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Environmental accounting.

• Jean-Louis Weber Jean-Louis Weber International Consultant on Economic-Environmental Accounting
• https://doi.org/10.1093/acrefore/9780199389414.013.105
• Published online: 26 February 2018

Environmental accounting is an attempt to broaden the scope of the accounting frameworks used to assess economic performance, to take stock of elements that are not recorded in public or private accounting books. These gaps occur because the various costs of using nature are not captured, being considered, in many cases, as externalities that can be forwarded to others or postponed. Positive externalities—the natural resource—are depleted with no recording in National Accounts (while companies do record them as depreciation elements). Depletion of renewable resource results in degradation of the environment, which adds to negative externalities resulting from pollution and fragmentation of cyclic and living systems. Degradation, or its financial counterpart in depreciation, is not recorded at all. Therefore, the indicators of production, income, consumption, saving, investment, and debts on which many economic decisions are taken are flawed, or at least incomplete and sometimes misleading, when immediate benefits are in fact losses in the long run, when we consume the reproductive functions of our capital. Although national accounting has been an important driving force in change, environmental accounting encompasses all accounting frameworks including national accounts, financial accounting standards, and accounts established to assess the costs and benefits of plans and projects.

There are several approaches to economic environmental accounting at the national level. Of these approaches, one purpose is the calculation of genuine economic welfare by taking into account losses from environmental damage caused by economic activity and gains from unrecorded services provided by Nature. Here, particular attention is given to the calculation of a “Green GDP” or “Adjusted National Income” and/or “Genuine Savings” as well as natural assets value and depletion. A different view considers the damages caused to renewable natural capital and the resulting maintenance and restoration costs. Besides approaches based on benefits and costs, more descriptive accounts in physical units are produced with the purpose of assessing resource use efficiency. With regard to natural assets, the focus can be on assets directly used by the economy, or more broadly, on ecosystem capacity to deliver services, ecosystem resilience, and its possible degradation. These different approaches are not necessarily contradictory, although controversies can be noted in the literature.

The discussion focuses on issues such as the legitimacy of combining values obtained with shadow prices (needed to value the elements that are not priced by the market) with the transaction values recorded in the national accounts, the relative importance of accounts in monetary vs. physical units, and ultimately, the goals for environmental accounting. These goals include assessing the sustainability of the economy in terms of conservation (or increase) of the net income flow and total economic wealth (the weak sustainability paradigm), in relation to the sustainability of the ecosystem, which supports livelihoods and well-being in the broader sense ( strong sustainability ).

In 2012, the UN Statistical Commission adopted an international statistical standard called, the “System of Environmental-Economic Accounting Central Framework” (SEEA CF). The SEEA CF covers only items for which enough experience exists to be proposed for implementation by national statistical offices. A second volume on SEEA-Experimental Ecosystem Accounting (SEEA-EEA) was added in 2013 to supplement the SEEA CF with a research agenda and the development of tests. Experiments of the SEEA-EEA are developing at the initiative of the World Bank (WAVES), UN Environment Programme (VANTAGE, ProEcoServ), or the UN Convention on Biological Diversity (CBD) (SEEA-Ecosystem Natural Capital Accounts-Quick Start Package [ENCA-QSP]).

Beside the SEEA and in relation to it, other environmental accounting frameworks have been developed for specific purposes, including material flow accounting (MFA), which is now a regular framework at the Organisation for Economic Co-operation and Development (OECD) to report on the Green Growth strategy, the Intergovernmental Panel on Climate Change (IPCC) guidelines for the the UN Framework Convention on Climate Change (UNFCCC), reporting greenhouse gas emissions and carbon sequestration. Can be considered as well the Ecological Footprint accounts, which aim at raising awareness that our resource use is above what the planet can deliver, or the Millennium Ecosystem Assessment of 2005, which presents tables and an overall assessment in an accounting style. Environmental accounting is also a subject of interest for business, both as a way to assess impacts—costs and benefits of projects—and to define new accounting standards to assess their long term performance and risks.

• environment accounting
• national accounts
• natural capital
• natural resource
• ecosystem service
• ecosystem capital
• physical units
• depreciation

Environmental accounting is an attempt to broaden the scope of the accounting frameworks used to assess economic performance, to take stock of elements that are not recorded in public or private accounting books. These gaps occur because the various costs of using nature are not captured, being considered in many cases as externalities that can be forwarded to others or postponed. Positive externalities—the natural resource—are depleted with no recording in national accounts (while companies do record them as a depreciation element). Depletion of renewable resources results in degradation, which adds to negative externalities resulting from pollution and fragmentation of cyclic and living systems. Degradation or its financial counterpart in depreciation is not recorded at all. Therefore, the indicators of production—income, consumption, saving, investment, and debts—on which many economic decisions are taken are flawed, at least incomplete, and sometimes misleading when immediate benefits are in fact losses in the long run, when we consume the reproductive functions of our capital. Although national accounting has been an important driving force in change, environmental accounting encompasses all accounting frameworks, including national accounts, financial accounting standards, and accounts established to assess the costs and benefits of plans and projects.

Environmental accounting can be traced back to preclassical economics, when natural resources were acknowledged as key elements of a nation’s wealth in works by William Pitt in England, and by Sébastien Le Prestre de Vauban and François Quesnay in France, who, at the end of the 18th century , designed what is considered to be the first national accounting framework, a model based on the “government of Nature” equal to the so-called biens fonds (agricultural land). Economists have continued to pay attention to the natural resources in terms of land rent, subsoil, or forest resource management, and to the social cost of negative externalities due to environmental degradation (Pigou, 1920 ). However, economic-environmental accounts in the modern sense, related to national accounts, began to appear after the 1972 Stockholm Conference and the subsequent debate on limits on growth. In following years, similar attempts to build and refine economic-environmental accounts were carried out in various countries following different rationales.

Finally, in 1992 , the United Nations Conference on Environment & Development, held in Rio de Janeiro, adopted “Agenda 21,” which recommends: “Developing and promoting the use of such techniques as natural resource accounting and environmental economics” (UNSD, 1992 , sec. 38.22).

The UN System of Environmental-Economic Accounting (SEEA)

In 1993 , the UN Statistical Division (UNSD) published a Handbook of Environmental and Integrated Economic Accounting (SEEA, 1993 ), commonly referred to as a “system of environmental-economic accounting.” The drafting of this handbook involved other agencies such as the UN Environment Programme (UNEP), the World Bank, the Organisation of Economic Development (OECD), and the European Commission Statistical Office (Eurostat). It took stock of work carried out in countries since the mid-1970s by public agencies (mostly national statistical offices) and research institutes, such as the World Resource Institute. Because of difficulties in implementation, the SEEA 1993 was revised and the SEEA 2003 was issued with more practical guidelines. In 2008 , the newly created UN Committee of Experts on Environmental-Economic Accounting (UNCEEA) decided to raise to an international statistical standard those parts of the SEEA for which sufficient experience exists. During the process of revision, the need for progress on ecosystem accounting resulted in the drafting of a second volume dedicated to the subject. The SEEA Central Framework (SEEA CF) was issued in 2012 and the SEEA-Experimental Ecosystem Accounting (SEEA-EEA) in 2013 .

In 2012 , the UN Statistical Commission adopted the international statistical standard called SEEA CF (SEEA CF 2012, 2014 ). As a statistical standard, implementation of the SEEA CF by national statistical offices is sought and supported by the UN Regional Commissions. The second volume on SEEA-Experimental Ecosystem Accounting (SEEA-EEA 2012, 2014 ) was published in 2014 to support a research agenda and the development of tests in voluntary countries. Experiments of the SEEA-EEA are developing at the initiative of the World Bank (WAVES), UNEP (VANTAGE, ProEcoServ), the UN Statistical Division (UNSD Advancing EEA project), and the CBD (SEEA-Ecosystem Natural Capital Accounts-Quick Start Package [ENCA-QSP]).

