EHS Management

Environmental Accounting Is More Than a Numbers Game for Compliance

It’s probably time to consider some environmentally friendly data solutions. No, we don’t mean recycling old hard drives and moving to the cloud, even though in some cases that might not be a bad idea; instead, we’re referring to the way we track and access environmental performance data.

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Without a doubt, one of the biggest questions companies wrestle with in the big data arena is: Now that we have advanced technology in place and more and more data are tantalizingly flowing upstream much like salmon in a river, how do we transform that raw data into meaningful information that we can use to the company’s advantage of our business?

It is a problem that is not unique to the environmental performance space, but it is a situation that speaks directly to the challenges of true environmental accounting in an era of increased regulatory scrutiny and sustainability.

In 2016, the U.S. Environmental Protection Agency’s enforcement actions alone led to companies devoting almost $14 billion to address pollution concerns, $6 billion toward penalties, and more than $1 billion toward commitments to clean up Superfund sites, which address hazardous substances that could endanger public health or the environment.

Across the Pacific, the Hong Kong Environmental Protection Department prosecuted 759 cases in 2016 leading to HK$6.7 million (about US$860,000) in fines. This might not seem like much in comparison, but when you consider that prosecutions are up 95 percent since 2012 when there were only 389 prosecutions leading to HK$2.6 million (about US$330,000) in fines, you see where things are heading.

With stakes this high, it’s clear companies need to ensure their environmental house is in order or risk significant financial penalties and problems.

Defining Environmental Accounting

So, what do we mean by environmental accounting?

The EPA explained in its 2014 primer on the topic that environmental accounting has many meanings, but, for the agency’s purposes, it defines the term as a “managerial accounting tool for internal business decisions.” Subsequently, the EPA stated that “environmental cost” has two meanings of its own: the “private” cost to a company’s bottom line and the “societal” cost to individuals, society, and the environment.

Accounting, of course, is a familiar term especially in the financial world. There, it is used as a way of tracking the money that goes in and out of a business as well as any tax liabilities, but, in the environmental compliance arena, what we are referring to is quantitative operational data, and how that data is managed with respect to tracking environmental performance, i.e., “the math.” Environmental accounting provides companies with disciplined data management practices that yield accurate, reliable, and complete environmental performance data that can be used to meet a multitude of needs, not just compliance. A true win-win situation.

The Internet of Things (IoT) and other technological innovations have given companies a greater ability to monitor their emissions, operating environments, and such, but having that ability to produce more accurate and more timely data also comes with a significant burden as well: How do we manage it? A fragmented environmental performance tracking system affects compliance abilities and the corporate bottom line, especially if companies are wasting money on a system that can’t capture the proper data easily or use the information to help mitigate environmental risks, especially at a corporate level. Additionally, Environmental Accounting plays a big role in overall corporate sustainability as well as in managing costs.

The Harvard Business Review, for instance, recently reported that disruptions in water supplies in Peru have led to the indefinite suspension of more than $21 billion in mining projects. We’re not saying that environmental accounting could have necessarily prevented such a situation, but it is important to note the significant financial pain points that can be attributed to environmental challenges.

“Significant cost reductions can result from improving operational efficiency through better management of natural resources like water and energy as well as minimizing waste,” the Harvard Business Review wrote. “One study estimated that companies experience an average internal rate of return of 27% to 80% on their low carbon investments.”

Keep in mind that ISO 14000 environmental management standards have already provided a framework for companies to develop environmental management systems to mitigate risk, so you’ll often see these intersect with standards related to health, safety, and other disciplines within an organization.

Challenges

There are two key areas where environmental accounting comes into play: for regulatory and voluntary reporting initiatives.

Many companies still rely on spreadsheets, desktop databases, and other homegrown solutions to keep track of environmental performance data. Unfortunately, those types of tools may work for local regulatory compliance and reporting purposes, but as a company strives to centralize and standardize environmental performance data for corporate use, these tools are woefully inadequate. This is especially true for companies that work in highly regulated fields with escalating demands for more data more frequently.

Different nomenclatures that are tracked at various divisions, for instance, can not only cause internal confusion but also affect a company’s ability to track data and stay in regulatory compliance. Workforce turnover can also complicate matters if a new employee isn’t familiar with how a previous worker tracked data for a certain software application.

Beyond the difficulties of simply harnessing the information for environmental accounting purposes is the challenge of handling many different types of data in real time from simple metrics or usage information to complex accounting methodologies, which fall on the end of the data-collection spectrum.

When rigorous engineering calculations come into play, a robust environmental accounting platform can offer even more value for compliance, governance, and reporting obligations. In essence, such a system acts as the one source of “truth” for the organization, especially as a way to handle ad hoc requests for information.

A high-performing environmental accounting system allows an organization to be more efficient, mitigate risk, and ensure compliance. And plug-and-play technology allows companies to be able to acquire historical data from hundreds of systems without complication to ensure compliance and better manage their environmental accounting.

Also, with the emergence of IoT, direct measurement is now possible in ways that were previously difficult at best or nearly impossible. Yes, there have been examples of direct measurement in the past, such as for acid rain measurements, but as technology improves, regulators are beginning to expect more data. For example, under the upcoming refinery flare rules set to go into effect in February 2019, flow meters must be installed to calculate emissions accurately. More data means more potential accounting difficulties.

What we’re learning about information technology is that it’s a great enabler for businesses and offers more standardization. The flipside is the perceived loss of end-user control that needs to be managed.

Addressing these concerns should be done by focusing technology on making EHS managers’ jobs easier. Eliminate tedious and redundant work. Consider the burden that comes when you go from annual to monthly to weekly or even daily or hourly tracking requirements. And what about every few seconds? For example, air permits increasingly demand daily, hourly, and even subminute compliance demonstration. It’s easy to see how that deluge of data quickly becomes all but unmanageable without the correct systems in place. Technology may require changes in the way EHS managers have historically done their job, but new tools should make their job easier and enable them to focus on more valuable activities than data collection and data quality.

Final Thoughts

For many companies, environmental accounting is not optional. It’s a must.

To achieve that goal, the primary challenge that we most often see is not technology-related at all, but instead, it’s program management-related. Embracing change is not always easy. It goes without saying that any new environmental accounting platform you implement will not work exactly the way your legacy tools and systems have worked in the past.

There will be a learning curve, but the benefits of employing an environmental accounting system far outweigh any workforce buy-in challenges.

The environmental regulatory landscape is changing quickly; how you account for the changes is key. After all, data accuracy is your company’s burden to bear.

JeffLadnerJeff Ladner is Sphera’s vice president of environmental performance. He has been helping corporations drive operational excellence and effectively manage operational risk for 20 years. He leads the Sphera solution strategy, helping corporations enable their management systems. Focus areas include environmental performance, personnel and process safety, product stewardship, supply chain management, risk assessment, and change management. Jeff holds a Bachelor of Science degree from Purdue University in chemical engineering and an MBA from the University of Delaware.
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