new ways in which the organisation can respond to green matters as awareness of the ubiquity of ecology and the environment grows. If external consultants are not to be used there have been broad brush suggestions as to how an organisation might perform its own overall green audit and these may be worth some attention". 5.13 The Financial Environmental Audit

At the centre of much of the above and as a prerequisite to attempting to implement more environmentally sensitive strategies will be the question of finance. As has been argued in earlier chapters, accounting may well have contributed to the significant environmental problems that we now face (through, inter alia, partial recording and short-termism) and any organisational assessment of the costs and benefits of environmental protection must beware of compounding these problems. The initial point will be financial assessment of the shortfall (if any) of the organisation's level of activity against current and arising standards - i.e. the costs of noncompliance. A cynical (or economically efficient - depending upon your point of view) organisation will then assess whether the costs of continuing failure to comply (fines, loss of credibility etc.,) exceed the costs of bringing the organisation into line. Evidence is, not surprisingly, hazy in this area but some research and a great deal of hearsay suggests that organisations generally find it cheaper to break the law". As experience suggests that

22

23

See Elkington (1990) but also Roger Gray'(1990), Derwent (1989) and Bins-Hoefnagels et al (1986). More sophisticated attempts can be found in Dierkes (1979), Dierkes and Preston (1977) and Ullmann (1976). See, for example, Social Audit (1973 et seq), Frankel (1981), 1982), and Medawar (1976)

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legal standards are often the very minimum expression of a nation's wants' and that Britain's environmental standards are often lower than other developed countries 25 continued law-breaking is incompatible with environmental concern or democratic responsibility - no matter how much the 'shareholders' might want it. Further, we should remember that accounting numbers can be made to do most anything with enough will'. The environmental issues are urgent so urgent that it is unlikely that the impact upon annual income can be relied upon as the sole criteria. This will be discussed in more detail in Chapter 6, but there is enough evidence to suggest that departmental and divisional accounting is greatly affected by accounting policy and short run income figures. This leads to clearly undesirable consequences in a purely financial and economic sense" so the consequences in an environmental context may easily be so much worse. Performance evaluation, relevant costs, time of payback, discount rates, allocative decisions, tax breaks, etc etc. all are amenable to accounting judgement. Circumstantial evidence suggests that our accounting judgement has favoured the short term at the expense of the environment. It is probably time that this was reversed. 5.14 Other forms of audit - Collection of information

24

See Stone (1975), Epstein & Votaw (1978), Dowling & Pfeffer (1975), Likierman & Creasey (1985).

25

See Macrory (1986), Cowe (1980), Porritt (1989a), (1989b).

26

See, for example, Hird (1983), Griffiths (1987)

27

The usual and most telling example is with regard to accounting for innovation and R&D. See, for example, Lothian (1984), Gray (1986), Nixon & Lonie (1989)-


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The above suggestions have all related to the collection of information and its dissemination as part of an awareness raising programme within organisations. They are pre-requisities for changing an organisation's environmental posture and culture and are predicated upon the assumption that once people know about something as important and as drastic as this they will seek to do something. The design of information systems suggests that this is not an entirely invalid assumption. There will be many other aspects of the organisation's activities which will not necessarily be covered by the above. Additional areas might include" environmental audits of takeover targets; of existing and future customers and suppliers; reappraisal of product ranges; reappraisal of transport arrangements for staff and goods; risk assessment of potential future environmental exposure; likely impact of ethical investment trusts as they get more into their stride and begin to gain real information upon which to base their decisions"; and analysis of environmental impact overseas particularly in developing countries30 ; assessment of specific UK and overseas environmental/social/community projects; the possibility of internal flows of products, services and consumables, for example, having eco-labelling (a mirror of the proposed government and EC schemes) - to identify the pro- or anti-environment rffect they contain - as they join and leave sites; etc., etc.

28

See, for example, Franc (1989), Rowley & Winner (1988), Singh (1969), Worcester (1973).

29

See Harte, Lewis & Owen (1990).

3° See Maunders, Gray & Owen (1990).

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In the following sections, a few suggestions begin to go beyond the collection and dissemination of information and, at a fairly speculative level begin to examine ways in which this information might be more directly integrated into the organisation's day-to-day activities. 5.15 The Environmental Budget

The aim of the environmental department is to integrate environmental awareness into every aspect of the organisation's activities. One way in which this may be approached is by ranking environmental criteria on some comparable level with other financial, marketing, reliability, economic etc criteria. The simplest level at which to attempt this is to allocate levels of environmental activity with other levels of budget allocation to activity centres, departments, divisions etc.. This could be developed to include an internal 'pollution licence', which was purchased from the centre and, perhaps, could be traded around the organisation. Alternatively, (much depending on the organisational and accounting culture of the organisation), an element of the reward and penalty systems could be tied to the satisfaction of allocated budget level (or positive and negative variances). For the organisation with interdivisional transfers, some means would have to be devised to deal with the transfers in and out of pollution, waste and environmental degradation. This would not be easy but, in principle at least, a financial charge for accepting divisional pollution etc could be made or the environmental budgeting system could be kept entirely in physical units and the inter-divisional bookkeeping system record the environmental inter-dependancies. Such systems would have to take equal account of environmental enhancements as well as degradations.


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Very few experiments of this sort of thing have reached the public domain and, as with the following suggestions, significant in-depth field research is urgently needed to examine the feasibility and the practicability of such notions'. Certainly, the introduction of (the initial stages of) an integrated environmental accounting system represents a significant shock to an organisational system and cannot be undertaken lightly. 5.16 The Environmental Investment Rate

Somewhat simpler, though no less intrusive, is the suggestion that all new investment should also meet environmental criteria as well as the other organisational criteria. In an increasingly changing business world, the use of short-term payback criteria for the assessment of investments looks especially sensible (despite the academic pleas for the dominance of discounted cash flow and the like) and it is that very uncertainty that makes longer term investment - particularly to cover environmental investment so much more difficult. In a textbook world, it is a relatively simple matter to introduce some notion of an environmental 'hurdle rate' through which to filter all investment decisions but in the more complex organisational world - especially where the future pressure is so uncertain -trading off financial viability against environmental considerations will raise many problems. A degree of aid can be found from three (potential) sources. First, the implementation of the information systems and environmental budgets

31

Two exceptional experiments are reported in Ullmann (1976) and in Dierkes and Preston (1977). These would provide one set of ideas from which further experimentation could attempt to build.

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discussed above would probably lead to some changes in investment patterns. More significantly, as cost structures change (with respect to waste, for example) environmentally sensitive investment will become more economically viable. Second, the British government will almost certainly have to follow Europe and North America in introducing changes in the taxation system to reflect green concerns. This will produce incentives/disincentives (see Chapters 1 & 3 and Appendices A & D) which the organisation will be able to simply internalise through the normal price mechanism. The third source of assistance is the EC whose promotion of clean technology extends a helping hand to organisations. This promotion is under the Euroenviron scheme and has been mirrored in the UK by the DTI's Environmental Protection Technology Scheme, (see Appendix B). A related initiative was launched by the Twelfth Report of the Royal Commission on Environmental Pollution". Organisations are encouraged to undertake systematic decision processes with a view to seeking the 'Best Practicable Environment Option' (BPEO) which "provides the most benefit or least damage to the environment as a whole, at an acceptable cost, in the long term as well as the short term"". HM Inspectorate of Pollution are already adopting the BPEO criteria in developing their future strategy and it looks like becoming a core concept in the 1990s. A brief outline of the Commission's suggested steps in arriving at BPEO is given in Figure 5.3. BPEO has emerged in the Environmental Protection Bill (1989) together with a close relation - Best Available Technology Not Entailing Excessive 32

Cmnd 310 (1988) and some detail is given in Elkington (1990)

33

Ellington (1990) p13.


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Cost (BATNEEC). Both concepts are an attempt to articulate the criteria

that regulatory authorities must apply to organisational assessment and whilst it is clear that the State believes that environmental criteria must not dominate commercial criteria, the position is now just a little harder and FIGURE 5.3 THE SELECTION OF A BEST PRACTICABLE ENVIRONMENT OPTION 1. Define the objective of the project.

2. Identify all feasible options. 3. Qualitative and quantitative analysis of options' environmental impact. 4. Clear, objective presentation of the information relevant to the choice. 5. Select BPEO 6. Have choice scrutinised by individuals independent of the initial choice. 7. Implement and monitor performance Fagainst expected/desired criteria. 8. Maintain an audit traiil of all steps, information and individuals involved in the process for post-audit Source: Cmnd 310 Best Practicable Environment sOption Royal

Commission on Environmental Pollution (London: HMSO) 1988

organisations will have to prove that they did in fact choose BPEO and/or

BATNEEC and, further, failure to so prove may lead to retrospectively awarded reparation damages'.

34

For more detail see the Bill, clauses 6 and 20-22.

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Once again, this is an area upon which little experimentation has reached the public domain. Little is known about the extent to which organisations already incorporate environmental criteria into their investment but a recent Touche Ross report suggest it is on the increase'. However, if the experience from the research into investment appraisal in general is anything to go by, there will be very little in the way of environmental assessment of past projects nor is there likely to be any systematic postaudit of new projects and so experience and information in this field will be built very slowly. If the environmentalists are right, we do not have the time to undertake long-term experiments and some means must be found to re-appraise existing practice and to collate information in this area as soon as possible. 5.17 Environmental Asset Maintenance

As discussed in Chapter 2, there are two essential characteristics of our economic and accounting systems which mitigate against environmental enhancement. These are the closely tied notions of private ownership and prices. Crudely, prices are only generated when ownership claims are transferred. No ownership - no price, and so the economic and accounting systems ignore it. Relatedly, private ownership gives virtually unfettered property rights over the use, abuse, enhancement and depletion of the thing owned as well as granting the owner an actual (although implicit) capacity to export 'externalities' to other non-owning individuals, groups, nations

35

See Touche Ross (1990) and see also Papworth (1990), Ferguson (1989).


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and, of course, other forms of life". To a degree, the accounting for pollution emissions, for waste and for energy usage captures some of this and, in the following section of this chapter some brief ideas are explored about how we may begin the attempt of bringing it all together. There is one specific issue though that can also be considered seperately. This relates to the distinction between man-made and natural capital raised in the Pearce Report and developed by Turner (see Chapters 1 & 2 and Appendix A) and whether our accounting systems can and should account separately for them. Currently, accounting recognises different grades of assets - basically current, fixed and intangible. We also distinguish to a degree between types of fixed assets - notably the separation of land and buildings on the basis of whether their money-value rises and falls. Relatedly we employ (often implicitly and contentiously) some principle of the maintenance of operating capacity - in part through the maintenance of those assets, provisions for depreciation, special provisions and reserves. Following the environmental economics arguments, some of these assets will fall into each of the categories of 'critical natural capital', 'other natural capital' and 'man made -

capital' and part of the activity of the organisation will be the use of the

natural capital in order to generate increases in the man-made capital and, ultimately .(in the world of economics), consumption benefits. Somehow, our thinking on this will have to change. In particular, ownership with the attendant property rights will have to be amended to a recognition that

36

The principle arguments here are taken from the excellent MacPherson (1973), (1978). His arguments are not, however, from an environmentalist standpoint. Any 'deep green' text would provide development of some part of these notions.

