The relationship between human beings and the natural environment has always been complex. Humans are at once both part of, and apart from, the natural world.1 The general scientific view is that we have evolved through natural selection from within the animal kingdom,2 but through manipulative technology we increasingly shape and craft the natural environment. In this sense, we are both inside and outside the traditional natural environment: both participants and observers. We thus both form and shape the environment, but are also capable of observing and recording both the environment and our impact upon it.3
An increasing recognition of the impact of humans on the environment has led to a radical requestioning of traditional economic, ethical, and accounting assumptions. In the 1970s, for example, there was a new concern with questioning the limitations of the traditional management paradigm. Chastain (1973), Gambling (1974), Ullman (1976) and Dierkes and Preston (1977), inter alia, explored the linkages between accounting, organisations and society. In the 1990s, the concern turned more specifically to environmental issues.4 More recently, there have been efforts to operationalise environmental issues.5 This paper seeks to develop a theoretical framework in which this debate can be located by developing eight premises.6
What is undoubtedly true is that concerns with the environment have moved centre stage over the last two decades since Kyoto. There have been a series of global meetings to discuss, inter alia, climate change. Following the Stern Report (2006) there is a new global interest in environmental issues (Gray, 2009), in general, and in carbon reduction techniques in particular. Accounting is implicated in these, for example, through carbon emissions trading and its involvement is likely to increase (Hopwood, 2009). Moreover, there is active debate about whether to save the planet we need to move towards a deep green ecological position (Maunders & Burritt, 1991).
This article is located within a broad body of literature concerned with environmental accounting and critical of the current role of accounting. The main purposes of this article are two-fold. First, to synthesise, unify and critically appraise the somewhat scattered prior literatures which provide a theoretical underpinning for environmental accounting and reporting. This prior literature is used to construct a multilayered model with eight premises. Thus, the objective is to provide a theoretical justification for environmental accounting and reporting.7 Put simply, this article aims to show why it is crucially important that organisations should develop a comprehensive system of environmental accounting and why they should report it to their stakeholders. This paper assumes that companies should behave in a socially responsible way (Solomon & Solomon, 2004; Quinn and Jarvis, 1995). Indeed, demands for businesses to act in ways consistent with social and environmental accounting and sustainable development are growing Milne, Tregida, and Walton (2009). The promotion of this particular model does deny other possible theoretical models. However, this model will hopefully provoke debate and prove useful in gauging corporate attitudes to genuine environmental progress on environmental issues.
It is based on a personal conviction that companies need to engage with environmental issues. Compared to the wealth of studies on environmental disclosure research (Berthelot, Cormier, & Magnan, 2003, for example review 57 studies) relatively few studies have sought to theorise on why we need environmental accounting (see as notable exceptions Gray (1992), Gray, Kouhy, and Lavers (1995), Gray, Owen, and Adams (1996)).8 Indeed, Hackston and Milne's (1996, p. 78) contention still holds that: “To date, however, there still exists no universally accepted theoretical framework of corporate social accounting” [i.e., by its very nature this includes environmental accounting and reporting]. Such issues generally “rarely merit explicit consideration” (Gray, 2003, p. 357). The second purpose is to examine the implications of the theoretical framework for organisations and accountants. In particular, the main approaches to operationalising environmental accounting are reviewed (such as full cost accounting, Herborn, 2005 and Bebbington, 2007; sustainable indicators Jones & Matthews, 2000).
This article attempts to synthesise and make visible the implicit, but often unstated (Cooper and Sherer, 1984) value judgements which often underpin environmental accounting and reporting.9 Eight basic premises are discussed in a multilayered approach.10 These have been derived from the environmental ethics, environmental economics and environmental accounting literatures.11 Where appropriate countervailing opinions are recognised and discussed. Together they provide a theoretical model, set out in Fig. 1, upon which more practical or empirical studies can be based. This theoretical model is integrative and summative, building on the separate strands of the prior theoretical literature.
There are several implications from the acceptance of this theoretical model for organisations and accountants. First, at the general level, given the severity of the environmental problems which face us, it would seem prudent for managers and accountants to take immediate action to address these threats. Simply put: it is not somebody else's problem. As was said at the start of the article “never send to know for whom the bell tolls, it tolls for thee”. There is a need for individuals, the government, companies and professional organisations to wake up to the environmental challenges. In a sense, this has already begun, if disjointedly and intermittently. For example, in the UK, key individuals, both in companies (such as British Petroleum and Carillion), and in academia (such as Bebbington, Gray and Owen) have already sought to operationalise advances in environmental accounting (ACCA, 2001) while in UK professional accountancy institutes, such as the ICAEW, and particularly the ACCA have provided leadership and funding. Specifically, companies should explicitly recognise that the environment is under threat, that the company has a responsibility to act, that the company is, in effect, a steward of the environment and that the company needs to acknowledge and work within a wider network of social, economic and environmental systems.
