Don't let profits go up in smoke

Improving your company's environmental practice makes good business sense, writes Roger Trapp

For all the talk of ethics, community giving and stakeholders, it is still a rare organisation that does something purely out of altruism. Generally speaking, there has to be a business case.

Consequently, companies will tend to introduce or tighten up codes of conduct if they feel that not doing so will risk a repeat of something like the train of events that brought down Barings. Equally, they will typically become involved in charities and other activities if they believe the ensuing publicity and image-building will improve sales.

But because many organisations are not yet convinced that being careful about resources and the surroundings can have a direct bearing on their finances, environmental accounting has not yet really caught the imagination. Recent research carried out in the City on behalf of Business in the Community discovered that analysts were generally reluctant to use environmental records to help them to distinguish between companies unless there was a clear financial effect (ie, a provision had been made against future clean-up costs or a legal action was pending).

Fresh evidence in the case for environmental accounting is available now, though. The Chartered Association of Certified Accountants, which has shown its interest in the subject by sponsoring the Environmental Reporting Awards, is offering companies a free guide to the area in the hope of making them aware of the hidden benefits it can bring. Roger Adams, head of the association's technical department, says: "American research shows that, frequently, companies more than recoup their expenditure on better environmental practice through cost savings."

He cites the example of the organic chemical industry, where a study showed that companies were saving an average of $3.41 for every $1 spent on preventing pollution. The savings came from introducing better-designed and more effective processes, using more efficient materials and reductions in waste.

The guide, An Introduction to Environmental Accounting as a Business Tool, is a reprint of a document produced by the US Environmental Protection Agency's environmental accounting project. It is designed to introduce the uninitiated to the key concepts and terms while giving those with a little more knowledge an understanding of developments in the United States, which in this matter - as in others - is some way ahead of Britain.

Though the booklet refers to some examples of US organisations, such as Caterpillar and AT&T, that have taken initiatives in this field, it by no means paints an entirely rosy picture. For example, the authors point out that "it has been quite common for financial analysis of investment alternatives to exclude many environmental cost savings and revenues". So corporations may not have realised the "financially attractive investments" in pollution prevention and clean technology that were available.

There has also been a common perception that environmental concerns are limited to those organisations whose plants spew out thick black smoke or pour millions of gallons of toxic waste into rivers and streams. However, the past success in the Environmental Reporting Awards of companies such as BT demonstrates that you do not have to have an image as a polluter to realise that you can have an impact on the environment - for example, through having fleets of vehicles not equipped with the latest catalytic converters, or allowing offices to waste large amounts of paper.

Moreover, as past entries to the contest have shown, there is no single approach that is favoured. Each organisation should produce a report that is suitable for its purposes, so that, for example, one company will concentrate on emissions, while another might focus on waste. Regardless of the type of business they are in, though, companies seeking to go down this route must measure the costs of failing to comply with good environmental practice as well as those associated with bringing the organisation into line with the requirements. And though these measurements may not necessarily be the kinds of figures that accountants are used to dealing with, they have a key role to play in helping companies to make them, says Mr Adams.

The short booklet helps them to take on this role by giving pointers towards approaches to the problem as well as providing explanations for the multitude of technical terms that have combined to obscure for many the essence of environmental reporting.

It also reminds them that they do not have to produce perfect environmental reports all at once. "Companies can make progress in environmental accounting incrementally, beginning with limited scale, scope and applications," the booklet says. They can start with those costs that they know the most about, and aim at dealing with the more difficult costs and revenues as they become more confident. But, ultimately, businesses will benefit from including costs that are difficult to estimate when they come to allocate costs and decide how they are going to spend money or what they are going to do with their processes or products.

As Mr Adams points out, the message for companies is clear: not only is good environmental practice morally right, it also makes sound business sense.

Copies of 'An Introduction to Environmental Accounting as a Business Tool' may be obtained free of charge from ACCA, 29 Lincoln's Inn Fields, London WC2A 3EE. The fifth annual Environmental Reporting Awards will take place at the same address today.