Beside the SEEA

Beside the SEEA and in relation to it, other environmental accounting frameworks have been developed for specific purposes. Material flow accounting (MFA) is now a regular framework at the OECD. The Intergovernmental Panel on Climate Change (IPCC) guidelines for UN Framework Convention on Climate Change (UNFCCC) reporting, and the Ecological Footprint and the Millennium Ecosystem Assessment of 2005 are other examples. Environmental accounting is also a subject of interest for business, both as a way to assess impacts, costs, and benefits of projects and to define new accounting standards to assess their long-term performance and risks.

Environmental Accounting: A Broad Range of Methodologies and Goals

Environmental accounting refers to a broad range of issues related to interactions of the economy and society with the environment. It aims to deliver the policy tools needed for sustainable development, either for maintaining income and wealth or for maintaining the natural systems on which our livelihoods and those of future generations rely. The various environmental applications carried out in recent decades can be described by a group of goals and measurement techniques. Nonetheless, there are two main approaches. First, there is an attempt to modify the production boundaries of conventional accounts to better integrate environment and natural resources into the economic national accounting framework. Second, there is the acknowledgment of two interacting systems (economic and natural)—with the purpose of assessing the sustainability of the natural system, which supports the economy as well as broader social functions. In the first approach, maintaining benefits is the focus. In the second approach, maintaining the biophysical system is the focus. Technically, accounts can be established in monetary and/or physical units, with different possible methodologies for support. The SEEA process is a general attempt to streamline the domain—a result still to be achieved.

Goals for accounting are many and sometimes contradictory. They include:

Extracting data entangled in existing national accounts to provide more detailed information to policymakers. This includes first assessing the value of the asset depletion, which is embedded in resource rent, to estimate the provisions needed to maintain income in the future. Another disentanglement consists of isolating the actual public and private expenditures for environmental protection and management, which are scattered throughout various flows (including taxes, subsidies, and other transfers), sectors, and activities. This information on expenditures is reported in a satellite account , as proposed in the System of National Accounts of 1993 . It is important for public policies, as well as for the assessment of the market for environmental services , the term used for the services provided by companies in waste and water management sectors. It allows for computing of the National Expenditure for the Environment and comparing it with similar aggregates for health, education or other areas of societal concern, and GDP.

Providing information to policymakers with additional data in physical units on natural resource supply, as well as data on use and stocks to assess resource depletion and resource use efficiency. This includes flows of materials use and pollutants disposal (in particular, pollutants in water, solid wastes, and greenhouse gases) by economic sectors and information on the life cycle of products to assess decoupling of economic growth from resource use.

Calculating the social cost(s) of environmental degradation and damages and correcting the (misleading) Gross Domestic (or National) Product and national income broadly used by economic policymakers by deducting those elements that do not correspond to positive welfare values, such as so-called defensive expenditure, and by doing so, bringing concepts of national accounting closer to those used in welfare economics.

Expanding the limits of production as defined and measured in conventional national accounts to integrate the environment and natural resources more completely within economic decision-making. This refers to taking stock of remote or pristine natural stocks that are not considered economic assets because they do not meet the double criteria of being owned and managed in view of a benefit. Pristine forests or fish stocks in international waters can be mentioned here. Expansion of production boundaries includes assessment and valuation of the services supplied by the ecosystem, given that they are not adequately captured by economic transactions and, therefore, are neglected. This comprises those ecosystem services that are of the utmost importance for the poor. In measuring the success of development programs against poverty, it is important to assess whether services have been degraded by new activities and subtract them accordingly from the newly created income.

Enlarging the conventional approach to capital by integrating economic capital with natural capital . The goal is to assess the wealth of nations supplied by the total or inclusive capital made up of produced, human, social, and natural capital. In this perspective, the value of ecosystem capital is derived from the net present value of ecosystem services according to the standard model of capital. The purpose is to justify (from an economic point of view) the importance of conserving natural capital as part of total capital. Because of substitutability of the various forms of capital, the perspective gained is of weak sustainability, as opposed to a strong sustainability perspective where ecosystem functions must be maintained.

Measuring the ecological value of ecosystems from physical assessments to compute ecosystem degradation or improvement attributable to the economy, and establishing ecological balance sheets for all economic sectors and agents. In this case, the perspective is of strong sustainability defined in reference to historical or social target values. In the first case, the benchmark is a theoretical potential corresponding to a natural situation anterior to industrial development or even to human presence. In the second case, the benchmark is stated clearly in reference to the planetary boundaries acknowledged in various regulations, laws, or conventions, including the CBD targets, the UNFCCC Conference of the Parties (COP21) objective for the climate, the UN Convention to Combat Desertification objective of “land degradation neutral development,” all incorporated in the Sustainable Development Goals approved by the UN General Assembly. This target implies offsetting nature degradation and incorporating ecosystem capital depreciation (in the broader sense, including the oceans and the atmosphere ecosystems) in all accounting standards to finance restoration when needed. To this baseline can be added the objective of restoration from historical degradation. Although physical costs needed to maintain or restore ecosystem capital can be converted to money by analogy with observed restoration costs, they do not allow for calculating the monetary wealth of ecosystems.

Adjusting conventional macroeconomic indicators . “Advocates of environmentally adjusted macroeconomic indicators have proposed several distinct ways to modify the conventional national accounting measures: (a) deduct the depletion of natural resources; (b) deduct the value of asset degradation due to pollution; (c) deduct the value of other harms caused by pollution; (d) incorporate the value of non-marketed flows of goods and services derived from the environment; and (e) deduct defensive expenditures” (Hecht, 2005 ). To these historical proposals for green accounting should be added the attempts to record the asset value of nonmarketed ecosystem services in assessments of total wealth (World Bank, 2011a ) or inclusive wealth (UNU-International Human Dimension Programme [IHDP] & UNEP, 2012 ). From a different angle, the measurement of ecosystem restoration costs suggests that there is an unpaid cost (Vanoli, 2014 ) corresponding to the measurement of the consumption of ecosystem capital (Weber, 2014 ), which should accrue to the final demand aggregate of the System of National Accounts (SNA) to calculate final demand at full cost.

Environmental accounting at the micro level: projects, local government, and enterprises . Environmental accounting is not simply a tool for macroeconomic policies. It is a tool for assessing the costs and benefits of projects considering their environmental impact and is broadly used in that context. For local governments, it is an element of their own assessment as well as a tool to appraise them in the broader national context. For nature protection policies, environmental accounts are tools for assessing the effectiveness and efficiency of protected areas management. For companies, there is greater interest, as the accumulation of unknown or ignored environmental costs can turn into risks. Initiatives by companies to promote self-assessment regarding climate change or natural capital degradation can multiply.

Although these various subjects have been discussed at length for decades, they are still significant, and they still provoke discussion. Extensive arguments on environmental accounting can be found in the three versions of the UN SEEA 1993 , 2003 and 2012 , in the documents and minutes of the UN London Group on Environmental Accounting (which assists the UNSD and the UNCEEA ), in reports by international organizations involved in the process (in particular the OECD, the World Bank, in Europe by Eurostat, the statistical office of the European Commission, and the European Environmental Agency), and by countries.

