Today’s blog post is taken directly from our latest newsletter, normally our newsletters are specifically written for our clients and ACE user audience, but this latest newsletter was a bit more generic and is focused on Environmental / Carbon Accounting. This is a very topical and political subject and there seems to be passionate people on both sides of the “Climate Change” debate. Our objective is to not get into the science or politics, but rather look at pragmatic ways an organisation can better measure and manage its environmental impact, whether that organization wishes to do this on a voluntary basis or is compelled to act via a Government imposed tax or emissions trading scheme.
But first – Some News…
We are excited to announce that BP (London) have recently engaged Pilbara Group to assist them with their ability to estimate their oil / gas platform decommissioning costs using the ACE software suite. The decommissioning of oil and gas platforms is estimated to be a US$44 billion industry over the next 40 years for the UK Continental Shelf alone, so the ability for BP to estimate both the timing and quantum of costs will be an essential component of their forecasting suite of tools.
This work not only demonstrates the flexibility that ACE has, but also Pilbara Group’s ability to work globally – this engagement involves BP personnel and contractors in UK, US, Africa and West Indies, as well as our teams here in Australia and the USA.
And another new client is Aristocrat – one of the premium suppliers of ground-breaking technologies and services to the international gaming industry! Aristocrat is another of our ‘global’ clients – we have been assisting them with the development of ABC models both here in Australia and in Las Vegas, USA.
Environmental / Carbon Accounting
The paper that follows this introduction is a summary of an article to be published in the Certified Management Accountants of Canada Magazine – the CMA Magazine. The full article is an output of the CAM-I Environmental Sustainability Interest Group, chaired by Pilbara Group’s US CEO, Anthony Pember. Members of the Interest Group include Pilbara Group, Boeing, International Federation of Accountants, CMA Canada, SAS, Grant Thornton and the University of Akron. The full paper is available to CAM-I members and CMA-Canada members.
The Consortium for Advanced Management – International (CAM-I) is a research organization consisting of sponsoring companies and academia who work in collaboration to study and solve management problems and critical business issues common to the group in the areas of cost, process and performance management. More information can be found at: http://www.cam-i.org/
The CAM-I Environmental Sustainability Interest Group aims to give value to all member participants by providing practical support on establishing an integrated strategy toward environmental sustainability management. Through the use of CAM-I’s Body of Knowledge surrounding cost, performance and process management the interest group seeks to facilitate the understanding and measurement of environmental sustainability impacts within organizations.
Applicability to Business Analysts:
This initial CAM-I paper explores the way the Activity-Based Costing methodology can be used to support business / financial analysts within most industries. There are also a number of other areas within CAM-I that can be used to support the reduction of an organizations environmental impact from a process, costing and performance aspect.
As an example of organizations already adopting environmental modelling, British Telecom (BT) had to undertake an extensive carbon foot-printing exercise as part of the submission to the London Organising Committee of the Olympic Games (LOCOG).
BT had to develop a methodology to measure the carbon footprint of the project to install a unified communications network for the Olympics, a methodology which they are now applying to all their products and services. This methodology covers emissions from the use of equipment BT installs and all related support services. The advantage to BT is that it will make them more competitive, particularly for public sector tenders where there are increasing demands for information on carbon emissions. This data can also be used by BT clients to assist them with identifying ways they can reduce their own emissions and provide them with benchmarking data.
Further information on BT’s work in this area can be found here: http://www.businessgreen.com/bg/news/1938794/bt-promises-green-olympic-legacy
In another example, Wal-Mart enforces carbon ratings on every one of their product lines and asks their suppliers to become “greener” or face being delisted. Wal-Mart’s supply chain network includes more than 60,000 suppliers in different sectors.
In 2009, Wal-Mart announced a sustainability index that would create a more transparent supply chain. The company asks its suppliers to answer 15 questions on the sustainable practices of their respective companies. This initiative is sending a strong message and reiterates the importance of measuring and reporting greenhouse gas emissions.
And closer to home here in Australia, in 2010 Aldi became the first company to join Planet Ark’s Carbon Reduction Label Program in Australia, with their everyday olive oil range becoming the first products in this country to be certified by the Carbon Trust.
And now for the article….
Managing Environmental Issues and Profitability
The Problem – Every organization’s operations have an environmental impact. There are numerous pressures – strategic, regulatory, etc. – that call for responsible environmental stewardship from organizations worldwide. There are real costs associated with addressing these issues. Accurately quantifying the costs of environmental impacts and remediation efforts has proven to be a daunting challenge.
Why It Matters – Consumers, shareholders and other stakeholders have become increasingly aware of environmental concerns and are pressuring organizations to consider environmental issues and how they relate to an organization’s bottom line. Understanding the costs of addressing environmental issues can help organizations make informed decisions which can minimize these costs and create a competitive advantage.
What Should You Do About It – Expand the culture of your organization by integrating environmental issues into your overall decision making framework. Use proven strategic management tools such as activity based costing to better manage the environmental sustainability costs of doing business.
An environmentally sustainable organization operates in a way that balances natural resource preservation and usage with its strategic and financial objectives.