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ownership involves stewardship - the responsibility to care for and maintain (what we currently call) assets on behalf of the race, other forms of life and future generations". This is not an easy notion and in its implications that ownership involves responsibility is radically at variance with our current Western culture. It is, however, central to the ideas in the Pearce Report which (as Appendix A attempts to show) is a far from radical document. Accounting can play a very major role here. I am not familiar with any experimentation along these lines and so can only offer a few initial suggestions and recognise that there are significant problems with devising a fully working system to account in this way. First, an organisation needs to try and categorise the assets under its ownership and add those environmental assets under its control but which, because of the pricing issues do not reflect in the books - for example rivers, lakes, wells. Categorisation will be extremely difficult. As Turner has shown, (see Appendix A), there will be dispute as to whether, for example, habitats are critical or 'other' natural capital. The second stage is then to decide how to 'account' for these categories. In principle, there seems no immediate reason to change the accounting for the man-made capital but the natural capital accounts will need very careful consideration. Part of the problem stems from our adherence to a traditional balance sheet - an adherence I have long been puzzled by as it seems to create many of the problems that accounting regulation seeks to solve. If we must (and I suppose we must) 37

This basic idea is developed in Daly (1980).


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maintain the balance sheet then it will be necessary to maintain two parallel accounting systems - one which continues a traditional historic cost accounting and one which is more descriptive. The historic cost accounting part could include that part of the book assets falling into the natural capital categories and then would record (estimates of) additions, deletions, enhancements, depletions and transfers between the three categories. It seems that part of the natural capital will have to be included as something like intangible assets - the estimated value to the organisation of non-priced natural facilities. The non-historic cost accounting element will probably have to rely on a variety of media - description and physical quantities as well as financial additions and benefits/depletions and transfers. Again, one might suppose that the environmental department will be charged with monitoring the maintenance, enhancement and depletion of the natural capital as well as auditing transfers between the natural capitals and the man-made capital. (These ideas will be briefly introduced in Chapter 6 when the implications for reporting are considered). A great deal more could (and perhaps will have to be) said about this idea. The theoretical and practical implications are profound - even if the exposition here seems rather glib. That it goes to the heart of the tenets of traditional accounting systems is the hidden message of the Pearce Report and without accountants and organisations responding along lines something like those proposed here the urgent message from the environmentalists will ring hollow.

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5.18 Resource-flow: Input-Output Analysis

As we have discussed earlier, the basic bookkeeping system records all the priced inflows and outflows that cross the organisational boundary. This systems perspective on the basic organisational accounting process' proved useful in earlier chapters as it enabled us to compare the accountants' perspective with a basic version of the environmentalist's systems perspective on the world. The accountant provides an immensely useful but very partial picture of the organisational world in the restriction on what is recorded and how it is recorded. Figures 2.2a,b &c summarised these perspectives. A fully representative", integrated financial/social/environmental accounting system would be a colossal undertaking and probably, in any realistic sense, impossible. But if we are to minimise our footprint upon the planet we do need a much better developed sense of the deontological qualities of our actions in addition to a more realistic awareness of the consequentialist limitations inherent in our thinking. Recognising that the complete knowledge necessary for consequentialist analysis is definitionally impossible there seems value in making some attempt at a fuller appreciation of the organisation's place in, in the present case, the environmental world. One way of attempting this would be to initiate a complete environmental flow-through accounting of each organisation. Such an attempt would be based around Figure 2.2c and, employing all the ,

38

39

For more detail see Laughlin & Gray (1988). But see Laughlin & Puny (1981), (1983) and Hines (1988), (1989) for some discussion of the weaknesses in this apparently inoccuous statement.


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mechanisms discussed in this chapter, attempt to account for all inputs; identify the environmental component of all inputs; trace all accretions, enhancements, deletions, depletions; identify all outputs; identify the incidence of environmental impact of all outputs. A thoroughly naive, primitive and crude representation of what is meant by this is included in Figure 5.4.

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FIGURE 5.4: OUTLINE RESOURCE FLOW IDENTIFICATION Land Sites ------ Left fallow -----Mining Office site -------- Factory site

Enhancement, habitats, scenic, oxygen etc. Depletion of natural capital (assessment), previously habitat for a,b & c. Restoration planned. Reparation required – No permanent effect known. Suspect toxicity of land. Site recently landscaped at cost of E. Short life, high energy cost of building, eyesore. Victorian architecture, recently restored at cost of E.

Office block

Buildings

Factory

Machinery

Extraction & Haulage No comment. Nothing known of suppliers' environmental position. ----- Processing machinery Ditto but BPEO exercise for replacements in hand

Vehicles

Haulage & on site --- On-road vehicles to be fitted with catalytic converters 1992. On-site vehicles all electric Personal cars ---- Provided to staff, all run unleaded fuel. Senior directors have waived this entitlement and now have company mountain bikes.

Infrastructure ------ Transport general — Public transport not used. All paper sent for recycling. 40% of paper used is recycled — General ----------------- Waste audit initiated 1990. Nothing known of suppliers' environmental position

Materials ------ Paper ----

Energy Electricity ------- Usage reduced by 10% in last two years. Entirely replaced by own methane digestor Gas Energy audit ordered for next year Insulation Products and Packaging

General

— No comment. Waste audit may be extended to assess life of products, re-cycling possibilities and packaging waste.

Community --------- See Social Report Noise, Air, Water, Toxic hazards ------ See Emissions Report


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Not only will the practicalities of such accounting have to be examined but the theoretical foundations are clearly shaky - if only for deciding what must be included. This combination of theoretical flaccidity and practical difficulty hounded many of the social reporting experiments of the 1970s. Whilst they are not insoluble they clearly need urgent and significant attention". 5.19 Condusions The more seriously one takes the environmental issues, the more difficult

will be the task of devising new accounting systems. Most of the possibilities discussed in this chapter, whilst intrusive, do not challenge the basic business of business. If the environmental issues are, however, as critical as some would have us believe then more substantive changes are necessary. The issues arising in the re-assessment of investments, introducing environmental budgets and, in particular, re-defining assets and monitoring resource flow-through start to go to the heart of the organisational accounting system. There is a most urgent need for all these techniques to be explored, for experience to be shared and for experiments and research to be undertaken if we, as accountants, are to be able to contribute anything significant to the greening of organisations. And for once there is the more pressing question - if we do not do it who will? Who can?

4° For more detail see, for example Gray, Owen & Maunders (1987), Estes (1976), Blake, Frederick & Myers (1976) and AICPA (1977).

CHAPTER 6 GREEN ACCOUNTING II EXTERNAL REPORTING 6.1 Introduction The immediate focus in the recent green debate has (naturally) been more upon what organisations do than upon what they report about what they do. Inevitably what they do is the crucial issue particularly in the light of some current experience which suggests that an organisation's social actions and the extent of its voluntary social reporting may have little correspondence'. However, there are three main reasons for considering why organisations must develop environmental reporting -in addition, that is, to the PR function which appears to be driving it at the moment 2. First there is the principle of accountability. Although little discussed, current financial reporting practice has a particular set of rights embedded into it - the rights of the investor over other groups in society. The notion of accountability questions how relative rights are arrived at and whether accounting properly discharges its function by only accounting in particular ways to particular groups. The environmental debate has raised a longstated concern that the race, the rest of life and future generations have significant rights to information about those things which may well affect their continued existence and will certainly affect the form and quality of

See, for example, Wiseman (1982), Rockness (1985), Belkaoui & Karpik (1989) but see also Kohls (1985). 2

See, for example, Dewhurst (1989), Parker (1976), (1977), Puny (1986).

CHAPTER 6: EXTERNAL REPORTING

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that existence. Environmental reporting may be derived as a recognition of those rights and as a partial discharge of the associated accountability'. Second, as was discussed in Chapter 5 with respect to the selection, design and implementation of information systems, there is considerable evidence to suggest that what an organisation is required to report can have a significant influence upon what it does - if and only if, of course, the reported information can be considered to bear any reliable relationship with the events and things it purports to represent. A requirement to report on environmental activity may therefore be a significant impetus to organisations to implement environmental programmes along the lines discussed in Chapter 5. Third, again as discussed in Chapter 5, there seems a high likelihood that information influences perceptions. Even the most dedicated environmentalist in the role of a company managing director would find him/herself profoundly constrained by the current pressures of the stock market, investors and finance houses. By introducing reliable, high-profile environmental information in organisational reporting there is always a slim chance that the information may influence the form of this pressure - that the financial markets may be persuaded away from the frenetic short-term self-interest that seems to inform them towards a more measured recognition of the organisational realities in an environmental context. The growth of ethical funds shows some signs that this hope is not misplaced.

3

See Gray, Owen & Maunders (1987), (1988) for more detail on this. Lilderman (1986) and Lilderman & Creasey (1985) discuss the issue of rights in some detail and Gray (1989)begins the process of linking the accounting process, through accountability to notions of democracy.

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And if one needed a fourth reason for considering environmental reporting, it would be that the ethical funds simply do not have reliable information in the present climate to make effective (or even efficient?) assessments of an organisation's environmental position'. This chapter will provide a very brief and general review of approaches to this external reporting and then look forward to various possibilities. In particular, the framework established in the recent United Nations initiative will be explored in some detail. Throughout, no formal theoretical framework will be adopted - the tone will be one of practicality and acceptability but underlying it, there will inevitably be an undercurrent of the need for accountability as a foundation for all external accounting and reporting - a tune I have long whistled 5. The emphasis will be upon self-reporting by organisations but a major element has been in the past and is likely to be in the future the 'external social audits' - usually arising as a result of failures in self-reporting. It is with these that this chapter begins. 6.2 The External Social Audits Chapter 5 made reference to two types of 'social audit':- (a) the external consultant called in by the organisation in order to help it (in this case) become greener - any information or report arising from this would be

See Owen (1990), Harte, Lewis & Owen, (1990) 5

For more detail see Gray (1983), (1989), (1990d), Gray, Owen & Maunders (1987), (1988), (1990 forthcoming), and Laughlin & Gray (1988).


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private and stay within the organisation's walls; and (b) the external social audits conducted by bodies independent of the organisation - the purpose of which is (generally) to place any resultant information into the public domain. It is this latter sort I want to discuss briefly here 6. There are no parameters to such 'external social audits' and so the range of activities that potentially fall within this ambit is enormous. But first, a brief history of the main experiments of the 1960s and 1970s. At one end of the spectrum was the consumer pressure group, The Consumer's Association, whose activities focussed upon the relatively systematic collation of information about products, companies and industries but from the specific point of view of a particular group in society. To the extent that one believes in the efficacy, efficiency, benificence and omniscience of consumer markets then the existence of a body like this enable the organisation's products and services to report for them. The analyses are inevitably partial however. At the other end of the spectrum came the allembracing ambitious attempts of Social Audit Ltd. Social Audit were concerned with providing "a balancing view" to the public in general in the interests of accountability. This was based upon the belief that an organisation has the power to say a lot about itself and that, as this is very likely to be biassed in the organisation's favour, society has a right to hear a fuller story'. They attempted to cover not only environmental issues but also employee, community and consumer interests. The organisation

6

The role of the government inspectorates could be potentially critical in this sort of role. Whilst their function will be touched upon it will not be examined in detail. See, for example, Gray, Owen & Maunders (1987, Ch7). For a summary see Gray, Owen & Maunders (1987, Ch 7). For more detail see Medawar (1976) and Social Audit 1974 et seq.

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collated information from any source available (including, on occasion, the organisation concerned) and produced the reports in their Social Audit Quarterly. The experiments lasted only for a few years but they demonstrated their principles clearly, brought out into the open the role of law and government monitoring agents and, in addition to demonstrating just how difficult a full social audit of an organisation is, they provided a host of ideas and experiences which have been followed since in various ways. The third major area of experimentation was the emerging role of Local Authority Social Audits which, although principally directed towards examining issues related to unemployment and plant closures had the effect of bringing another new player into the wider social responsibility arena'. Each of these have their counterparts in the recent rise of environmental concern. Magazines such as New Consumer are attempting to systematically monitor the environmental impact of products, organisations and industries. It is too early to say how far their influence will stretch but, despite the limited information they can collect, the emphasis upon and collation of public information is bound to have some influence upon perceptions. The mantle of Social Audit falls most obviously onto the shoulders of Friends of the Earth and Greenpeace whose campaigns and investigations are constantly bringing new issues into the public domain. These organisations have been very successful in the past in raising public awareness of specific issues - their 'environmental audits' of specific issues and/or specific organisations are bound to have a significant impact upon perceptions of

8

For more detail see Harte & Owen (1986), Geddes (1988) and Haughton (1988).