The Account of (Actual) Environmental Protection Expenditure

The account of environmental protection expenditure has been part of the enlarged framework of national accounts since the SNA 1993 . This type of account is called a satellite account by reference to SNA core tables. The purpose of a satellite account is to compile in one single statement data related to a given domain, such as education, health, social protection, or the environment. All these data are in principle recorded within the core account, but they are scattered throughout multiple classifications and standard items, which makes them difficult to find. For a given domain, the satellite account compiles all the expenditures related to characteristic production activities, current spending, and investments, as well as related transfers between institutional sectors, including taxes and subsidies. Its typical aggregate is the National Expenditure (NE). As long as satellite accounts are tightly connected to the core accounts’ rules and classifications, NE of one domain can be compared with GDP as well as with NE of other domains. The classification of environmental protection activities and expenditures (Eurostat, 2000 ) at the highest level distinguishes the following areas: protection of ambient air and climate; wastewater management; waste management; protection and remediation of soil, groundwater, and surface water; noise and vibration abatement (excluding workplace protection); protection of biodiversity and landscapes; protection against radiation (excluding external safety); research and development; and other environmental protection activities (including government expenditure).

Environmental protection expenditure is compiled in several countries on a regular basis.

Accounting for Weak or Strong Sustainability

In considering environmental accounting goals, another overlapping issue—pricing —refers to sustainable development and the paradigms of weak and strong sustainability.

Accounting for Weak Sustainability

The conservation (or increase) of net income flow and total economic wealth is called “weak sustainability”—as it considers only monetary values with the explicit or implicit assumption of the broad or total substitutability of the assets that compose total capital and that support development: produced, human, and natural. The concept of total capital has been developed, in particular, by John Hartwick ( 1978 ), who established that an economy on a given growth path would remain on this path if total capital is maintained. Subsequently, this theorem was interpreted as a condition for sustainable development in its “ weak ” form, as it did not require maintaining each of its components, particularly natural capital. This is formulated most clearly in the Inclusive Wealth Report (UNU-IHDP & UNEP, 2012 ):

The inclusive wealth framework allows substitution across the different forms of capital and refrains from asserting any specific interest of any particular constituency. Therefore, natural capital is not preserved for its own sake, but for its contribution to the overall productive base of a country. For example, a country with extensive commercially available forest stocks will, according to the inclusive wealth measure, be able to convert some of these forest stocks to other forms of capital assets that it might need to increase the well-being of its citizens and to maintain a sustainable path. The degree of substitutability is determined by the ratio of the shadow prices of the capitals in question.

As a consequence, environmental accounting for nature and ecosystem services in monetary units involves the acceptance of a broad substitutability between natural and other capitals and the weak sustainability paradigm.

Accounting for Strong Sustainability

In terms of cycling and living, another position on renewable natural capital (the ecosystem) holds that it should be maintained for its own sake as its functions to support livelihoods and well-being in the broader sense and in the long run promotes strong sustainability . The argument is that irreversible ecosystem degradation should be avoided. Strong sustainability has been frequently caricatured as the expression of hard conservationism and a static vision of the world. A different formulation has emphasized the value of critical natural capital as necessary to secure the reproduction of the earth’s ecosystems. A more recent formulation (Ekins, Simon, Deutsch, Folke, & De Groot, 2003 ) of the strong sustainability paradigm defines it as the conservation of the overall or total potential of nature including its reproductive capacity. This approach allows consideration of compensations between different ecosystems under certain conditions—but not between ecosystems and other forms of capital.

In practical terms, weak sustainability leads to paying more attention to services and benefits, while strong sustainability leads to paying more attention to the resilience of the systems that are able to deliver those services.

Resource Depletion and Environmental Degradation

Assessing natural resource rent and depletion.

Assessing natural resource rent and depletion is current practice in resource management. Its purpose is to optimize resource use over a period of time. The emergence of the sustainable development paradigm has stimulated the development of methods to account for the depletion of the stock of natural resources. “Since the extraction of any of this stock enriches the generation using it while reducing the quantity available to future generations, sustainable development requires either that no generation use the stock, or that users compensate future generations in some manner for the depletion of the stock.” And “future generations could be compensated for this loss if investments were made to ensure the maintenance of the flow of goods and services from the stock of productive capital, or of some more direct measure of human welfare” (Santopietro, 1998 , p. 39).

In theory, the price of a depletable resource includes two components: production cost (capital and labor), and resource rent. The SEEA describes it this way: “The measurement of resource rent provides a gross measure of the return to environmental assets. As for produced assets, it is also relevant to consider the derivation of a net measure of the return by deducting depletion from resource rent, i.e., depletion-adjusted resource rent” (SEEA CF 2012, 2014 , 5.116) “Depletion relates to the physical using up of natural resources through extraction. In monetary terms, it represents the decline in future income that can be earned from a resource due to extraction”[SEEA CF 2012, 5.69]. “Depletion [. . .] reflects the change in the value of an environmental asset that is due to extraction in excess of regeneration” [SEEA CF 2012, 5.116]. Depletion is equal to the difference between values at two dates of the environmental asset, which is not due to discoveries or catastrophic losses. As for many environmental assets there are no relevant market transactions or set of acquisition prices, the SEEA recommends calculating the value of environmental assets as the net present value (NPV) of future returns. The methodology is described in much detail in the SEEA CF Chapter 5 (SEEA CF 2012, 2014 ).

Most assessments of environmental assets follow this approach to the valuation of assets and the calculation of resource depletion. As this calculation is considered by the SEEA to conform to SNA principles, aggregates net of depletion can be presented.

Historical Applications

In the 1980s, a simplified method was used by Robert Repetto ( 1989 ) in Indonesia and Costa Rica for the purpose of delivering assessments of rents and depletion using existing data. The so-called Net Price method is based on the difference between the average price of a resource and the production costs needed to obtain it. Net price is used to assess the value of assets. All the rent calculated in that way is assumed to be depletion. The method was tested in other places with refinements such as the deduction of returns to fixed capital from the resource rent.

A somewhat different way of calculating depletion has been proposed by Salah El Serafy, under the name user cost approach (El Serafy, 1989 ). The purpose is to distinguish within the resource rent a true income component that can be consumed and a depletion cost. The depletion cost is the amount that needs to be reinvested to sustain the economy’s ability to provide future generations with the capacity to enjoy a nondeclining level of consumption. The message is particularly important for assessing the sustainability of the development of countries where natural resources are an important source of income. The El Serafy method does not necessitate any valuation of natural assets, only their life expectancy, but it requires agreeing on a discount rate corresponding to the return expected from the alternative investment.

Depletion and Degradation

As stated in the SEEA CF [5.103], “The approaches described in the SEEA, in particular the net present value approach, provide reasonable proxies for observable market prices and consistency with the SNA, but do not take into account the full range of benefits (and costs) that might be considered relevant.” Environment degradation is another possible negative consequence of human activities. According to the SEEA ( 1993 , p. 36):

The use of natural assets can affect their temporary or permanent depletion (quantitative use) or leave nature unchanged quantitatively while possibly affecting the quality of the environment (qualitative use). In the first case, the flow of quantities from the natural environment to the economy is viewed as a flow of environmental goods. In the second case, the use of natural assets is interpreted as involving a flow of environmental services from the natural environment to the economy. The use of environmental goods may thus lead to depletion of natural assets, and the use of environmental services may cause degradation (qualitative deterioration) of natural assets.