Second, the traditional accounting paradigm with its narrow focus on accounting numbers does not capture the environmental consequences of organisational activity. A new environmental accounting system would need to measure, capture and disclose the full range of environmental corporate impacts. This would include, inter alia, accounting for air and water pollution, and the depletion of natural resources. There are three conceptual approaches: a damage cost basis, an avoidance basis and a restorative basis. In the first, the damage caused by the impacts are considered; in the second, the costs of taking preventive action to prevent environmental degradation are considered; and in the third, the cost of restoring the environment to its pre-corporate impact state are taken into account. There is, thus, a need to experiment with new models of corporate environmental accountability. The most popular way forward has been to operationalise the umbrella concept of sustainable development. However, as Gray (2009, p. 6) comments on sustainability: “Innovation and experimentation are still not especially common in academic work”. New environmental systems and approaches are needed to capture and measure the environmental impacts.
Much interest has been shown in full cost accounting (for example, Antheaume, 2004, Antheaume, 2007, Baxter et al., 2002, Baxter et al., 2003, Bebbington, 2007, Bebbington et al., 2007, Bebbington et al., 2001, Boone and Rubinstein, 1997, Frame and Cavanagh, 2009, Griffiths, 2001, Herborn, 2005, Howes, 2001, Howes, 2003, Rubinstein, 1994 and Taplin et al., 2006; and Xing, Horner, El-Haram, & Bebbington, 2009). Full cost accounting seeks to monetise externalities (Davies, 2009a and Frame and Cavanagh, 2009, p. 195). Rubinstein (1994) develops a fictional model for a forestry company and then reports on an experimental study carried out in Canada on a pulp mill. Bebbington et al. (2001) apply full cost accounting and attempt, using avoidance or restoration costs, to identify and measure the external impact of the activities of a research centre in New Zealand. By including such negative externalities as pollution and the decline of biodiversity, the full cost of environmental activities can be monetised. In effect, the environmental impacts are valued, wherever possible, on an avoidance or restorative basis.17
Bebbington (2001a), Baxter, Bebbington, and Cutteridge (2003), and Bebbington (2007) apply a sustainability assessment model (‘SAM’, a type of full cost accounting) for economic, resource, environmental and social flows to British Petroleum. The SAM measures economic, resource, environmental and social flows using damage costs. This analysis shows that for a ‘typical’ oil and gas development there are very large negative environmental impacts which generate large economic and socially positive benefits. This analysis provides a baseline so that a project can be reengineered to gain more positive benefits. The SAM has since been applied to a large number of other projects (Frame & Cavanagh, 2009) and developed into Construction and Urban Development forms (see Bebbington & MacGregor, 2005, and Xing et al., 2009, respectively). Further, Davies, 2009a and Davies, 2009b describes how the SAM forms the basis of a ‘full cost accounting for higher education’ model that has been developed in a dialogic manner under action research principles to assess a new campus building.
Figge and Hahn (2004) adopt a different approach within the sustainability umbrella. They use the notion of sustainable value added. It measures whether a company creates extra value (i.e., do the sustainable benefits outweigh the sustainable costs). Another approach to improving sustainability is to improve the Environmental Life Cycle Assessment Social Criteria. Gauthier (2005) devises The Extended Life Cycle Assessment and applies it to the sourisverte (Green mouse) a manual charger for mobile phone batteries. Antheaume (2004) uses three external cost valuation methods (avoidance cost, cost of damages and collective consent to pay) to attempt to fully cost an industrial process. Finally, Herborn (2005) investigated full cost environmental accounting (FCEA) against the background that FCEA had been constrained by a lack of appropriate measurement techniques. She investigated FCEA in the context of the Australian public forest sector seeing FCEA as a negotiated solution and questioning the role of environmental accounting valuation techniques.
The use of sustainable indicators at the macro and micro levels appears promising. The concept of sustainable development has been operationalised at a global level by an international body, the Global Reporting Institute™ (2000) and on systems of national income accounts. There is, for example, a System of Environmental and Economic Accounting (SEEA) developed by the United Nations’ Statistical Commission (Lange, 2007) and systems have been developed in individual countries, such as in the UK (DETR, 1999, 2000). In such initiatives, a range of sustainable performance indicators are developed to evaluate economic, environmental and social performance. This has extended to the stock markets with the launch of sustainable indices on the Dow Jones in the US and the FTSE in the UK (Fowler & Hope, 2007). Sustainable performance indicators build on the earlier work by Dierkes and Preston (1977) who develop a set of reference statistics and measurement techniques. Walter and Stützel (2009) point to numerous indicators and indicator sets for sustainable agriculture and sustainable land management. Lamberton (2000) uses an accounting method which combined environmental performance indicators and life cycle analysis to measure performance against ecologically efficient and sustainable targets. He used both quantitative and qualitative data on a city farm. He found mixed results with both sustainable and unsustainable aspects. Chambers and Lewis (2001) use ecological footprint analysis in an attempt to arrive at a sustainable indicator for business. Jones and Matthews (2000) apply a natural inventory to the Elan Valley Nature Reserve. Unlike the other initiatives, this model focuses on flora, fauna and natural habitats. Finally, Jones (2003) suggests that sustainability indicators can be used to gauge the health of natural assets.