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organisational activity9 . Finally, it would appear that some local authorities are just beginning to re-emerge as significant sources of influence on organisational social accountability and the environment. Their position is unique in their being able to access and collate a considerable range of information and whilst little about this re-emergence seems to have reached the accounting press yet a most significant role can be expected". In addition to these three forces, there are a variety of possible further influences seeking to bring information into (various elements of) the public domain. These range from varieties of investigative journalism through to the activities of EIRIS, the Green Alliance, and, who knows in time, perhaps even a British equivalent of the USA's Council on Economic Priorities. External social audits are almost bound to present a view different from that which the organisation concerned might choose to present but they are forcing organisations more out into the public eye - increasing their "transparency'. And despite the difficulties that such external social auditors must experience - in terms of time, cost and the (non-) availability of information - their products remain of interest and, perhaps most significantly, they remain often the only source of serious information (aside from the financial statements) about organisational activity. The existence of, often quite reasonable, attempts to collate information about

9

A review of Friends of the Earth's or Greenpeace's publications would add more substance to this (see the contacts in Appendix B) but just one typical but good example is Greenpeace (1985).

" We have discussed earlier the emergence of local authorities as a force in the ethical investment movement. See Dobie (1990). " For more detail on the concept of transparency see, for example, Cartwright (1990) and Malachowski (1990).

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organisational activity must act as both a pressure upon and an indictment of organisational self-reporting practice. And until organisations willingly increase their own transparency and produce systematic self-reporting of substance (as opposed to the current practice of PR 'puff) these pressures must continue to grow. 6.3 A Brief History of Experiments in Environmental Self-Reporting It is convenient to consider there to be three communication media for external reports: narrative, statistical and financial'. As we shall see in later sections, a suggested first basis for environmental reporting would contain elements of all three. In terms, however, of extant organisational practice, the use of statistical or financial data in external environmental reporting has, to date, been fairly rare and, until very recently, the amount of attention given to environmental issues at all in British organisational reporting was negligible indeed13. Corporate social reporting in the UK (including environmental reporting) is predominantly the province of the larger companies but, even here, remains largely a marginal activity. It appears that, on average, the Annual

12

Photographs, other pictures, graphs etc. either are restatements of (typically) statistical data or additions to, enhancements of or simply (flattering?) glosses upon the basic message and are therefore excluded from specific consideration here. The emotive use of photographs is also important -as most annual reports of large companies or an opposite use by Social Audit, Counter information Services, Greenpeace, Friends of the Earth or whoever, demonstrates. Without getting drawn into the probably impossibility of the aim, a degree of something we might be happy to consider as verifiability and 'objectivity' will probably be desirable.

13

The following sections will concentrate almost exclusively upon reporting by companies principally because it is about companies that most is known and about which most research in this area has been conducted. The data relating to the UK is drawn from Gray, Owen & Maunders, (1987), Guthrie & Parker (1988) and an unpublished paper - Gray (1990b). Such surveys of non-commercial organisations as there have been have unearthed very little in the way of social reporting, (see for example, Gray, Owen & Maunders, 1987; Gray & Haslam, 1989).


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Report' of a company in the top 1000 in the UK would have somewhere between a page and a page and a half of data on matters concerned with employees, the community, customer welfare and the environment. With the exception of the material concerning employees, the vast majority of this would be narrative. Narrative can, again, be usefully distinguished between the general (wide and sweeping) and the specific (potentially auditable). The considerable majority of UK social reporting would fall into the former category. Reporting on environmental issues has been, until very recently, almost entirely absent from UK companies. It looks as though only about 10 or 15% of companies even mentioned either environmental or energy issues. The subjects were given less attention than any other subject' - the environment would typically receive little more than a sentence in most companies. (Although there are some particular exceptions to this (such as BP and ICI, for example) where the environment features prominantly in the Annual Report). More recently there has been a small, but noticeable, rise in the prominence given to environmental issues in Annual Reports. This began with years ending 1988 and, particularly, one might notice the relatively novel intrusion of an occasional specific item of data - we can read, for example, that: BPB handle 650,000 tonnes of recycled waste paper

14

With the exception of reports to employees, the Annual Report might be normally assumed to be the main communication medium. However, recent work by Zeghal & Ahmed (1989) in a Canadian context has demonstrated the importance of other media.

15

A recent small study by Hall (1989) suggests that, amongst the very largest companies at least, the only environmental issue to be touched upon in social disclosure by more than 15% or so in the last 15 years is the issue of protection of the countryside. By the mid 1980s (the last point in Hall's survey) disclosure on pollution control and raw material conservation had fallen off to vitually nothing from fairly significant levels in the mid1970s whilst disclosure on energy conservation had risen to 17% having previously been virtually ignored.

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and thus save 10 million trees per annum; Rhone-Poulenc have experienced a 12% drop in waste products; ICI have spent over £11.5 million on environmental laboratories and the like; and BP received the World Environment Center's gold award. Even these developments remain marginal and exceptional. They are a long cry from anything one could recognise as systematic reporting or formal accounting for the environment. For more developed examples, one needs to look overseas and whilst useful specific experiments are known there, little recent descriptive research has reached the English-language literature from which one might draw any general conclusions about reporting. The following brief review is necessarily sketchy therefore. North America has been a particularly fertile ground for experiments in environmental reporting. This has been aided by (at least) three closely connected factors:- (1) the continuing (relative) priority given to environmental matters in North America - as evidenced by the role of the Environmental Protection Agency and the Superfund Act; (ii) the requirements of the SEC (from 1975) upon companies to disclose (a) any shortfall on environmental standards under federal law; (b) estimated future capital expenditure for pollution abatement; (c) any violations and potential violations of pollution laws; and (d) the extent of any fines; and (iii) the continued interest of pressure groups and researchers in environmental matters with the resultant public availability of information from, particularly, The Council for Economic Priorities and the subsequent


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research into environmental performance". Accounting experiments are really only limited by the imagination of the experimenter and for this reason a very wide variety of attempts to account for the environment can be found in North America over the last 20 years. The main examples include: * the basic but clear and concise emission statement with associated compliance costs of Philips Screw Inc', * the 'dialogue' approach of Atlantic Richfield in which the company's major social and environmental claims were commented upon by a well-known local journalist". * the earnest descriptive approach adopted by Noranda and INC0 19. * the complex 'social indicator' approach of First National Bank of Minneapolis" * the various financial quantification approaches - with or without integration into financial statements - of Clark C Abt & Associates Inc'. These examples remain, however, isolated incidents and apart from the

16

For example, see Freedman & Jaggi (1988) for a review of the use of Council on Economic Priorities data. The availability of data is probably the biggest single factor in influencing research -particularly from North America and, of course, the continuing research keeps the issue live and in the public domain. Other illsutrations of the North American interest in environmental accounting can been found, for example, in Beams & Fertig (1971), Coppock, (1977) and AICPA (1977). Environmental performance has been examined in, for example, Belkaoui & Karpik (1989), Ingram & Frazier (1980) and Wiseman (1982).

17

See, for example, Gray, Owen & Maunders (1987, p112) or Estes (1976).

18

19

20

21

See, for example, McComb (1978) or Gray, Owen & Maunders (1987, p97). See Brooks (1986, p175) See Blake, Frederick & Myers (1976, p165) or Belkaoui (1984). The Abt experiments are amongst the most detailed experiments in the field of corporate social reporting and have been widely reported and commented upon. See, for example, Blake, Frederick & Myers (1976), Johnson (1979), Belkaoui (1984) and, for a different intepretation, the Cement Corporation of India's application of Abt's ideas in Gray, Owen & Maunders (1987). See also the Linowes experiment (Linowes, 1972) and responses by Burton (1972) and Mobley (1972). Most texts would provide a commentary on the proposal.

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SEC disclosure requirements, no widespread, systematic reporting of environmental information can be said to have dominated. This is generally true for the rest of the world as well. Australasia has demonstrated a pattern very similar to the UK" and the experience in India and Malaysia, for example, remains patchy'. In continental Europe, the interest remains high but again is experimental and occasional. There have, as yet, been few attempts to make systematic appraisals of the European experience of reporting environmental issues - unlike the well-reported European experience with employee reporting'. Even this brief review demonstrates that there is no shortage of possible ways in which to develop corporate social reporting in general and environmental reporting in particular. However, as with financial reporting itself, evaluation of various approaches and subsequent choice of policy requires, as a minimum, some agreed criteria - i.e. in the popular current terminology, an agreed conceptual framework. Whilst a number of attempts to build conceptual frameworks for corporate social reporting have been attempted they have either suffered from the same flaccidity that bedevils traditional financial reporting and the usual decision-usefulness approaches" or else they are built within a framework different from and

22

22

24

25

See, for example, Trotman & Bradley (1981), Guthrie & Mathews (1985), Guthrie & Parker (1988), (1989). See, for example, Singh & Ahuja (1983), Andrews et al (1989) and Teoh & Thong (1984). See Brockoff (1979), Dierkes (1979), Lessem (1977), Preston et al (1978), Schreuder (1979)Grojer & Stark (1977), Lung & Ofledal (1977), and the widely reported Deutche Shell experiment - Jaggi (1979), Most (1977) and Van den Burgh (1976). See, for example, Ramanathan (1976), Mathews (1984), Dierkes and Antal (1985). The problem is, initially at any rate, the problem of choosing the objectives for any system of reporting - see Perks & Gray (1978), (1979), Parker (1977), Cowen et al (1987).


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largely incompatible with current reporting practice. A particular example of this is the attempt to structure reporting in an accountability framework 26. Whilst I believe this still remains the most productive line of enquiry there is little evidence to suggest that a full reappraisal of accounting in general and corporate social reporting in particular within this framework are political possibilities in the near future. Therefore, whilst it is possible for some of the accountability-driven ideas to be articulated in a way compatible with current reporting practice' a generally more pragmatic approach needs to be taken if the urgent environmental pressures represented in the Pearce Report are to be integrated into reporting practice in the immediate future. Such is the line being taken by the United Nations initiative in this field and, as such, it is this initiative which promises the most practicable option for the immediate future of environmental accounting and reporting.

6.4 The United Nations Initiative on External Environmental Reporting The United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting are a committee of the UN's Economic and Social Council and they discuss, monitor, research various aspects of accounting practice and recommend policy changes where considered appropriate. (The address and contact are given in Appendix B). One recent issue to which they have turned their attention is that of "information disclosure relating to environmental measures". A recent

26

See Gray (1983), Gray, Owen & Maunders (1987), (1988), (1990).

27

See Gray, Owen & Maunders (1986).

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agenda paper summarised their position to date, (reference E/C.10/AC.3/1990/5). The paper is a review of regulations and practices (plus a thin sampling of attitudes) with respect to environmental disclosure in Brazil, Canada, FDR, India, Netherlands, Norway, Sweden, Switzerland, UK and USA. The work was undertaken a view to establishing: (i) the information about environmental issues that the preparers of financial accounts are currently giving, and; (ii) the environmental information which would be necessary to provide users with a true and fair view. Thus the analysis has the overall appearance of compatibility with current reporting practice but has no rigorous theoretical framework. One important element to emerge from the UN survey of business attitude is the remarkable degree of apparent support for increased accounting in the environmental sphere. The UN group appeared to believe they were very much working in the realms of the possible. The paper addresses the following major areas: (a) The definition of environmental expenditure and activity;

Distinguishing expenditure which is incurred for reasons of protection or enhancement of the environment from normal business expenditure is a considerable problem (e.g. part of the cost of a new machine or process may incorporate state-of-the-art environmental technology). Business is concerned about this. The UN refused to allow this problem to become insurmountable. Definition clearly is an issue and at a minimum it mitigates


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against seperate inclusion in the profit & loss account and balance sheet but it need not, however, mitigate against the inclusion of best estimates in the notes to the accounts or in the directors' report; (cf. USA and Norway reporting).