It is important to note when considering the national accounts that depletion and degradation cannot be considered at the same level. Depletion of an asset is a reduction of its economic value. Here, adjusting national accounts involves subtracting an element of economic value as recorded in the SNA. Degradation is an external effect which results from uses of environmental services or functions that are not recorded as such (including the indirect impacts of resource depletion on ecosystem services or functions). Environmental degradation is an unpaid cost that is not part of GDP. Thus, subtracting it from a total (GDP) does not clarify its significance, which remains uncertain. Another solution (Vanoli, 2014 ) is to consider that ignoring this unpaid cost results in undervaluing the SNA’s Final Demand (composed of Final Consumption and Gross Formation of Fixed Capital), presently measured at purchasers’ price. Comparing Final Demand at full cost with GDP and with national income would highlight a gap in critical sustainability. In the SEEA CF, degradation is not addressed but is forwarded to the SEEA EEA, where it is defined as loss of future ecosystem services and valued in money. The CBD Ecosystem Natural Capital Accounts: A Quick Start Package (ENCA-QSP) framework (Weber, 2014 ) recommends measuring ecosystem physical degradation and valuing it on the basis of avoidance and restoration costs.

Adjust or Supplement GDP?

For many, environmental accounting is equivalent to correcting the headline, the aggregated indicator of national accounting, Gross Domestic Product (GDP), from flaws that would otherwise make it a misleading policy tool. A commonly used metaphor is “Green GDP.” Arguments are that GDP does not record adequately or at all the elements contributing positively or negatively to present or future welfare. Rents on nature are confused with true income, costs of environmental damages are not recorded as loss of welfare, and even worse, their reparation is accounted as positive value added. In the same way, expenditures to protect people against a potential or a actual decline in their environmental quality ( defensive expenditures ) are positively recorded in the final consumption when they should be considered as an intermediate cost and therefore subtracted from GDP. Others recommend taking into account the ecosystem services that are not included in GDP. Another approach is to consider the unpaid costs of maintaining the ecosystems considered as assets or as capital supplying free services. The costs resulting from ecosystem degradation by economic agents should be added to the value of the final demand to compute it at the full cost.

The traditional position of national accountants is to insist that GDP is a comprehensive measure of transactions, not of welfare. The subjective value of production, income, and consumption is not appraised in national accounts. Defensive expenditures (Leipert, 1989 ) cannot be deducted from GDP as they contribute to the final demand (e.g., through the salaries paid). Regarding positive or negative values not recorded as transactions (the externalities), the issue for incorporating them into GDP is related to prices. National accounts are based on observed transaction prices (which reflect what has actually been paid), which are in essence very different from welfare prices that reflect a willingness to pay—an amount that is always higher than what we actually pay (the difference being called consumer surplus ). As a consequence, national accountants dismiss attempts to adjust aggregates from values computed with welfare prices. However, regarding monetary values related to the environment or the natural resource, two types of accounts are, so far, part of the national accounts: environmental protection expenditures and calculations of resource depletion.

In 2007 , the Beyond GDP Conference on Measuring Progress, True Wealth, and the Well-Being of Nations—convened in Brussels by the European Commission (EC, 2007–2016 )—concluded that, due to its broad use in economic policy-making, GDP should not be changed but instead should be supplemented with other indicators more inclusive of environmental and social aspects of progress. This position was subsequently confirmed by the Report of the Stiglitz-Sen-Fitoussi Commission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen, & Fitoussi, 2009 ).

This is not the end of the debate on the meaning of GDP and national income, a debate that has lasted since the origin of modern national accounting in the 20th century via opposing interpretations of aggregates in terms of production, income, and related variables (Keynes, Hicks), and in terms of goals of the economy, that is, the true social welfare measurement (Kuznets) (Vanoli, 2005 , 2014 ). It has strongly marked the genesis of economic-environmental accounting in terms of methodologies and purposes. For those who consider that the mere purpose of accounting is to measure the true welfare supplied by the economy, imperfect measurement of shadow prices should not be an obstacle to adjusting the SNA aggregates.

Examples of Adjustments of the SNA Aggregates

Adjustments of GDP (or GNP) and national income have primarily focused on eliminating negative values from standard SNA calculations. A distinction has to be made between adjustments for natural assets depletion, a broadly accepted concept (Vanoli, 2005 , SEEA CF 2012, 2014 ), adjustment for environmental damages or degradation, and subjective adjustments of GNP from negative welfare components, in particular, defensive expenditure.

Adjustments in the SEEA Context

In the SEEA ( 1993 ), the additional recording of imputed environmental costs leads, other things being equal, to a decrease in the net domestic product (NDP) of the economy. The net domestic product diminished by the imputed environmental costs of industries is called the environmentally adjusted domestic product or, for short, the eco-domestic product (EDP). Different main versions of EDP can be distinguished according to the valuation methods applied to environmental costs:

EDP version 1 at market values (only) . The market valuation concept used in that version is consistent with the valuation concepts used in the conventional SNA under the category “other volume changes.”

EDP version 2 at maintenance costs . The compilation of EDP v2 takes into account imputed environmental costs at maintenance values, reflecting the cost-caused concept. It includes a wider range of (nonmarket) phenomena in the field of the environment and is particularly significant in the elaboration of strategies of sustainable development.

EDP version 3 takes into account imputed environmental costs with a combination of market and contingent valuation, reflecting the cost-borne concept. However, the application of contingent valuation methods in national accounting is controversial, as it uses techniques of valuation that are based on the revealed preferences of individuals (section D). Such techniques have been applied with (limited) success in project or program evaluation, and it remains to be seen whether they can be extended to the assessment of environmental costs and benefits for the whole economy.

In the SEEA ( 2003 ), adjustments for degradation are forwarded to a specific chapter 9, and are still not fully integrated. The SEEA CF 2012 ( 2014 ) Central Framework limits proposed adjustment of aggregates to assets depletion; degradation is forwarded to the experimental volume on ecosystem accounting.

Adjustments out of the SEEA

A stream of welfare-oriented adjustments to national accounts of product and income aggregates starts from the measure of economic welfare (MEW), as proposed by Nordhaus and Tobin ( 1972 ), which focuses on consumption as the main goal of the economy. The method consists of reclassifications of GNP final expenditure, imputations for capital services, leisure, and nonmarket work, and deductions for disamenities of urbanization (Nordhaus & Tobin, 1972 ). The Index of Sustainable Economic Welfare (ISEW), developed by Daly and Cobb ( 1989 ), estimated for the United States for each year from 1950 to 1990 and tested in different countries, is a variant of MEW, with similar adjustments and differences; in particular, more emphasis is given to environmental issues (Hecht, 2005 , p. 217, ss).

The Genuine Progress Indicator (GPI) (Anielski, 2001 ; Costanza et al., 2014 , pp. 149–150) and ISEW are essentially equivalent measures. Both divide economic transactions into those transactions that make a positive contribution to human welfare and those transactions that make a negative contribution. In principle, they refer to a corrected concept of Hicksian income: “To summarize, let us define our corrected income concept, Hicksian income (HI), as net national product (NNP) minus defensive expenditures (DE) and depreciation of natural capital (DNC). Thus, HI = NNP - DE - DNC” (Costanza et al., 2014 , p. 141). This extension aims at identifying the quality of income according to expenditure purposes:

These indicators deduct some evaluations of the costs of water, air and noise pollution from consumption and also try to account for the loss of wetlands, farmland, and primary forests, and for other natural resource depletion, and for CO 2 damage and ozone depletion. Natural resources depletion is valued by measuring the investment necessary to generate a perpetual equivalent stream of renewable substitutes. (Stiglitz et al., 2009 , p. 66)

This is agrees, in part, with trends in national accounting, where household income is analyzed according to its availability and to beneficiary social groups, as for example in the Report by the Commission on the Measurement of Economic Performance and Social Progress (Stiglitz et al., 2009 ). It also meets concerns related to the meaning of the mean consumption index price when groups of components (e.g., food and electronic products) vary in opposite ways, with different consequences for households with different levels of income. However, as shown in the various formulas used for these kinds of indexes, subjectivity and arbitrariness are difficult to avoid.