Every organization’s operations have an environmental impact. There are numerous pressures, strategic, regulatory and otherwise that call for limiting these impacts through responsible environmental stewardship. These pressures require organizations to change their behaviour. This change in behaviour requires a company to adjust the way it does business, and thus assigns additional costs to addressing the environmental impact. Building an understanding of these impacts and the actual costs associated with ensuring environmental sustainability can provide an organization with a competitive advantage.
Accurately quantifying the costs of environmental impacts and remediation efforts is challenging because they do not show up as part of traditional cost accounting models. The true costs associated with environmental stewardship are lost as “overhead” and ignored in traditional accounting. Understanding these costs and layering them into an organization’s decision-making processes will allow the organization to effectively and efficiently utilize its resources. Using activity based costing (ABC) is one way organizations can better understand this competitive advantage.
How can ABC be applied to environmental sustainability?
An emissions inventory is a form of accounting. Accurately understanding the amount of emissions and tracking that amount over time is not unlike financial accounting performed by virtually every organization on the planet. For this reason, tracking and managing environmental emissions such as greenhouse gases (GHGs) can be addressed in much the same way – and employ the same tools and techniques – as financial management.
As in financial accounting, only having an “inventory” provides little insight into how particular activities are performing. Performance indicators provide information that allow for effective management. In order to make management decisions about resources it is necessary to understand what is driving them. Building models that show how activities drive resources to products and services provide this insight – it shows how, why, and by whom resources are consumed. ABC models are a proven methodology that can help a company effectively manage is GHG emissions.
ABC was originally used to track overhead costs by assigning those costs to particular activities, it is also widely recommended as a means to track environment-related costs. ABC is a proven method to uncover “hidden” costs by directly assigning those costs to activities. The “Environmental Management Accounting Procedures and Principles” paper from the United Nations Division for Sustainable Development advocates the allocation of environment-related costs directly to the activity that causes the cost.
‘Whenever possible, environment-driven costs should be allocated directly to the activity that causes the costs and to the respective cost centers and cost drivers. Consequently, the costs of treating, for example, the toxic waste arising from a product should directly and exclusively be allocated to that product. Many terms are used to describe this correct allocation procedure, such as environmentally enlightened cost accounting, full cost accounting or ABC. ABC, “is a product costing system… that allocates costs typically allocated to overhead in proportion to the activities associated with a product or product family”’ 
Simply put, ABC can help move GHG costs from the catch-all line item of “overhead” and directly assigned to particular activities and cost objects which can be analysed for performance.
Using ABC to address an Organization’s GHG emissions
The true power of the ABC methodology comes by integrating value items that are not part of traditional accounting into an ABC model. An ABC model can combine cost, revenue, and GHG emissions into the same model. This allows the correlation of GHG emissions to other business specific cost and performance metrics, providing a more robust assessment of environmental performance to management.
A model that includes cost, revenue, and GHG emissions would provide GHG/cost/revenue metrics that would allow organizations to measure profit and GHG emission impacts for product lines or services. Such a model gives perspective on how the GHG footprint of particular products, services and activities relate to profit and value for the organization.
Decision-makers will be able to know which products, services and activities have a high GHG footprint but little “value” versus those with a lower GHG footprint but high “value.” This will enable managers to evaluate the overall impact GHG emissions have on a company’s bottom line and prioritize best practices that will yield the lowest GHG footprint with the most value.
A model such as this can be extended further to cover a company’s supply and selling chains.
How do we analyse GHG in ACE?
ACE allows unlimited items of Value to be flowed through a model and also allows additional information to be assigned or tagged to entities within the system. GHG emissions can simply be another “cost” that flows through the model and calculates the Carbon cost on: vehicles, offices, switching equipment etc. Activities such as field repairs have their own carbon contributions.
The cost drivers for the entities remain, so the standard ABC analysis of cost assignment remains valid. More field repairs need more vehicle-trip carbon contributions.
This enables a GHG analysis for services, networks and business processes – built on top of the conventional cost analysis and data.
Such analysis enables the potential for evaluation of total cost – including carbon costs. This could show that cheaper equipment might have a higher cost of carbon compared to more expensive equipment that has lower power consumption and needs fewer field repair trips.
Moreover, the model can flow GHG Emissions down to individual products and services so that the appropriate Tax or Trade amounts can be applied for on-selling and the end consumer has full disclosure of the environmental impact of the product or service.
The Benefits of the Approach
An ABC model for GHG emissions provides an organization with the tools to address these decisions. The benefits of this approach include:
- identifying the GHG footprint of particular products and services;
- providing a detailed understanding of the energy consumption and emissions of particular activities within a company;
- better defining the “boundaries” of emissions for which a company is responsible;
- understanding how energy and GHG intensity effects cost and how those costs are passed from producer to consumer;
- engaging staff in targeted energy reduction steps;
- building a valuable knowledge-base to help measure and justify future corporate environmental and financial decisions;
- setting the example and expectation to suppliers and contractors to do the same; and
- enhancing public profile and reputation as a good corporate citizen.
 United Nations Division for Sustainable Development. Environmental Management Accounting Procedures and Principles. New York: United Nations, 2001 (p. 75)