(b) The asset/expense distinction and whether expenditure on environmental issues can be capitalised; Subject to (a) above, there appears to be a growing acceptance that organisations be permitted to capitalise expenditure on environmental measures. The theoretical case is based upon the principle of accrual and, in particular, the proposition that the expenditure will benefit future generations in future accounting periods. The political reason, however, is much stronger - i.e. capitalisation allows amortisation over a number of years and thus reduces short run pressure on earnings-per-share (EPS). Given the need to encourage organisations to undertake environmental expenditure, encouragement is probably necessary and has been seen to be necessary in other EC countries (see Chapter 3). The concern over EPS may be bizarre but it is real none-the-less and is one of those examples of accounting being implicated in sub-optimal behaviour. In the case of EPS, accounting has probably had some considerable influence on short-termism and thus upon the environment itself. (See Chapters 2 & 3). This looks like one 'economic consequence' we .need not argue about and which we must undo as quickly as possible. Thus, given that accounting has no agreed conceptual framework and one can therefore find a theoretical justification for virtually anything - it seems politically appropriate to allow capitalisation of environmental expenditures.

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(c) Contingent liabilities with respect to future environmental costs Environmental contingent liabilities are a matter of increasing concern in USA and (more recently) in Europe'. The simplest manifestation of this is in the need to clean up a site of (for example) toxic waste. Companies in the USA are finding themselves faced with this more frequently and insurers, bankers and takeover/merger consultants are becoming very concerned about such potential future liability in a client/bid target. (See Chapter 3). The UN paper reviews the wide range of practice which exists in accounting for contingent liabilities/losses and devotes considerable attention to the issue. The problem against which the UN stumbles relates to the basic question of why one should treat environmental contingencies as any different from any other. There would seem to be no a priori case for treating environmental contingent liabilities as a special category of contingent liability. The urgency which attaches to the environmental issue suggested to the UN, however, that there is a need to (a) tighten up the reporting rules on contingencies and (b) flag up environmental expenditures as a major possible source of future contingencies.

(d) Taxation The UN discussion was concerned with ways of giving business 'motivation' to do something they probably should have done/should be doing already. The discussion fell into four main categories: (i) the extent to which various countries' tax systems are closely tied to the financial accounting numbers (i.e. in Britain the link is very loose and therefore the issues in this section have less direct impact on the UK).

28

It appears that they are now arriving in the UK. Roger Cowe reports that Beazer disclosed a provision for the reparation of environmental damage, (AA (Accountancy Age) November 1989 p7).


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(ii) following (i), there was discussion of different countries' practice with respect to when an expenditure could be recorded in the accounting system - when it was contracted for or when it was paid. Practice varies considerably and the tax effects can be serious. (iii) review of countries' practice vis-a-vis accelerated depreciation/tax allowances on environmental assets (cross reference the expenditure capitalised debate above). Again practice varies considerably and the cash effects are real. (iv) a most interesting option not allowable in Britain is the idea of permitting deductions made from income for the purposes of creating environmental investment funds to be allowable against tax. Other possibilities within the tax system do exist - such as tax credits and tax shelters as well as grants and investment assistance.

(e) Disclosure The UN paper is very strong in support of disclosure. It effectively covers disclosure in four categories: (i) disclosure of environmental policy - whilst this is probably envisaged as being rather less bland than most companies' statement on (e.g.) R&D policy it is unlikely to be either very contentious or of dramatic content; (ii) disclosure of expenditure in the accounting period (possibly distinguishing between costs of meeting current requirements and 'voluntary' expenditure). These I have discussed above. The mood of the UN appears to be favouring the inclusion of best estimates in either the notes to the accounts or the directors' report. (iii) disclosure of future expenditure: in addition to the contingent liabilities discussed above there are 'voluntary and 'semi-voluntary' clean up and

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restoration costs (the simplest example of which are mining companies). The UN paper seems to support disclosure in all categories. (iv) disclosure of activity and performance: disclosure of what the company is doing, its voluntary undertakings and a statement of its performance against (a) standards set in law and quasi-law and (b) its own personally set targets. A minimum inclusion here will be emmission levels, noise levels and toxic waste as well as recycling/'clean' waste activity. 6.5 Discussion of the United Nations Initiative

The UN Working Group approach has a number of important attractions at a practical level. In the first place, it has sought neither a fully developed and integrated system of financial and environmental accounting nor some marginalised bolt-on addition to the Annual Report. In avoiding the first the Working Group has stayed away from the considerable practical and theoretical problems that integrated accounting raises. In avoiding the second, the Group has recognised that environmental issues are not marginal, but are central, to organisational activity. This must be reflected in the accounting system. At a pragmatic level, the UN approach steers a fine line between these two. In the second place, the UN Working Group has maintained the distinction between organisational activity, disclosure of that activity and 'incentive' for the activity. The Group has not allowed mere accounting problems to interfere with these distinctions. (The taxation issues will dearly need to be addressed but these are largely of a macro-policy nature outside the immediate direct influence of accounting and so are not examined further


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here)". Further incentives lie outside the direct scope of accounting but the existence of disincentives is very much our business. Whilst moral exhortation, cajolery, re-education and the like may be preferable ethical bases for increasing the environmental sensitivity of organisations, there seems little doubt that unless (or until) the appropriate organisational change can be wrought the most effective means of ensuring actions more commensurate with environmental sensitivity is through the income number - whether through enhancing cleanly generated income numbers or, alternatively, ensuring that no impediments are placed in the way of cleaner income numbers. Definition issues aside, the principle of allowing capitalisation of environmental expenditure therefore has a great deal to recommend it'. The UN's concern with the contingent liability echoes two points which are writ large in the USA experience - (a) the legal liability for the clean-up of sites (the Superfund problems) and other existing or inherited liabilities; and (b) the costs which an organisation would need to incur to meet (typically) federal environmental requirements other than site clean-up. It would seem that it is in the realms of (a) that the pressures for the use of contingent liability lie - for (b) there seems little argument that the same data can be transmitted through the notes to the accounts or whatever as

29

30

These matters were touched upon in Chapter 3. More detail can found in Owens, Anderson & Brunskill (1990). See also Pearson & Smith (1990), Alexandre et al (1980). Chapter 3 touched upon matters related to the pressures to be both green and seen to be green. These are in probable tension with the more immediate, 'conventional' pressures upon the organisation. As the environmental pressures mount, however, the traditionally greener organisation will begin to gain over those organisations which have been slower in responding to the need for greater environmental sensitivity. Perhaps, also, there is a need to encourage even the dirtiest and most reluctant organisations to consider becoming greener.

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long as the same level of reliability (the presumed impact of audit) can be inferred. It is therefore in the realms of disclosure that the greatest push must come". Disclosure in the categories suggested by the UN Working Group seems conventionally uncontentious and, appeared from the research there undertaken, to have met a degree of enthusiasm - a result that admittedly rings hollow when laid alongside the results of the environmental disclosure surveys reviewed earlier in the chapter. The principal focus for disclosure is, it seems to me, to enable individuals to discover the extent to which organisations have played by the legal, quasi-legal and social 'rules of the game' - in this case a game whose consequences are far from frivolous. That requires the compliance statement mentioned by the UN but, more particularly, a compliance-with-standard report in which site-by-site comparisons are made between currently accepted standards (from law, quangos or 'other authoritative source') and the organisational performance against that standard. Each standard would need a referent (e.g. the level of Biological Oxygen Demand at which particular forms of life cease) and, I suppose, some indication of the reliability of the data". That report, together with the UN's other suggestions - environmental policy, costs incurred and costs expected - provide a useful, pragmatists' first attempt at

31

32

It seems reasonable to expect that organisations will either introduce appropriate accounting innovations themselves or put pressure on the regulatory bodies to introduce the changes they want (see, for example, Hope & Briggs, 1982; Hope & Gray, 1982). In general, however, organisations seem reluctant to voluntarily disclose 'hard' data and it is here that pressure must be applied if environmental reporting is to mean anything and the organisations are not again allowed to be the architects of their own accountability. These issues are considered in much more depth in Gray, Owen & Maunders (1986), (1987), (1988), (1990). The 1986 reference, in particular, gives a suggested specimen as to how a compliance-with-standard report might look.


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environmental reporting. 6.6 Further Developments The UN suggestions rely on the simplest of the notions introduced in Chapter 5 - the environmental policy, the compliance audit and, to a degree, the financial environmental audit. Whilst external environmental reporting might usefully start here, recognition of the considerable complexity of the issues involved should really push for an increasing number of dimensions to the reporting. Following Chapter 5 this would mean taking account, first, of the ethical audit and then following up with reporting upon wastes and energy issues. Although in the present climate, the likelihood of organisational reporting getting even this far seems ludicrously optimistic the issues are sufficiently important to mean that these forms of reporting must be examined and developed. Further still, the matters raised in Chapter 5 relating to the environmental budget, investments and BPEO and, finally, the suggestions culminating in Figure 5.4 for a Resource flow: inputoutput analysis may also need integration into the environmental reporting system. All these suggestions, whilst they have some immediate applications, are going to benefit from serious and measured research from a variety of sources. Setting in stone ideas which, in time, turn out to have been halfbaked is not especially fruitful. Hence why the relatively simple, thin-endof-the-wedge approach from the UN has seemed so attractive. However, there is one dimension from Chapter 5 that could be usefully considered with the simple notions - that of the categorisation and characterisation of

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organisation environmental assets. 6.7 A Brief Reconsideration of the Nature of Assets The complexities involved in eco-sphere, social, economic, political, transcendental and entity interactions make attempting to construct some total, comprehensive and coherent system of accounting for the environment a profoundly difficult (if not impossible) task". One can only hope that researchers will continue to make the attempt, but in the meantime, the urgency of the environmental issues could again be taken to counsel pragmatism. That is, a system of accountings of mixed pedigrees is perhaps better than no accountings at all given the urgency of raising the issues upon the agenda, changing perceptions and undertaking different actions and strategies. It strikes me that the basic UN initiative has only one major flaw at the pragmatic level and this is that it fails to address the essentially radical nature of environmental concern. That is, as we have seen, there is a basic philosophical, ethical and theoretical conflict between protection and enhancement of the environment and the neo-classical economic basis of our organisations and their accounting. It is my belief that any environmental accounting system should acknowledge this possibility even if it cannot take it entirely to its bosom. One matter from Chapter 5 that does go to the heart (or part of the heart

33

See, for example, Mathews (1984), (1985). Note also, that many of the serious challenges to the ability of accounting to accomodate the social and environmental world lie in the basic assumptions of the craft. Social accounting, in general, happily tramples over the principles of economic events, money measurement, and user-orientation (see, for example, Laughlin & Gray, 1988; Ch10) but the entity concept is usually maintained. This has been successfully and appropriately challenged (see, for example, Tinker, 1985; Hines, 1988) but nothing has, as yet, been put in its place. A 'softened' version of the entity concept is therefore maintained throughout this project.