Besides the character of the choice, whether good or bad, other criticism exists regarding the appropriateness of adding subjective values to national accounts. The first argument is that national accounts record observed prices, which are what has really been paid, while subjective welfare values record the willingness to pay, which is always superior or equal to the former (the difference being the consumer surplus).

Accounting for the Past vs. Modeling Future Prospects

A second argument is that such adjustments do not simply affect the final totals but result in changes to the consumption structure (quantities and prices) that underlies GDP or national income. Yet national accounts look at the past as it actually happened, and changing quantities and prices is not relevant. Instead, such calculation can be meaningful in the context of modeling the future under environmental constraints. Such an approach was followed by Roofie Hueting for the calculation of “sustainable national income” (Hueting, 1980 ). The logic behind his approach is that an implicit set of consumption preferences underlies the calculation of conventional national income, and that these preferences are currently biased. Sustainable national income is estimated on the assumption that people would prefer a sustainable economy defined as transferring all environmental functions to future generations without depleting any of them in the present. Similarly, the GREENSTAMP report of the EC recommends the “estimation of a ‘greened GDP’ and, by extension, of a sustainable national income (SNI) based directly on empirically calibrated modeling of a national economy in order to calculate feasible economic output subject to respect for environmental quality (ecological-economic sustainability) norms” (Brouwer, O’Connor, & Radermacher, 1999 ). As with Hueting, the reference standard is a physical measurement (e.g., pollution level), not a welfare value. But the difference is that the GREENSTAMP model does not refer to welfare economic theory. This means, in particular, that the subtraction by Hueting of defensive expenditures and avoidance costs of meeting standards from national income is not relevant in GREENSTAMP. Instead, multi-sector national economic models are used to assess avoidance costs and calculate “possible” environmentally adjusted national (future) income(s).

Adjusted Net Savings

Genuine or Adjusted Net Savings (ANS) are synonymous terms given to an indicator proposed by Kirk Hamilton and computed by the World Bank:

In standard national accounting, only the formation of fixed, produced capital is counted as an investment in the future and thus as an increase in the value of the assets available to society. Likewise, standard calculation of net saving rates includes only depreciation in the value of human-made capital as a decrease in the value of a nation’s assets. The adjusted net savings framework takes the broader view that natural and human capitals are assets upon which the productivity and therefore the well-being of a nation rest. Since depletion of a non-renewable resource (or over-exploitation of a renewable one) decreases the value of that resource stock as an asset, such activity represents a disinvestment in future productivity and well being. In the same way, the creation of an educated populace and a skilled workforce—a nation’s human capital—increase the value of that resource and might better be seen as an investment (Bolt et al., 2002 , p. 4)

Genuine savings is a requalification of investment flows, which does not require changes in product and income. As quoted on the World Bank web page where ANS results are disseminated:

Adjusted net savings are equal to net national savings plus education expenditure and minus energy depletion, mineral depletion, net forest depletion, and carbon dioxide and particulate emissions damage. (World Bank, 2011a )

ANS are discussed in detail in the Stiglitz Report of 2009 :

The relevance of the ANS approach crucially depends on what is counted (the different forms of capital passed on to future generations), namely, what is included in “extended wealth,” and on the price used to count and aggregate in a context of imperfect or indeed nonexistent valuation by markets. (Stiglitz et al., 2009 , p. 67)

Other ANS criticism is that environmental degradation is captured only by damages due to CO 2 and particulate matter (PM10) emissions (with no consideration for water, soil, or biodiversity) and that prices obtained by modeling are “accounting prices.” Depletion of an exhaustible resource (like oil) is based on market prices. These prices would be acceptable in the context of a perfect market, which is not the case. In addition, they are very volatile, which limits the practical usefulness of the adjustment. From a global perspective, resource depletion is imputed to producers only, the overconsumption by the buyers (developed countries in many cases) being ignored. The consumption of the producers is therefore not sustainable, while that of the consumers seems to be, even if it is made of products manufactured in unsustainable conditions.

Adjustments for Environmental Benefits

Henry Peskin ( 1976 ) and Roefie Hueting ( 1980 ) worked on more comprehensive approaches to account for environmental benefits as well as costs.

In 1976 , Peskin developed a framework known as the Philippine Environmental and Natural Resources Accounting Project (ENRAP). The ENRAP framework includes (a) consumption of waste disposal services (an input supplied by air and water); (b) environmental damages as a result of consumption of waste disposal services; and (c) final consumption of environmental quality services or “environmental benefits” (recreation, watershed protection, and existence values). Peskin then defined a net environmental benefit (or disbenefit) as (a) − (b+c). In accounting for nonmarketed services in addition to the natural resources recorded by the SNA, depreciation can be defined more broadly than in the SEEA. The Peskin approach was recommended in the United States by the Panel on Integrated Environmental and Economic Accounting of the National Research Council (Nordhaus & Kokkelenberg, 1999 ).

Techniques for valuing these kinds of non-marketed environmental services developed slowly, but today Peskin’s approach to environmental benefits can be considered a precursor of the ongoing work on ecosystem services.

Hueting’s vision of the “environment as a scarcity”—a scarce resource as a whole—is also a step to take into account the value of nature, although in a different way than Peskin. For Hueting, the sustainable national income (SNI) in a given year is an estimate of the production level at which—with the technology in the year of calculation—environmental functions remain available “for ever.” This value is established in relation to socially established targets in laws, regulation, or conventions.

Accounting for Ecosystem Services

Ecosystem accounting.

Accounting for ecosystems has gained attention since the early publications of Rapport, Daily, and Costanza in the 1990s, the first classification of ecosystem services by De Groot and Costanza, the Millennium Ecosystem Assessment of 2005 , The Economics of Ecosystems and Biodiversity (TEEB) (Ten Brink, 2011 ), and applications such as the Land and Ecosystem Accounts of the European Environment Agency. In this context, the UN Statistical Commission has accepted that the SEEA under revision will be supplemented by an experimental volume that brings together the best experience to support experiments in voluntary countries. Such experiments are going on with noticeable actions steered by the UN Statistical Division, UNEP, the Convention on Biological Diversity, the World Bank, and the Indian Ocean Commission.

At this stage, two visions underlie the development of ecosystem accounting: the extension of the scope of the economy to give a better recognition of ecosystems and their services vs. multiple interacting (co-evolving) systems, where the maintenance of the ecosystem potential to deliver services is at the core.

In the first approach, degradation is understood as a loss of services. As aggregation of physical ecosystem services is difficult due to the variety and multiple units used for their measurement, valuation in money with market prices or shadow prices is seen as the only way to assess all services, to aggregate them, and to calculate the wealth of ecosystem assets.

In the second approach, degradation is the loss of functions and resilience. The aggregate relates to the ecosystem itself, measured according to the sustainability of its overall performance at delivering services, not according to the services themselves. Therefore, services do not need to be recorded exhaustively and valued in money (which can be done, however, at the bottom of the accounts), and no valuation of ecosystem wealth is foreseen besides the value of economic natural assets presently recorded in the SNA. Valuation is foreseen only for restoration costs of ecosystem functions.