Third, as part of the innovation and experimentation, there is a continued need to explore potential alternative monetary and non-monetary valuation systems.18 There are a variety of possible monetary systems such as market use (i.e., timber sales) or non-market use (i.e., conservation value or bequest value). These are premised upon the commensurability (common essence) of environmental values and their commodification (the need to set up a uniform system of exchange values) (Douai, 2009). Many of these are based on willingness-to-pay. A recent study of this kind (Czajkowski, Buszko-Briggs, & Hanley, 2009), for example, investigated the Bialowieza forest in Poland. These methods could be used in cost benefit analysis or in Full Cost Accounting, for example, to measure the value of a product or service compared to the environmental damage its production or delivery causes. Non-monetary systems could, for example, use ecological grading systems that document the ecological importance of environmental assets and environmental impacts. For instance, Jones and Matthews (2000) use an ecological grading system to assess flora and fauna, and wildlife habitats.
Finally, the theoretical framework implies that as part of their discharge of their stewardship function organisations should disclose their environmental performance to stakeholders. This confirms the current practice whereby companies provide environmental information in annual reports or stand-alone environmental reports. Simnett, Vanstraeken, and Chua (2009), for example, show that 2113 companies from 31 countries produced sustainability reports from 2002 to 2004. Owen (2003) shows that traditionally within Europe, German and Scandinavian companies have led the way.19 In Europe, for example, there is a well-established set of European Environmental Reporting awards; while in the U.K. the government is monitoring corporate environmental reporting (DETR, 2000). If companies are going to discharge their stewardship duties, it would seem that the following tentative suggestions would enhance this reporting process. These could either be set as voluntary guidelines or prescribed by standards. On a pragmatic note it should, of course, be appreciated that companies may well be reluctant willingly to embrace environmental disclosure regulations. For example, Cho, Chen, and Roberts (2008, p. 451) argue that their research “provides empirical evidence that affected firms were already striving to reduce or mitigate environmental disclosure regulations, using political avenues, despite global environmental rises”. Therefore, mandatory regulation is likely to be more effective than voluntary regulation. Companies could provide the following statements in the annual report or stand-alone environmental reports.
A statement of their corporate philosophy towards the environment. In particular, identifying any threats they recognise and, in particular, whether their business activities potentially contribute to those threats.
Whether the company recognises a duty to act and what in broad terms it intends to do.
A statement of its attitude to sustainable development, what it believes the phrase means, and how it operationalises sustainable development. In particular, whether its pursuance of sustainable development will lead to any economic sacrifice for shareholders and other stakeholders.
A statement on whether the company sees any need for a radical reorientation of the human relationship with the environment.
A clear specification of its social, economic and environmental targets, how many have been met, how many partially met and to what degree.
Compliance with a clear comprehensive set of time-series performance indicators either internally devised or externally such as the GRI. These should embrace, inter alia, targets on water, waste, recycling, energy, pollution, biodiversity and, in particular, given the current concerns with climate change comprehensive details of air emissions, particularly tonnes of carbon dioxide.
A verification statement that clearly specifies whether the opinion is a “fair and balanced representation” of the company's social and environmental activities.
Overall, therefore, this article had two major objectives. First, this article aimed to synthesise the prior literature into a model to provide a theoretical justification for environmental accounting and reporting. The article developed a multilayered theoretical framework to underpin environmental management (severe environmental dangers; corporate responsibility; new relationship between industry and environment; measure industry's impact and disclose and report impact) comprising eight premises. The model was developed from a personal conviction that companies should engage with environmental issues. The model also strived to be realistic recognising the political and social realities of the current world situation. This particular model is not meant to be exclusive or deny other theoretical models. However, it is one model by which environmental progress can be measured.
The article's second objective was to investigate the implications of the theoretical model for organisations and accountants. Four implications arose from the theoretical model. First, that there is an urgent need for managers and accountants to take action. Second, we need to experiment at once with new environmental accounting systems to measure, capture and disclose corporate environmental impacts. Third, potential alternative monetary and non-monetary valuation systems should be explored. And, finally, organisations should formally report their activities to their stakeholders probably under a mandatory framework.