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at least) of the issues, is the way we consider ownership and assets. Chapter 5, section 5.17, provided some brief discussion concerning the nature of ownership and property rights. The wider implications that are inherent in 'assets' were discussed in Chapter 2 and illustrated in Figure 2.2c. In this section, I will attempt to suggest a few ways in which this central issue might be touched upon, hinted at, perhaps even accounted for, in the Annual Report. Perhaps one way of approaching this is from the notion of capital maintenance. Currently, our accounting for fixed assets, very crudely, distinguishes between assets on the basis of some combination of tangibility, use and expected life. Depreciation, very crudely, together with the use of various provisions and reserves ensures, to some degree, that the capital of the organisation is maintained - not squandered. The question of whether we do attempt, and whether it is apposite to so attempt, to maintain capital as defined by either operating capacity or owner's equity is, of course, a live issue. But the principle is there, however articulated, and could be introduced to an Annual Report with an environmental orientation. Following Chapter 5, there would be three elements to consider: (a) the definition and categorisation of assets; (b) transfers between categories (to and from man-made capital); and (c) maintenance of the assets in each of the categories. (a) Definition and categorisation of assets

Following the Pearce Report there is an urgent need to distinguish manmade from natural capital. As we saw (following the arguments of Turner -

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see Appendix A for more detail) we should further distinguish between critical capital and other natural capital. Although the practical problems of identifying and categorising assets in this way are horrendous, the importance of the matter suggests that approximations are better than nothing. It will be recalled that an important element of the natural capital will be 'intangible' arising from non-priced assets. It seems to me that important experiments can be undertaken by organisations in trying to arrive at the sort of categorisations they (and the environmentalists!) can live with. Whether accurate or not, (and precision may simply not be possible), whether consistent or not, I would like to see these categories appearing on the face of the balance sheet. In this way, a signal of the complexity and centrality of the issues might be given to the less environmentally sensitive members of the financial and business worlds. (b) Transfers between categories of assets A central issue has been that ownership allows one the right to diminish natural capital at whim. The diminution is usually in pursuit of an increase in priced consumption benefits either directly or via increases in man-made capital. If accounting is to capture this, there will have to be some attempt to track priced (and non-priced) movements from the categories of natural capital to the categories of man-made capital and current expenditure/consumption benefits along the lines suggested by Figure 5.4. From the environmentalist perspective, perhaps the most pressing area in which accountability is needed is here - to what extent is critical capital being privately diminished? In addition to the sheer difficulty of the exercise, it seems very likely that such disclosure would be fairly unpopular with reporting organisations. I cannot, however, see any alternative if the


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asset maintenance principles are to be explored further. At a minimum, it seems that the notes to the accounts, or the directors' report must contain a report suggesting the amounts within and the movements between the categories. It will be very difficult, it must not be impossible. (c) Maintenance of the categories of assets The essential characteristic of critical capital is that it must not be diminished. This will obviously have a perverse motivating effect upon the categorisation of 'critical' and 'other' capital as the ownership of a critical asset would, in traditional economic terms, become a useless asset - one which could not be further used for productive purposes. This is unlikely to be popular with some organisations. Once the categories have been established then attempts by organisations to ensure no diminution in critical capital will - in Pearce's terms - cause a reduction in the increases in man-made capital. Such information should be shown to the world at large because although the substitution will show as a diminution in traditional capital maintenance and a reduction in income, it represents a non-reduction of critical capital and this needs to be communicated. In time, (and very quickly one hopes) the transfers between critical capital and other categories will cease. Movements between other natural capital and man-made capital look like continuing for some time yet and it is here that the more difficult tracking and accounting will take place. I would have thought that this was an area for urgent theorising, research and experimentation to discover the possibilities and practicabilities of the issue. 6.8 Conclusions. Again the twin themes of urgency and experimentation emerge from this

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chapter and, once again, the more seriously one takes the environmental issues the more difficult will be the accounting. There is no shortage of possible ways to try and account for the environment but all approaches are less than perfect'. However, given both the urgency of the issues and the extent of the difficulties inherent in a complete environmental accounting, a pragmatic line seemed apposite. The most practicable option would be: (a) to follow the UN initiative within the current framework of financial reporting; (b) require the addition of a compliance-with-standard report in order to capture the current legal framework of pollution regulation and; (c) in order to initiate a reorientation of the accounting from ownership towards stewardship and to enable the implementation of the Pearce proposals on natural and man-made capital; introduce a redefinition of assets and capital maintenance. Such proposals could be introduced almost immediately, would force experiment, encourage research and, most importantly, begin the process of moving the external accounting and reporting process into a more environmentally benign role.

34

Such a consideration has been no hindrance to financial accounting, but has been erected as an obstacle to corporate social reporting in the past, (see, for example, Perks & Gray, 1978; Gray, Owen & Maunders, 1987).

CHAPTER 7 CONCLUSIONS, RECOMMENDATIONS AND THE WAY FORWARD? 7.1 Introduction The publication of the Pearce Report and the response of the DoE to its recommendations signalled a significant change in UK environmental posture. That change in posture would lead to a change in practice through three major mechanisms: - changes in economic, particularly taxation, policy; changes in law, particularly influenced by the EC; and changes in attitude, particularly attitudes of employees and consumers and changes in attitude deriving from DoE and DTI encouragement. Some of the changes, most notably in taxation, will 'go with the grain of the market' and result in really no more than a changing price structure. Organisations will have to do nothing intrinsically different from normal 'good business practice' and respond to a change in market pressures. However, other changes will require new, and perhaps even intrinsically different, activities - but no one is quite sure what these new activities will entail or how we might go about setting them into motion. More directly, how can organisations set about the process of implementing the principles of the Pearce Report? As accounting practice is a major factor in the structure, orientation, decisions, performance and rewards of organisations, as well as being a major element in its dealing with external participants it makes considerable sense to ask what accounting could contribute to the implementation of the Pearce Report and, more generally, to the whole issue of environmental protection and enhancement.

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This short report has sought to begin that process. There are, broadly, three elements to this: re-examination of the position of accounting from an environmental perspective (Chapters 2, 3, & 4); discussion and suggestions about possible ways in which accounting could directly contribute to the greening of organisations (Chapters 5 & 6); and now, here, an attempt to suggest directions for the future. It seems to me that there are, broadly speaking, four potential strands of development: experimentation; sharing knowledge and ideas; changing ways of thinking; and research. The preferred approach to each will depend, to a significant degree, upon the extent to which the current environmental issues are treated as serious and critical. 7.2 The Environment: Crisis or Credulity?

Dealing first with the question of how serious are the environmental issues - rather than how does a changed environmental perception affect organisations - there are a number of levels of response to this question. They crudely fall into four categories: "there is nothing to worry about ignore it all"; "there is a bit of a problem with one or two unpleasant manifestations but all it needs is some symptom-curing and everything will be basically alright" (the light green response); "the planet may soon cease to support life - the matter is critical" (the deep green response); and 'Western man's failure is a spiritual and social one of which environmental abuse and degradation is only a symptom" (a Gaia and green politics response). Whilst the fourth is a matter of judgement and conviction, (and is often the basis of a deep green perception), the question of which of the other three positions is correct is largely an empirical question - but one

CHAPTER 7: THE WAY FORWARD?

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whose testing is somewhat dramatic. This report has been prepared to straddle the light and the deep green perceptions. That is, the response from the UK government and from business so far has been light green that is, therefore, the framework within which analysis of the possible takes place. At the same time, however, I take a deeper green view of the matter and have offered analyses and possibilities which will introduce environmental questions at a more fundamental level of organisational and accounting life. 7.3 Experimentation

A major purpose of this report was to distill and deduce from existing literature and previous experiments a 'shopping list' of possible approaches to deriving more environmentally sensitive accounting practices. These were discussed in Chapters 5 & 6 and a summary of them presented in the Executive Summary - those summaries are repeated on the following pages for convenience. Now is the turn of the organisations in general and practicing accountants in particular to respond with: explanations of the suggestions' implausibility; experience which enhances or denigrates them; or a willingness to experiment with them. Experimentation seems urgent as so very little is currently known about most of these things and the matters are pressing ones. Organisations are encouraged, also, to consider working with a number of researchers on these issues to enable a wider monitoring of the processes and their effects and to provide a semiindependent input (and perhaps even a transparency) to the process.

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SOME POSSIBILITIES FOR MORE ENVIRONMENTALLY SENSITIVE INTERNAL ACCOUNTING AND INFORMATION SYSTEMS * Development of an environmental department. * Development, adoption and communication of a detailed environmental policy. The Valdez Principles represent a good first stage. * Institution of regular monitoring, reporting and auditing of legal, and quasi-legal compliance. * Development of the compliance audit to encompass the ethical audit. * Institution of regular and systematic identification, monitoring, reporting and audit of waste. Consider re-definition of waste as by-product for re-cycling. * Develop the energy audit. Consider the possibility of a full energy accounting system. * Monitor emerging issues. * Develop a regular mechanism for conducting environmental impact analysis and incorporating the results into all board and senior management decisions. * Consolidate the foregoing (plus other strategies) into a full environmental audit specific to each organisation. * Establish the regular and systematic financial appraisal of environmental options that recognises the new and emerging price structure. * Consider other possibilities related to: the third world; risk asessment; eco-labelling; response to ethical investment; etc., etc.. * Establish environmental budgets for activity centres. * Introduce environmental hurdle rates for new investments. Recognise the reality of BPEO and BATNEEC. * Develop a new classification of assets to recognise man-made, natural and critical capital. Develop environmental asset accounting and maintenance. * Consolidate this all with the development of Resource-flow input-output analysis.


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SOME POSSIBILITIES FOR MORE ENVIRONMENTALLY SENSITIVE EXTERNAL ACCOUNTING AND REPORTING SYSTEMS Note that if one's own organisational reporting is not sufficient one may find oneself the subject of external social audits. * There is a very wide range of previous experiments from which to learn and upon which to build further experiments. * The current United Nations initiative offers a practicable and realistic policy option upon which external environmental reporting could be based. The initiative suggests that each organisation might include in its Annual Report: # the organisation's environmental policy; # the capitalisation of environmental expenditures; # specific identification of environmental contingent liabilities relating to (a) bringing the organisation into line with current regulations and (b) future potential liabilities such as site cleanup costs; # disclosure of current period expenditure on environmental protection . # disclosure of anticipated environmental expenditure in excess of that:classified as contingent liabilities - both voluntary expenditure and that designed to satisfy current and future regulations; # disclosure of organisational activity and performance. * A more specific approach to the disdosure of activity and pe rformance would be the production and disclosure of a systematic compliance-with-standard report where standards would consist of (a) legal standards; (b) anticipated legal standards plus EC directives not yet incorporated into UK law; (c) industry best practice standards; (d) the organisation's own ethical/code of conduct standards where these are in excess of (a), (b) and (c). * If reporting is to reflect the extent ,of the environmental issues and to fully operationalise the Pearce Report, then it will be necessary to re-define the nature of assets and to disclose (a) man-made, natural and critical capital assets; (b) transfers between categories of assets; and (c) data on the maintenance of critical and other natural capital assets.