Although approaches by services valuation, in money and by measurement of functions and resilience of systems in physical terms are different and to some extent opposed, some convergence can be seen in practice, because physical accounts are needed for valuation exercises. The point is particularly clear for those services that require quantitative geographical assessment prior to valuation. As ecosystems are typically described as geographical entities (Weber, 2014 ; SEEA-EEA 2012, 2014 ), data collected and assimilated for physical accounting can be useful input for the valuation of ecosystem services assessed with similar geographical patterns. In addition, assessment of ecosystem monetary values can benefit from indicators of ecosystem condition, which adds additional information on sustainability to their results.

Ecosystem Services Definition and Classification

Accounting for ecosystem services is a concept whose roots can be found in Peskin ( 1976 ). In the 1990s, the concept was developed by the economist Gretchen Daily (Daily, 1997 ) and thereafter enhanced by De Groot and Costanza (Costanza et al., 1997 ). It came to the forefront of natural accounting discussions with the MA2005 and TEEB 2007 . A historical perspective on the emergence of this concept in economic theory is given in Gómez-Baggethun, De Groot, Lomas, and Montes ( 2009 ). Ecosystem services are an essential element of the UN SEEA-EEA, which proposes a provisional classification called CICES (Common International Classification of Ecosystem Services) (SEEA-EEA 2012, 2014 ) derived from that of the MA2005—which defines four categories: support, provision, regulation, and sociocultural services.

The discussion on ecosystem services classification is, however, continuing, due in particular to ambiguities in the definition of what a service is. Different opinions relate to the inclusion of those services that are a joint production of economy and nature, namely, in agriculture, forestry, and fishery. One position is that only the so-called final ecosystem services (which value is not captured in the production of SNA) should be recorded. This position is that of the U.S. EPA National Ecosystem Services Classification System (NESCS). NESCS is based on the Final Ecosystem Goods and Services Classification System (FEGS-CS):

NESCS draws a key distinction between intermediate and final services. For both economic and environmental accounting, this distinction is essential to avoid double counting services. Consequently, the NESCS focuses on flows of final ecosystem services (FFES), which it defines as the direct contributions made by nature to human production processes or to human well-being. (U.S. EPA, 2015 , p. xiii)

This distinction between final services and services that are input to production is important when aggregating values to the National Accounts. The point is less clear in terms of physical measurements, as it may lead to excluding intermediate services, which are essential contributions of ecosystems (e. g., to food security). The SEEA-EEA recommends following the final service approach in the case of cultivated biological resources (SEEA-EEA 2012, 2014 [3.26]), having in view consistency with the SNA boundary of production. It acknowledges as well that definition of services from harvests is what is done in MA2005 and TEEB, or in the Mapping and Assessment of Ecosystem Services (MAES) project of the European Union and warns of risks of double-counting in that case.

Valuing Ecosystem Services

According to Hecht ( 2005 ), valuing ecosystem services and assets refers implicitly or explicitly to the paradigm of Total Economic Value (TEV), made up of use values and non-use values. TEV = direct use value + indirect use value + existence value + option value + quasi-option value + bequest value. Direct use is that of marketed products, such as timber or food, and of nonmarketed products, such as wood gathered for fuel or water. Note that, in principle, all goods are accounted for in the SNA, including produce for one’s own consumption, such as vegetables from family gardens or berries and mushrooms picked in public forests, or fish caught by anglers in a river. They are measured at market prices of similar goods. Indirect uses include waste disposal, amenities such as recreation or scenic vistas, flood protection, and water filtration by wetlands. Indirect uses generally are not marketed, though they can be reflected in asset values (in the case of flood protection) or recreational and/or tourism services for which payments are purposely done, directly or indirectly (e.g., transportation costs). Non-use values of the environment capture our willingness to pay simply to know that the resource exists, even though we do not expect to use it. Option and quasi-option values relate to our interest that the resource will exist in the future. Bequest value is the willingness to pay to ensure that future generations will be able to enjoy the service.

Addition of use and non-use values in cost–benefit assessments where the public is asked to state its preferences makes sense; aggregation in the context of national accounting is controversial because of price inconsistencies.

Valuation of ecosystem services has a particular importance for comparisons between social groups, especially in terms of the rural poor. Many ecosystem services benefiting the rural poor account for little or nothing in GDP. Byproducts of forestry (wood for fuel, non-timber forest products), and non-commercial fisheries can be underestimated in statistics. Functional ecosystem services such as water quality and regulation, soil fertility, fish stocks regulation, aesthetic and cultural elements of quality of life, and attraction for tourists can be ignored by national accounts. However, in case of ecosystem degradation and loss of services, a loss of one dollar would hurt poor people more than it would the rich. The poor also have few possibilities of replacing free ecosystem services with commercial services. These issues have led to assessment of the “GDP of the Poor” (Gundimeda & Sukhdev, 2009 ).

Methodologies for Ecosystem Services Valuation

Methodologies for ES valuation are well documented in the literature. A recent and comprehensive presentation of the various techniques used can be found in (UNEP, 2014 ). It covers the following:

the production function technique;

the market price technique;

the travel cost technique;

hedonic pricing;

replacement cost and avoided damage cost;

contingent valuation;

the choice experiment technique;

the value transfer technique;

Accounting for Natural Capital in National Accounting Context

Valuing natural capital in the national accounting context.

[In the SNA] the ideal sources for asset prices are values observed in markets, in which each asset traded is completely homogeneous, is often traded in considerable volume, and has its market price listed at regular intervals. . . . For some assets, including many environmental assets, there are no relevant market transactions or set of acquisition prices that would permit the use of the previous approaches. Thus, no values for the asset itself, in situ, are available. In this situation, the discounted value of the future returns approach, commonly referred to as the net present value (NPV) approach, uses projections of the future returns from the use (usually by extraction or harvest) of the asset. SEEA-EEA ( 2014 , sec. 5.4.4, Valuation of assets)

This SEEA-EEA proposal corresponds to the standard capital model of conventional economic theory. The equivalence between the value of capital and the net present value of future returns is commonly used in comparative cost–benefit analysis of projects that are assessed over common life duration. In financial accounting, the identity is used as a surrogate of the actual market value when the market is too narrow to provide a correct price for an economic asset; the method is called fair value, as it informs on the capital value of prospective income. This standard capital model is considered by many as relevant at the macro scale for the produced capital, and a special chapter of the System of National Accounts (UN SNA, 2008 ) is devoted to “Capital Services and the National Accounts.” This chapter is different in style from the rest of the SNA, as it brings proposals (and not recommendations) to improve capital assessment, in particular regarding productivity analysis, to those statistical offices interested in doing so. Natural capital is part of the discussion, with an exclusive focus on the natural resources that are considered in the SNA, the economic assets that are owned and managed in view of a benefit. The possibility of recording natural capital consumption is acknowledged but no adjustment of GDP or national income is proposed within the SNA, the task being forwarded to the SEEA, where the methodology is developed. This prudence can be understood as a consequence of the difficulties in calculating natural consumption and of the volatility of natural resource prices, which may result in unstable aggregates adjustments, likely to be much more important at some moments than their core variation.

