9.3 Why should a management accountant care about environmental issues?

So far, you have discovered that a management accountant is a professional responsible for collecting, analysing and presenting information for internal decision-making purposes. Traditionally, the focus of accounting information collection for internal decision making was on maximising profits and minimising costs. However, it has been increasingly recognised that management accounting plays a vital role in achieving a wider range of goals, including social and environmental objectives. Over the last few decades, the scope of management accounting for internal decision making has expanded beyond just financial costs and performance.

For instance, in order to minimise the use of valuable resources such as water and energy, and reduce waste and CO₂ emissions, etc., managers must carefully analyse the inputs and outputs of their production processes and work to reduce any negative impacts. This process of accounting, while relying on non-financial measurements, is still a critical component of management accounting. The goal is to create a more sustainable and responsible approach to business operations.

The importance of managing environmental costs has become increasingly prominent for companies for a number of reasons. First, environment-related costs are increasing significantly for many companies, with some industries using more than 20 per cent of operating costs to prevent, reduce or repair damage to the environment arising from their operating activities. Such significant costs need to be managed. Second, there are growing regulations and penalties for non-compliance. Third, society is demanding that companies be more environmentally responsible. Therefore, in order to stay competitive, organisations need to integrate environmental considerations into their business decision-making process.

Management accountants are now required to integrate environmental considerations into mainstream business decision making. Management accounting practices have therefore gradually shifted beyond information provision to focus on the reduction of waste (the reduction of resource loss) to the generation of value (the effective use of resources). Section 1 highlighted how the standard conventional management accounting costs are only a part of the total costs that a company might incur, particularly when you consider all the possible external/environmental costs.

However, in the recent academic literature, management accounting has been criticised for not giving sufficient attention to incorporating environmental, social and sustainable issues. Studies such as Bartolomeo et al. (2000), Henri et al. (2014, 2016) and Schaltegger and Burritt (2017) reported that not enough companies were explicitly tracking environmental cost, which can lead to a lack of visibility into the true costs associated with environmental factors, making it difficult for organisations to make informed decisions.