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7.4 The Sharing of Experience and Ideas

This report will enable a wider dissemination of the available public ideas plus others less widely known. It should therefore be a useful starting point for conferences, meetings, brainstorming sessions or whatever, where professional accountants and other organisational participants can share ideas, experience and knowledge. If the deeper green perception is correct then (1) the issues are too important to let everyone (who has an interest anyway) duplicate efforts behind closed doors and continually re-invent wheels; and (ii) the issues are considerably more important than trying to get a 1% market advantage over ones nearest competitor. It is recommended that the professional accounting bodies continue - and firmly establish - the processes they have started in the undertaking of research, the formation of working parties and the arranging of conferences. These issues require as wide a range of minds on them as possible and must be as fully integrated as possible into conventional ways of thinking. 7.5 Ways of Thought One theme that I hope has come out from this report is that our normal

ways of thinking about things do not allow full emphasis to be given to the environmental issues. In particular, the way traditional accounting is focussed, it cannot possibly take any account of environmental issues. Chapter 2 dwelt on this a little and, using a systems perspective, suggested how our traditional view of accounting might be re-analysed in such a way that the limitations of our profession could be seen more clearly. Once the limitations can be seen, a solution is so much more likely. It therefore seems essential that new ways of thinking - first about traditional accounting


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practice and second about how accounting can begin to incorporate environmental matters - be explored and incorporated into the accounting orthodoxy. The report has offered one such starting point. 7.6 Further Research The first priority in further research must be to bring the academics and practitioners together - working in partnership, experimenting with the 'shopping list' of proposals given above in section 7.3 in a joint action research programme. The issues are of such urgency and complexity that the full range of talents and experiences will be needed. It may be, that as a pre-requisite to this, in-depth survey work will also be necessary. We do need to discover (i) what is happening in this field; (ii) the difficulties that surround articulation and implementation of environmental accounting systems (i.e. experiences with what is happenning); (iii) a review of what is not happening and why; (iv) explorations of what can happen. For this there is a necessity to gain information from a large number of organisations but that, itself, needs to be informed by fairly substantive practitioner/academic cooperation to build up field awareness. Also, such work will generate useful case material and (depending upon the ontology one prefers) either provide a basis for questionnaire research or become the foundation of our environmental accounting knowledge. At the same time as such mutually involved experimentation is taking place, there are longer term issues which must be addressed: the theoretical issues

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concerning the relationship of accounting and the environment will need reexamination and re-construction; the implications for the traditional model of accounting and for a 'conceptual framework' need to be established; there seems to be an important need to re-consider how we define assets; the conceptual basis of accounting's recording of transactions as a function of property rights deserves further thought; such analysis will lead to recognising accounting's social and even democratic role; this may lead to questions about how we may develop accountability or what our current role in accountability tells us about the type of society we practice in; and so on. There is a particular need for more researchers to see that social and environmental accounting are not the marginal and irrelevant activities they have been thought to be for so long. They go to the very heart of what passes for traditional accounting and are the larger set of which traditional accounting is a subset. Researchers must bring their considerable abilities to bear upon the issues. As accounting comes to appreciate the fundamental nature of the questions raised by an environmental perspective, the questions needing answers and the research opportunities available will rise exponentially. The sooner we start the better.

APPENDIX A: A REVIEW OF THE PEARCE REPORT David Pearce, Anil Markandya, Edward B. Barbier, Blueprint for a Green

Economy (London: Earthscan) 1989. pp192

Introduction Blueprint for a Green Economy (the Pearce Report) arose out of a report originally commissioned for the UK Department of the Environment (DoE). Its publication signalled that Britain, and British politicians in particular, had finally recognised that any consideration of 'economy without a consideration of 'environmental' was going to land Britain; almost certainly the West; and most probably the world itself; in a critical situation. This critical situation might, in its most pessimistic scenario, fail to continue supporting life - including human life. From the outset it is important to recognise that there is very little that is new in the Pearce Report. It was written as an attempt to summarise the last twenty years or so of development of environmental economics in a manner both accessible and politically digestible. This it achieves with success. It is this success - as illustrated by the response that the Report has generated as part of its political weight - rather than any feast of fresh ideas that makes the Pearce Report remarkable. However, this success also raises questions which should be borne in mind in what follows. First and foremost, there is an especially persuasive case

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that modern economic analysis (not just neo-classical economics such as that found in the Pearce Report) is fundamentally incompatible with environmental issues and philosophically and ontologically incapable of dealing with the ideas. I shall return to examine this point below. Secondly, one might be disturbed that it should be an economist who is considered able to comment upon so complex an issue and who, unsurprisingly, comments with all the intellectual terrorism with which so many economists address any issue. I will return also to this matter. Finally, the Report has been apparently acceptable to a Conservative Government of the Thatcher administration, committed (in rhetoric at least) to 'free markets' and to the encouragement and stimulation of competition and growth in a world where success is increasingly represented by money wealth.

The Report The first chapter consists of a long and thorough introduction to the principal ideas which are to be developed in the text. It begins with the notion of "sustainable development" - a hotly contested term. In the case of the Pearce Report, 'development' is seen to include the desirability of rising real per capita income and the 'sustainable' element relates broadly to the sort of level of continuing growth that the species (or at least some of it) can/should expect. But this is only part of the story. Humanity also requires an additional dimension which we can call 'quality of life'. The first major piece of economic sedition to enter the Pearce Report occurs at this point when it is suggested that traditional measures of income (e.g. GDP) do not and cannot capture all of this and, therefore, there must exist the danger that any reasonable assessment of 'quality of life' is in danger of

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decline if we do not rectify our standards, measurements, policies and approaches. As Pearce argues, we must expand our thinking to embrace three additional concepts: environment (we must recognise that the environment has value); futurity (we must extend our time horizons); and equity (we must seek greater intra-generational and inter-generational fairness). An essential element in this process is a re-examination of the nature of capital. Capital or wealth, the report argues, must be seen as consisting of two elements - man made capital (called in the report, for some reason, "capital wealth") and natural capital (called "natural wealth"). Man-made capital is -

all man-made things from roads through plant and machinery to human intelligence, whilst natural capital consists of all the environmentally given assets from air and water through wildlife and minerals to the ozone layer. One of the things with which the equity concept is concerned, is ensuring that this generation passes to subsequent generations the same value of capital. In general, the natural capital is diminished in the creation of manmade capital. To what extent (if at all) are they substitutes for each other? And how (if at all) may we best estimate rates of substitution between manmade and natural capital? One question inevitably follows - to what extent has the enormous per capita rise in income in the West been at the expense of the capital of future generations? Have we been living off the world's capital and, therefore, the capital of future generations? Have we been failing to maintain the earth's

capital? And, finally (although given less profile in the report) to what

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extent has this Western binge been at the expense of both the income and the capital of Third World countries? This text does not attempt seriously to answer those questions. Instead the report looks forward - less concerned with how we got here and more concerned with where we can get to. For this, there has to be some recognition of the political exigencies in which any policy prescription is set. This Pearce does implicitly although much of his earlier work shows similar orientation, (see, for example Alexandre et al, 1980; Markandya & Pearce, 1988). In the end, the Report provides an excellent introductory review of some of the traditional economic, "market-based" possibilities by which, it is purported, 'environment', 'futurity' • and 'equity' may be enhanced. To set the scene for the 'solutions' the report rehearses in Chapter 3 - for those of a traditional, even spiritual, affection for the traditional groves of neo-classical economics - the considerable literature on how to attach economic values to everything for which there is no market price. After all, the only problems that can exist in the world that Pearce portrays must, by definition, arise from 'imperfections in the markets' and, it may follow, such problems will be amenable to further economic analysis. Clearly and carefully, Pearce lays out the notions of 'total value' as some sum of 'use value', 'option value' and existence value' and goes on to outline how far economists have got with estimating such 'values'. The report is careful no: to come out too strongly in favour of any particular valuation method. From here, the report flows nicely into national income accounting.


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Chapter 4 begins with a review of the French and Norwegian methods of national resource accounting before progressing to a review of some of the more immediate failures of traditional national income accounting. These are principally of two sorts - (i) those arising because the environment has a price only when property rights.have been established over it and those rights then exercised; and (ii) those arising because of the bizarre habit of treating income as a measure of welfare. The report recommends numerical adjustments to the national income accounts but confesses itself unable to say what those adjustments should be. The report does not address the idea that the weakness it has illuminated might be taken as examples of why national income accounting is a fundamentally improper way of recording human existence. Chapters 5 and 6 are simple, technical chapters on methods of project appraisal and estimates of discount rates. 'Simple' in the sense that every effort has been made to clarify what is often a very esoteric and elusive literature, and 'technical' in the sense that we are looking for numerical solutions derived from structured algorithms established within a traditional economic technist view of the world. Insofar as one believes it is necessary to undertake such actions, these chapters are particularly valuable. Otherwise they are likely to make one feel poorly. Regardless of how the authors arrived there, it is the contents of Chapter 7 which will have the political and policy influence. This is the chapter of recommendations and the readings of all the entrails point to their having

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considerable clout at the DoE. The authors are clear that their brief only extends to a review of market-based incentives so other possibilities - such as the alarmingly entitled 'full-privatisation' option (in which "we could create markets in previously free services") - are not explored. Furthermore, it is a necessary article of faith in Pearce-world that 'market-based' solutions are more efficient than 'regulatory' solutions and are thus, definitionally, closer to godliness. This issue (quite wisely given the immediate audience) is not seriously addressed. The chapter discusses (strictly in the fashion of a traditional neo-classicist): calculations of 'marginal social cost' pricing; the polluter pays principle; pollution taxes, in particular the much mooted tax on carbon fuels; tradable pollution licences where the 'right' to pollute can be bought and sold; and various forms of incentives, particularly with energy conservation and waste recycling in mind. Assessment

There would seem to be at least three levels on which to attempt an assessment of the report: as a political and practical attempt to raise the environmental agenda in the UK; as a piece of economics; and as a contribution to understanding and the long term well-being of the species. As an attempt to raise the environmental agenda, the report has been a considerable success and to offer any criticism seems churlish. A fuller, better argued, 'greener', more radical text would not have been anywhere near as successful. And, as Turner (forthcoming) argues, the report has been successful in stimulating constructive debate and the beginnings of a policy reorientation in the UK. This is no mean achievement but, despite this, the report must be set in context.


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The Pearce Report, Environmental Economics and Ethics The Pearce report would appear to sit in a well-populated middleground of environmental economists. That is the place where neo-classical economics recognises problems but sees them as amenable to neo-classical solutions, (see, for example Fisher & Peterson, 1976; Devarajan & Fisher, 1981). Traditional economic growth is (often implicitly) believed desirable, if not essential, (see, for example, Lowe & Lewis, 1980; but see Mishan, 1969) and it is in this ground that, for example, the 'Brundtland Report' (UN 1987) took root. It is within this context that intergenerational equity is much debated (see, for example, Bosse1,1987; Dobbs,1982), the marketbased solution is king (see, for example, Thomas, 1980; Peskin et al, 1981; Bjork, 1980; Baumol & Oates, 1979) and tax solutions are the natural outcome of the reasoning, (see, for example, Baumol, 1975; Kneese, 1977; Alexandre et al 1980).