The approaches to natural capital assessment, alongside the welfare economics theory, have considerably focused in the last decades on ecosystem services and their monetary valuation. Driven by the academic world and institutions such as the World Bank, they have paid more attention to accounting, at the micro level or at the national or global levels, under the influence of David Pearce, Kirk Hamilton, Salah El Serafy, Partha Dasgupta, Karl-Goran Mäler, Charles Perrings, Robert Costanza, Pavan Sukhdev, and many others. In this approach, monetary valuation with “shadow prices” is considered to be the only way to incorporate dimensions ignored by the economy into the broad picture. Green economics and the systematic valuation of it is a way to force neoclassical economic theory to take nature into account (as well as human and social capital) and achieve sustainable development. At the global level, noticeable outcomes are the Total Wealth of Nations (World Bank, 2011b ) and the Inclusive Wealth Report (UNU-IHDP & UNEP, 2012 ). TEEB, The Economics of Ecosystems and Biodiversity program launched at the G8+5 in Potsdam ( 2007 ) by the German government and the European Commission pays great attention to environmental accounting in a broad view, including physical accounting, but with particular attention to the value of nature (Ten Brink, 2011 ). Recent developments of monetary assessments of ecosystem services and/or assets are taking place in countries in the context of the World Bank’s WAVES initiative or UNEP lead programs (VANTAGE, ProEcoServ).

Criticism of Natural Capital Valuation and Accounting

There is, however, a lively debate on the feasibility of natural capital valuation and its relevance to addressing sustainable development issues. In a recent paper, Walter Radermacher and Anton Steurer ( 2015 ), after highlighting the frontier of possible monetization, define natural capital valued in money as a narrow capital approach, which is not meaningful for (most) natural capital and sustainability assessments. One argument is that transposing the micro-economic view to the macro level reduces the complexity of decisions to a one-dimensional choice based on the optimal allocation of scarce resource only, which implicitly means considering marginal or progressive change while irreversibility is at the core of natural processes. Considering in addition that property rights are not clearly enforced for all assets, such optimal allocation is defined de facto by “the invisible hand of the market” and corresponds to a weak sustainability perspective. Accounting for ecosystem natural capital in physical units is an approach to strong sustainability.

Accounting at the Micro and Macro Levels

Accounting is a technique aimed at calculating the income and wealth of companies, institutions, households, or countries. Accounting frameworks at the micro- and macroeconomic levels are related, in principle. National accounts are, to some degree, the sum total of individual accounts, only to some degree, however, because limitations exist due to statistical difficulties that require the use of estimations as well as differences in perspectives. Corporate (or financial) accounts rule the internal life of the company as well as its relations with its clients, shareholders, and the fiscal authority. Financial accounts are legal documents submitted to strict control. National accounts are macroeconomic tools that feed models used for policy-making. Their soundness is the product of the consistency and completeness of their methodological framework and of the quality of the statistics on which they are based.

An example of a discrepancy is the estimation of capital depreciation, the way of sharing out over time the cost of using goods that last more than one year. According to the famous definition of income by John Hicks ( 2001 , p. 176), “a man’s income [is] the maximum value which he can consume during a week, and still expect to be as well of at the end of period as he was at the beginning.” Income should, therefore, be accounted net of capital depreciation (or capital consumption). Regarding environmental accounting, László Drechsler ( 1976 ) pointed out the importance of the “input asymmetry” problem linked to the fact that man-made capital is depreciated in the national accounts to arrive at net domestic product, while depreciation of natural capital has been ignored. In corporate accounts, the values of only natural assets of subsoil, forests, timber, and fish stocks are depreciated; ecosystem assets are not.

The way depreciation is measured by corporations highly influences the net amount of profit to be distributed to shareholders after being submitted to tax levy. It is submitted to strict regulations. In national accounting, the equivalent amount is called consumption of fixed capital and is used to “net” the gross domestic product from the cost needed to maintain industrial assets as well as buildings or roads and come to a measurement of income in line with the Hicksian definition:

Consumption of fixed capital is the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage. The term depreciation is . . . avoided in the SNA because in commercial accounting the term depreciation is often used in the context of writing off historic costs whereas in the SNA consumption of fixed capital is dependent on the current value of the asset. (UN SNA, 2008 , 6.240, p. 123)

This example is one through several of differences between micro observations and what statistics can record.

Other discrepancies between micro and macro level assessments relate in particular to price systems and have led to multiple approaches, often partial and associated in different ways in various documents. This continuous debate overlaps to some extent with approaches by official national accountants thinking in terms of statistics and academic researchers paying primary attention to theories and models, and the interpretation of accounting aggregates. This opposition is reinforced by the fact that researchers can test their models on the basis of their own assessment practice, which generally relates to cost–benefit analysis, a methodology developed for assessing projects. When prices need to be estimated, national accounts recommend using similar prices, which can be observed on the market. Being forward looking, cost–benefit analyses are more open to other prices such as the amount that stakeholders are willing to pay for this or that option (such as welfare or shadow prices).

The United Kingdom National Ecosystem Assessment ( 2014 ) (UK NEA) is an attempt to generalize the use of cost–benefit analysis to support policy decisions. It is the “application of economic analysis techniques to assessments of the ecosystem service flows generated by a range of land use change scenarios” (Bateman et al., 2013 , p. 292). The aim is “incorporating natural science information within economic analyses in a manner which allows more thorough and spatially explicit CBA assessments of decision possibilities” (Bateman et al., 2013 , p. 294). A spatially explicit approach to modeling each welfare stream is followed by monetizing all value streams. Issues of double counting are addressed on a case-by-case basis. However, “where this [monetization of welfare streams] cannot be reliably achieved, here in the case of biodiversity . . ., a straightforward constraints-based approach [is] designed to ensure species sustainability” (Bateman et al., 2013 , p. 292).

Environmental Accounts in Physical Units

Environmental accounts in physical units can be considered as a support to valuation or as assessments in themselves, or both. An issue with physical accounts relates to aggregation.

Early Accounting Frameworks in Physical Units

The first accounts to be published were the Natural Resource Accounts (NRA) of Norway in 1974 . The purpose was to supplement the conventional national accounts with tables on important national resources such as fish stocks (cod stocks in the North Sea had been severely depleted at that time) or water (as a resource for hydroelectricity) with the purpose of enlarging macroeconomic models to incorporate these data. In 1979 , Statistics Canada published a report on the Stress-Response System (Rapport & Friend, 1979 ), a comprehensive framework where data on material flows were combined with data on the condition of environmental systems. This model was not implemented as such but was adopted by the OECD to frame the first State of Environment reports, under the name of Pressure-State-Response (PSR). As such or with variants, the PSR model has been used very widely and is still in use. A few years later, similar approaches were implemented in France and Spain under the name of Natural Patrimony Accounts (NPA). Natural patrimony accounting is another attempt to integrate accounts of stocks and flows of components (material resources, water, fauna, and flora) and systems (water systems, ecosystems). Monetary accounts are foreseen in NPA, but not as a general means for integration. They include the valuation of some natural assets such as timber or the recording of environmental protection expenditure, but there is no attempt to compute damage costs.

Natural resource accounting emerged at the time of intense reflection on the limits of materials and energy available for economic development, of which Georgescu-Roegen’s book, The Entropy Law and the Economic Process (Georgescu-Roegen, 1971 ) is an essential milestone. Important developments took place—and are continuing—in terms of materials and energy accounting. They include the life cycle analysis of products, approaches to industrial metabolism, and energy accounts in thermodynamic terms, where the influence of Robert Ayres should be noted.

Accounting for Material Flows

Early works by Ayres and others resulted in the publication by the United Nations of Draft Guidelines on Materials/Energy Balances (United Nations, 1976 ). It inspired national experiments in material balances for selected products, life cycle analysis, and later, for the development of economy-wide material flow analysis and accounts (EW-MFA), where all materials are measured in tons. EW-MFA was developed during the 1990s by various organizations, principally the World Resources Institute; the German Wuppertal Institute for Climate, Environment, and Energy; the Netherlands Ministry of Housing, Planning, and Environment; the University of Klagenfurt in Austria; and the Japanese National Institute for Environmental Studies (Adriaanse et al., 1997 ). The purpose is to measure key indicators of the “industrial metabolism,” using the ton as the equivalent unit for all materials.