But, I suppose, for the bulk of economists who see themselves as being in the core of the disciplinary matrix (Kuhn, 1970), Pearce and his ilk are heretical and radical because 'environmental economics' remains a specialist field and has not yet embedded itself into mainstream thinking. For some, there would appear to be no problem at all (see, for example, Jones, 1974, Smil, 1987) whilst for other, more influential movers, the environmental issues will bring their own solutions - the markets will sort it all out. This latter view is 'championed' by Simon (see, for example, Simon, 1981; Simon & Kahn, 1985) although not without vigorous opposition, (see, for example, Richardson,1985; Daly, 1985; Pearce, 1985). I make this point because from

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a 'less-economist' point of view, Pearce-world looks cozy, predictable, safe and intelligible only to other economists. It is useful to remember that Pearce has been fighting a battle to retain even this (doesn't-look-very-highto-me) ground for over twenty years and that battle should not be underestimated. As one moves away from the disciplinary core, the criticisms become more damning as environmental science, ethics and systems theory are reintroduced and the coyly veiled foundations of neo-classical economics are reexamined and, exposed, are found be of a suspiciously vacuous ontology. The place to start is probably with two of the most influential founding fathers of modern economic thought - Adam Smith and John Stuart Mill. These two, who gave us (or helped give us) the 'invisible hand', the 'rational economic man', and the utilitarian manifestation of consequentialist reasoning would very probably be appalled by the cold, narrow brutalism applied in their name - although Jeremy Bentham and James Mill might well be altogether happier about the outcome. Smith is best known for his Wealth of Nations published in 1776 and yet the whole of his economic man is premised on the basis of his earlier work, The Theory of Moral Sentiments published in 1759. Smith was concerned with the whole man, not just

economic man, and the 'self-interest' is presumed to be set within an enlightened mind and to be governed by moral law. ('Enlightened' means a great deal more than its usual abuse as "seeing which side my bread is buttered in the long and the short term"). In modern neo-classical


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economics, the great wisdom of Smith is trivialised - his reasoning certainly provides no justification and foundation for modern economics, (see Coker, 1990). We find similar lacunae in the use of John Stuart Mill's work. In particular it is probably useful to remember that Mill was a supporter of the stationary state economy (no-growth). Such a view today would have one

"I know not why it should be a matter of congratulation that persons who are already richer than anyone needs to be, should have doubled their means of consuming things.." J.S.Mill Principles of Political Economy Vol.!! (London: John W. Parker) 1857,

excommunicated in no time. Further, Mill was not a supporter of man's total dominance of nature and recognised the dangers and undesirability of controlled eco-systems, reduced bio-diversity and the disappearance of wilderness. (For more detail, see, for example, Daly, 1980). If we can find such incompatibility within the very foundations of neoclassical economics thinking, we should be unsurprised at the extent of less 'conventional' attack upon the way of thinking and analysing (particularly) environmental issues. There a couple of themes - ethics and growth - that arise from J.S.Mill which naturally lead into these concerns.

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In general, neo-classical economics believes itself to be free of such valueladen notions as 'ethics', (see, for example. McKee, 1986). Insofar as they do arise they are dealt with scientistically within the utilitarian, consequentialist framework. Even from a non-radical perspective (but see Tinker, 1984) this is a dangerous narrowing of the issues. First, the consequences of everything cannot be known - destruction of the ozone layer probably could not have been predicted 50 years ago - therefore consequentialist analysis must be partial. Secondly, in its more brutal manifestations, consequentialism depends only upon the trade-off of financial values - i.e. all consequences have costs and benefits to which financial numbers are attached and the 'ethical' decision is that one which generates the largest positive number. We have already touched upon two major problems here - attaching financial numbers to non-market phenomena is very difficult and the problem we find ourselves in arises from the environment only having a number attached when it comes into private ownership. Furthermore, the prices reflected in resources etc. cannot be seriously argued as reflecting some value-free 'true' value. Some, or all of income, wealth, information, intelligence, altruism, faith and power are unevenly distributed throughout the world and throughout history thus producing distortions of preferences of one group over another, for one generation over another, for one country over another and so on, (Gray, 1989). Of particular significance is the way in which consequentialist thought has driven out motivist and deontological ethical reasoning (see, for example, Donaldson, 1989 and see Chapter 2) and thus left the environmental issues

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largely unprotected. These are issues taken up by Turner, (1989; forthcoming) and by Daly (1980). Neo-classical economics takes no account that there might be some intrinsic 'rightness' or 'wrongness' in the way man approaches his use of and interaction with the environment. This need not be a religious concern - there are serious intellectual reasons for considering that any decline in bio-diversity as a result of man's actions is fundamentally unethical and therefore is 'wrong' action - whether or not consequentialism would come to the same conclusion. How are the rights of non-human life to be integrated into our values, reasoning and policy decisions? The question is far from trivial, but neo-classical analysis has no solutions. The second issue raised by Mill was that of 'growth'. Mishan has argued that "economic growth is embedded in our psyche" so much so that we are unable to consider it and discuss it. Certainly the attachment to it makes no rational sense unless one takes Daly's argument, developed from Ruskin, that "politic economics tries to buy off social conflict by abolishing scarcity". Scarcity shows no sign of being abolished whilst inequality shows every sign of increasing. A central argument between the deep and light greens has been over the question of the desirability and possibility of sustained growth. 'Sustainable development' which appears in one of its manifestations in the Pearce Report is an attempt at a compromise. Suffice it for now to point out that there is a significant body of opinion that believes that western (traditionally measured) economic growth cannot be sustained without either (a) continued exploitation of the Third World and/or (b) increasing the likelihood of ecological disaster within a fairly short space of time.

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Whoever one chooses to believe and/or whoever turns out to be right (a more drastic means of deciding) there is one central point to the Pearce report which must be reconsidered. Turner (1987, 1989, for example) has long argued that we must reconstruct our notion of capital. Whilst the Pearce report goes some way towards recognising that the manmade/natural capital distinction is important it does not address the question of non-replaceable capital in sufficient detail. I suppose an essential selling-point of traditional economics is its ability to work with and through the price mechanism thus allowing all things to be reduced to a common medium - money. Thus, unless the price mechanism distinguishes between different types of things, economics will not either'. Human capital, within neo-classical economics, usually appears to be infinitely substitutable and virtually infinitely renewable. Natural capital tends to be considered similarly. This is precisely what is NOT the case. Ecosystems, habitats, biodiversity and many basic resources (e.g. the ozone layer) are NOT renewable or substitutable. Turner introduces the notion of critical capital and other natural capital to try and deal with this. Some natural resources have a higher degree of substitution - fossil fides with solar panels, for example - whilst there are many others that mankind should just leave alone altogether regardless of what some arbitrary but highly adored price mechanism has to say on the matter. By facing up to the question of 'critical It might be possible to typify the tension between traditional economic and environmentalist approaches to environmental crisis in relation to prices and the price mechanism. The traditional economist will consider that the prices currently generated in the market place are wrong - that they fail to take in the full costs of the product or service to which they relate. To an environmentalist, it is the process by which the price is produced that is flawed - i.e. the system of property rights and exchange by which a price is generated that is so alien to harmonious existence. It is the system of property tights and prices which focusses attention on only those things which are priced (hence the tragedy of the commons) and on only certain aspects of the thing owned (hence private resource/bio-diversity depletion).


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capital' we start to face up to the central tensions between our traditional expectations of economics and the critical matters of environmentalism there is always the chance that most of the eco-system is 'critical capital' and the considerable amount of it which mankind has destroyed already may mean that many of our preferred options are no longer available to us. World plc, (to use a crass but popular idiom of the UK late 1980s), may well already be bankrupt. The Pearce Report, Environmentalism and Systems Theory

Although Pearce, in other work, (see, for example, Pearce, 1985), has recognised the value of setting environmental analysis in a systems framework no such influence is apparent in Blueprint for a Green Economy. The intellectual history of environmentalism has been dominated by systems thinking. From its earliest start (see, for example, Carson, 1962; Ward, 1966; and especially Boulding, 1966) through its take-off period (see, for example, Goldsmith, 1972; Commoner, 1972; Ward & Dubos, 1972; Meadows et al, 1972; Schumacher, 1973; Dickson, 1974) through to more recent analyses (see, for example, Ward, 1979; Daly, 1980; Boulding, 1982; UN, 1987) writers have explicitly or implicitly adopted a broad systems frame of reference. The contribution of systems theory lies, first, in its conception of planet Earth as a virtually closed system and, second, in its recognition of the considerable interaction and interdependence of all life in that closed system. This leads to a recognition that if the planet is no longer able, for example, to sustain life then life ceases. There are no other alternatives.

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Economics, whilst able to recognise specific scarcity, has been unable to internalise this recognition of general and total scarcity, (see, for example, Brown, 1981; Zaikov, 1985; Daly, 1980). It also leads us to recognise that mankind's impact on the eco-sphere is likely to be profound and largely unknowable in the short term and so raises crucial questions about the point at which bio-diversity, habitat destruction, warming, pollution, destruction of forest, algae bloom etc. become critical. Again, a systems conception reminds us that the answer is unknowable until it is too late. From whatever point of view one approaches these issues, it becomes very sensible indeed to stop messing with the planet. Such an approach may lack the precision and apparent rigour of neoclassical economics but there is no reason to suspect that its conclusions can be ignored. A brief introduction to environmental systems theory will show a very different form of analysis that, naturally, produces very different question with very different answers. (See Chapter 2). Economics can only produce one sort of answer and systems theory in general has shown us that (in Ackoffs famous dictum) we must stop behaving as though the universe were divided up in the same way as are university departments. Conclusions It has become something of a truism that the mental framework one employs determines the questions one asks. The questions one asks inevitably influence the answers one finds. Furthermore, the faith one holds will greatly influence the weight one attaches to evidence, the evidence one will acknowledge and, even, what one will consider to be evidence. It is not possible (either epistemologically or evidentially) to prove, within the


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positivistic functional world of neo-classical economics, any of the serious assertions about environmental issues. Only when the species is extinct will we have successfully proved that the environmentalists were right. Furthermore, within many Western economies, there would appear to be a belief that any challenge to totems of 'growth', 'enterprise', 'change', 'business', 'wealth', 'investors', and so, are somehow improper. This means that one is severely bounded in the range of politically acceptable things one can say about environmental issues and, consequentially, much of the environmental systems analysis starts from and produces ideologically improper ideas. Therefore, for those of the neo-classical faith and/or seeking to provide environmental solutions acceptable to the present government (or most previous UK governments come to that), the Pearce Report has a considerable amount to recommend it. For those with differing faiths (i.e. most of the world) and/or with differing objectives one can only be counselled to beware of economics in green clothing. Neo-classical economic thinking and analysis got us into the mess, there seems only the most slender of possibilities that it has anything to contribute to getting us out of it.

APPENDIX B: CONTACT NAMES AND ADDRESSES Introduction The following are just some of the places where further information, advice or encouragement can be found. The names and addresses were correct at the time of writing. They are in alphabetical order. No endorsement of the quality of the organisation or its information or advice is implied by its listing here. BRITISH INSTITUTE OF MANAGEMENT 64/78 Kingsway London, WC2 6BL

BUSINESS NETWORK 18 Well Walk Hampstead London NW3 1LD

"Links business people and others interested in transforming business so that ity embodies a vision of wholeness of life for the planet and for the human spirit". CENTRE FOR ECONOMIC AND ENVIRONMENTAL DEVELOPMENT (GEED) 12 Upper Belgrave St. London SW1X 8BA

An independent organisation set up in 1984 whose role is develop policies and initiatives which further the economic development of the UK and at the same time protect the environment for the future through the sustainable use of resources. CONFEDERATION OF BRITISH INDUSTRY Centre Point 103 New Oxford Street London WC1A 1DU

The Publications department have produced two relevant booklets: The greenhouse effect and energy efficiency and Clean up - its good business. David Nickson (President have a responsibility of the CBI) in his foreword to the latter book says "All firms which can be and, in a number of cases has been, turned to for the environment commercial advantage." See also the survey of attitudes they conducted Waking up to a better environment.

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Environmental Protection Technology Scheme DEPARTMENT OF THE ENVIRONMENT Room B 357 Romney House 43 Marsham Street, London SW1P 3PY

This inititiative has led to the publication of a booklet - Clean Technology - which provides illustrations of clean technology currently in use by British industry. The booklet also provides further contact points. DoE have also published Sustaining Our Common Future outlining the UK's policy, Protecting Your Environment - A guide and a series of booklet/wallcharts in an Environment in Trust series. Ian Oaldns The Business and the Environment Unit (BEU) DEPARTMENT OF TRADE AND INDUSTRY Ashdown House Victoria Street, London SW1E 6RB

DTI has issued booklets, Your Business and the Environment and Cutting Your Losses:a business guide to waste minimisation, as part of their attempts to encourage organisations to be more environmentally aware, to show what can be done and to encourage the attitude that being environmentally sensitive need not restrict profitability. The Ecologist 73 Molesworth St. Wadebridge Cornwall P127 7DS ENVIRONMENTAL DATA SERVICES (ENDS) LTD The Finsbury Business Centre 40 Bowling Green Lane, London EC1R ONE

Publishes the monthly ENDS Report which, monitors the environmental performance of leading companies, provides up-to-date information on issues affecting organisations and the environment and gives data on how organisations are responding to them. The Environment Digest Worthyvale Manor Farm, Camelford, Cornwall PI32 9T1' A monthly digest of the latest developments in environmental affairs drawn from

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national and international newspapers, peiodicals and specialist publications. ETHICAL INVESTMENT RESEARCH & INFORMATION SERVICE (EMS) 4.01 Bondway Business Centre 71 Bondway London SW8 1SQ Conducts research into the actvities of companies in order to provide guidance to both investment funds and individual groups and organisations on approapriate ethical investment. EUROENVIRON c/o Dr Ian Harrison Department of Trade and Industry Business and the Environment Unit Room 1010 Ashdown House 123 Victoria Street, London SW1E 6RB A programme within the European EUREKA framework for supporting innovative research and development to address some of Europe's major environmental problems. DTI will fund up to 50% of the eligible costs of a UK company's share of an approved project. FRIENDS OF THE EARTH 26-28 Underwood Street, London, NW1 7SQ THE GREEN ALLIANCE 60 Chandos Place, London WC2N 4HG The goal of the Alliance is "to introduce an ecological perspective into British political life... [and]... its primary concern is to raise the prominence of environmental policy on the agenda of public and private institutions". The alliance is funded from a variety of sources including the Department of the Environment. They produce publications of three particular sorts: a Parliamentary Newsletter which monitors and summarises present and forthcoming parliamentary activity; Briefing for Members is information for members of the alliance; Green Briefs are principally briefing documents for MPs. The Alliance was recently responsible for the lauching of the Valdez Principles in the UK, (see Chapters 3 & 5 of main report).

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GREEN PARTY 10 Station Parade Balham High Road London SW12 9AZ

GREENPEACE 36 Graham Street, London, N1 8LL

GROUNDWORK FOUNDATION Bennetts Court 6 Bennetts Hill Birmingham B2 5ST A national network of local initiatives to tackle the problems of deriliction, to restore

landscapes and wildlife habitats and make positive use of wasteland. One of the Conservative Government's private sector/government 'partnership' initiatives. HER MAJESTY'S INSPECTORATE OF POLLUTION Romany House, Marsham St. London SW1P 3PB

William J. Stibravi INTERNATIONAL CHAMBER OF COMMERCE 121 Avenue of the Americas New York, N.Y. 10035, USA

NATIONAL CENTRE FOR ALTERNATIVE TECHNOLOGY Machynlleth, Powys, Wales.

The Centre have brought together many experiments in environmentally sensitive, lowimpact ways of doing things and have considerable experience in the less-destructive ways of approaching the environmental problems of human living. NATIONAL SOCIETY FOR CLEAN AIR 136 North St. Brighton N1 1RG

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New Consumer 52 Elswick Road, Newcastle-upon-Tyne NE4 6JH SUSTAINABILTP/ 49 Princes Place, London W11 4QA Probably the leading organisation in the 'greening' of organisations in the UK. Publishers of The Green Capitalists, The Green Consumer Guide and The environmental audit: a green filter for comapnv policies, plants, processes and products. These publications are amongst the best sources of ideas, information and experience in this field at the moment. UNITED NATIONS Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, Centre for Transnational Corporations Room DC2-1244 United Nations New York, NY 10017 USA. WORLD WIDE FUND FOR NATURE Panda House, Weyside Park, Goldalming, Surrey GU7 1XR The goal of the organisation is to stop the accelerating degradation of the planet's natural environment and to help build a future in which humans live in harmony with nature. Since 1984 the WWF has represented the DoE in the UK by attracting funds from industry for conservation schemes.

APPENDIX C: FURTHER READING AND A SHORT ANNOTATED BIBLIOGRAPHY No bibliography is ever likely to be complete but the final section of this report contains a considerable list of references and bibliography. The few suggestions here are designed to enable an individual with only slight acquaintance with the issues to learn more, relatively painlessly. For details of the publications mentioned here the reader should consult the full references and bibliography section. Accounting and the Environment: The production of this report was

motivated, in part, by the absence of much material on this specific issue. However, the special issue of Accountancy (June 1990), and the articles by Chastain (1973), (1974), and Roger Gray (1989) are worth looking at. Business Ethics: Probably the best introduction to this difficult area is provided by Donaldson's Key Issues in Business Ethics. Some of the links between business ethics and social/environmental responsibility are brought

out in the article by Gray (1990d) and the broader questions of ethics and the environment are nicely introduced in Daly (1980). Corporate Social Reporting and Accounting: A broad introduction and analysis of the literature, ideas and practice of corporate social reporting is given in Gray, Owen & Maunders (1987) Corporate Social Reporting: Accounting and Accountability. Further illustrations of US practice can be found in Estes (1976), Blake, Frederick & Myers (1976), Johnson (1979), Belkaoui (1984), Parker (1989). Surveys of practice and possibilities commissioned by professional accountancy bodies in North America are interesting in their own right - See AICPA (1977) and Brooks (1986). Environmental Economics: The Pearce Report (Pearce et al, 1989) is an

excellent introduction to the main issues. There are many 'conventional' texts on environmental economics but for a deeper analysis the edited books by Daly (1980) Economy, Ecology and Ethics: Essays towards a steady state economy and by Turner (1988) Sustainable Environmental Management: Principles and Practice can be warmly recommended.

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Environmental Issues: The Brundtland Report (UN, 1987) provides one of the most accessible introductions to the spread of issues and the problems they raise. A more direct book - which is all the more interesting for its age - is Goldsmith (1972) Blueprint for Survival. Keeping up with the issues is not easy but is helped by magazines: The Ecologist; Green Magazine: and, from a consumer perspective, New Consumer. Environmental Issues and Business: Probably the best overall consideration of this is Elkington (1987) The Green Capitalists. The surveys conducted by Touche Ross (1990) and CBI/PA Consulting (1990) are also well worth looking at. An important source of information for organisations is what others are doing, what is available and what new issues are emerging. The ENDS Reports provide this (see further contacts). Environmental Protection Bill: There is not really any substitute for reading the Bill but a good summary is provided by KPMG Peat Marwick McLintock's Environmental Briefing Note Autumn 1989. Greening of Organisations: The best introduction to this is probably Elkington (1990) The Environmental Audit and see also Elkington (1987) The Green Capitalists. After that the best bet is probably to contact the DoE, DTI and ICC who have produced (and continue to produce) a number of interesting papers and booklets related to the issue. Law and the Environment (UIC/EC): The article by Bryce (1990) gives an introduction to the area. More substantial monitoring may be provided by Garner's Control of Pollution Encyclopaedia published by Butterworths, and Environment Law Brief published Legal Studies and Services. Also, monitoring of European Trends published by the Economist Intelligence Unit is probably worthwhile. Social Accounting/Reporting: See corporate social reporting and accounting. Technology: An important element in the environmental issues is how we see technology and the processes of technology production. An outstanding reappraisal of this can be found in Dickson (1974) Alternative Technology and the Politics of Technical Change.

APPENDIX D: A BRIEF NOTE OF SOME UK LAW AND EC DIRECTIVES CONCERNING ENVIRONMENTAL PROTECTION Introduction Every organisation will have built up its own knowledge of the law relevant to its activities and have developed ways of monitoring developments. For the well established, large organisation this appendix will add nothing.In fact, this appendix (it would be nice to think) may be entirely redundant but, on the assumption that some individuals and organisations are just beginning to enter this field and recognise the importance of the environmental exigencies, the following is offered as a brief, beginners guide.

UNITED KINGDOM LAW Atmospheric pollution: The first measure of national importance was the 1863 Alkali, etc, Works Regulation Act which limited factory emisssions. It, together with the 1906 Act have been the focus for industrial pollution legislation until the present time. Subsequent major reinforcements have been The Clean Air Act (1956) and Health and Safety (Emissions into the Atmosphere) Regulations (1983). Part IV of the Control of Pollution Act (1974) consolidated the law on both industrial and domestic pollution and enabled regulations for the lead content of motor fuel and the sulphur content of oil fuel. Although starting to change quickly with recent statements on CFC, nitrous oxide, carbon dioxide and benzene (for example), UK law has, to date, largely concentrated upon sulphur dioxide, lead and particulates.

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Water pollution: British Water Acts date from 1845. The principle theme has been the granting of Consents by Water Authorities which establish the conditions of discharges of effluent and industrial pollutants. The Rivers (Prevention of Pollution) Act (1961) strenghtened this theme and the Clean Rivers (Estuaries and Tidal Waters) Act (1960) extended its use. The Water Act 1963) established the role of the ten regional water authorities in controlling the use of water - both as an agent of dispersal and a resource by the issuance of licences to industry. The Act (1973) gave new powers to the Water Authorities over inland waterways; they were made responsible for all water services in their region - water resource development, water supply, river conservation, development of amenity, pollution control, land drainage, fisheries, sewerage and sewage disposal. The Water Act (1989) introduced the water authorities into private ownership and brought into being the National Rivers Authority. The NRA claims to control all types of water pollution but has yet to specify the industrial or agricultural chemicals involved or the standards that are deemed acceptable. NRA will, can, and recently did prosecute industrial offenders. Land Pollution - Waste: * Municipal Waste - chiefly domestic refuse - is collected by District Councils and then disposed of by County Councils, chiefly in landfill sites under the Control of Pollution Act (1974) which consolidates the provisions originally from the Public Health Act (1936). * Hazardous Waste - certain wastes are 'notifiable', i.e. their movement and disposal procedures require special notification, documentation and monitoring to and by the authority. Toxic waste was formerly controlled by the Deposit of Poisonous Wastes Act (1972) which was repealed and replaced with the Control of Pollution (Special Wastes) Regulations (1980). Licences must be issued to handlers of such waste and the sites of disposal must be specially constructed and monitored to avoid contamination of the atmosphere or of water supplies. * Radioactive Waste - also covered by the Control of Pollution (Special Wastes) Regulations (1980) and their treatment depends on the level of radioactivity present. Low level wastes may be dispersed in local authority tips or the sewarage system, under licence. Medium and high level wastes must be contained and stored until the activity has decayed to a safe level which may take hundreds of years.

APPENDIX D: LAW AND EC DIRECTIVES

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EUROPEAN COMMUNITY INITIATIVES

The EC's Declaration of the Council of the European Communities (1973) laid the framework for the first Programme of Action on the Environment. The directives do not have the status of law in the member states but there is a strong expectation that they will be so incorporated. Directives on Atmospheric Pollution have focussed upon lead in the air, acid rain, pollution from industrial plant, sulphur dioxide, nitrous oxide, carbon monoxide, waste incineration, and hydrocarbon emissions from cars, and the use of CFCs. Local authorities have received increased powers to provent potential pollution from questionable devleopment. Directives on Water Pollution have received more publicity in Britain because the drinking water and safe beaches issues. There is an increasing emphasis upon sewarage outfall and the dumping of waste in rivers and coastal waters. EC Directives and Recommendations also cover noise, protection of the sea - paricularly the dumping of wastes, land pollution - especially toxic wastes, protection of flora and fauna - especially habitats and forestry provision, and agricultural practices, as well as protection of the built environment, concern over the ozone layer, and control of the greenhouse effect. FURTHER READING

The bibliography in Appendix C gives a few possible sources of further information. In addition, a very general introduction to EC matters can be found in either Roney (1990) or Owen & Dynes (1990). Other sources of information include: Spearhead - the EC database available from DTI; The European Environmental Yearbook published by Doeter International; Haigh & Baldock (1990); and DoE, DTI and NRA publications and releases.

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