MFA, “Decoupling,” and Resource Efficiency

In recent years, MFAs have been applied more broadly and standardized in methodological guides by Eurostat (Eurostat, 2000 , 2013 ) and the OECD (OECD, 2002 , 2008 ) with the purpose of producing aggregated indicators measuring production “decoupling” from its material base and measuring progress in resource use efficiency. Material flows include materials from/to the domestic environment and exchanges of materials with the rest of the world. It will be noted that water and air (O 2 , N 2 , CO 2 . . .) are not included in the recorded material input. Also, land (which has no weight) is excluded from resource use assessment with MFA. Material inputs consist of raw and processed products: biomass, metal ores and concentrates, non-metallic minerals (including sand and gravel), fossil energy, and waste imported for final treatment and disposal. Material outputs are made of emissions to air (including CO 2 emissions, which represent an important part of the total), landfill waste, emissions in water, the dissipative use of products, and dissipative losses.

Typical EW-MFA aggregates are:

Domestic Extraction Used (DEU): material inputs from the natural environment into the economy.

Imports and exports of materials and the Physical Trade Balance (PTB), which is their difference.

Domestic Processed Output (DPO): the total weight of materials that are released back to the environment after having been used in the domestic economy. DPO does not include exported products.

Domestic Material Input (DMI): the total of domestic extraction of resources and imports.

Direct Material Consumption (DMC): DMI minus exports.

Total Material Requirement (TMR): DMI plus the indirect flows caused by and associated with the domestic extraction (called “Hidden Flows”). This indicator corresponds to the theory of the “rucksack” of products.

MFA and Carbon Accounting

One extension of the MFA is the use of so-called carbon balances or budgets for reporting to the UNFCCC. These accounts seem more consistent than conventional MFAs, as the measurement unit used, the CO 2 equivalent, is clearly defined in relation to global warming. They are extended to carbon stocks or pools and their depletion and renewal (carbon sequestration). MFAs in carbon have also been developed to measure the pressure of human activities on the renewable flow of carbon defined as the biomass. This is the so-called Human Appropriation of Net Primary Production (HANPP), where appropriation means consumption (in the conventional accounting sense) and the losses of NPP due to land use degradation, such as soil sealing or deforestation, measured in reference to an absolute potential corresponding to natural conditions (Haberl et al., 2007 ; Vitousek, Ehrlich, Ehrlich, & Matson, 1986 ). Although expressed in hectares to emphasize the limitation of our consumption patterns, the Ecological Footprint Accounts can be considered as an offshoot of MFA in carbon, the conversion of tons to biocapacity being done through conventional yields.

MFA in the SEEA

The UN System of Environmental-Economic Accounting (SEEA) includes material flow accounts as an important component. In the 1993 SEEA, material flows in particular were addressed in terms of input-output (I-O) analysis, mirroring with physical data the monetary I-O tables (I-OTs) of the SNA. I-OTs are tools created by Wassily Leontieff to analyze the internal exchanges of commodities between industries. Compiling I-OTs in physical units has been proposed by Carsten Stahmer, in the SEEA ( 1993 ). In subsequent SEEA versions (SEEA, 2003 , 2014 ), the ambition has been reduced to Physical-Supply and Use Tables (PSUT) only, because not all countries around the globe compile I-OTs in monetary units. PSUTs are easier to compute but do not have the same analytical power as I-OTs.

Important developments of national account I-OTs in monetary units integrated with physical flows are the so-called “hybrid accounts” or “joint presentations” of the SEEA. They are the summary of the National Accounting Matrixes with Environmental Accounts (NAMEA), developed in the Netherlands in the 1980s for the purpose of assessing the effects of economic growth on resource use and waste generation, as well as of environmental regulations on economic growth. On the basis of the expected contribution of each polluting substance to a particular environmental problem, emissions are converted to theme equivalents (De Haan & Keuning, 1996 ).

NAMEA is an efficient support for macro-economic modeling. It has been extensively tested in Europe, Japan, and other OECD countries, in particular regarding emissions of greenhouse gases. NAMEA can easily be connected to environmental protection expenditure accounts.

Accounting Based on Thermodynamic Principles

Although energy balances are regularly produced and a volume on the SEEA-Energy is under preparation, they are limited to the energy sector and products. In a different context, comprehensive energy accounts integrating the whole earth system in the way pioneered by Georgescu-Roegen have continued to be developed, but they are still limited in their applications. Main approaches are those focusing on available solar energy and the conversion of all economic and natural flows into Emergy (embodied energy), and those calculating all costs in terms of loss of Exergy (the energy of the system which can be used).

Emergy Accounting

According to Howard T. Odum ( 1996 ), emergy is the available solar energy used up directly and indirectly to make a service or product. Indirect use means embodied in the various inputs to the given service or product. Conversion into a common emergy unit (solar emjoule or sej) is done using “solar transformity values” for each energy category of a process described in a pathway analysis. All the source emergy of a process is therefore assigned to the output(s) of the process. Recent developments relate to the measurement of ecosystem services in emergy units (Brown et al., 2015 ).

Exergy Costs Accounting

Exergy, in thermodynamics, is the maximum energy of a system that is available to be used. After the system and its surroundings reach equilibrium, the exergy is zero. “The consumption of natural resources implies destruction of organized systems and dispersion, which is in fact generation of entropy (or exergy destruction)” (Valero et al., 2006 ). “Exergoecology is the application of the exergy analysis in the evaluation of natural fluxes and resources on earth” (Exergoecology Portal, 2016 ). Experience has been gained in Spain since the early 1990s and has led to the publication of water accounts in exergy integrating into one single measurement of quantitative and qualitative characteristics (Naredo, 1997 ).

Accounting Frameworks Based on System Analysis

The stress-response system.

Other approaches to system analysis have been developed. One is known as the Stress-Response System (Rapport & Friend, 1979 ), developed at Statistics Canada. It articulates the description of ecological systems and their response to various stresses due to resource overextraction or overharvesting, to contamination by pollution, and to disruptions due to urban or agricultural land use. Attention is paid to habitats and ecosystem mapping as a priority task for implementing “ecological capital accounts comprising size and spatial distribution of ecological zones and their rates of transformation” (Rapport & Friend, 1979 , p. 25). The Stress-Response approach paved the way for the development of the ecosystem health assessment approach, which is explicitly or implicitly referred to in various ecosystem accounting frameworks.

The Natural Patrimony Accounts

In a different context, Natural Patrimony Accounts were developed in France (CICPN, 1986 ) and Spain in the 1980s. Here again, the need to supplement material balances with system accounting is strongly emphasized. In Spain, natural patrimony accounting allowed for testing the exergo-ecological methodology for rivers and, in the same measurement, assessing water availability and use in quantitative and qualitative terms. In France, it led to the proposal of ecosystem accounting and the definition of an ambitious program of land cover mapping to create a directory of all land ecosystems. The land cover mapping methodology has been adopted by the European Union under the name of CORINE Land Cover and is now the basis for the land accounts published by the European Environment Agency (Haines-Young & Weber, 2006 ) for its 34 member countries, and is updated every 6th year.

ENCA-QSP, the Ecosystem Natural Capital Accounts; Quick Start Package (Weber, 2014 ) published by the CBD to support the “implementation of the Aichi Biodiversity Target 2 on Integration of Biodiversity Values in National Accounting Systems in the context of the SEEA Experimental Ecosystem Accounts” is a framework based on a systemic approach (Weber, 2014 ). It is based on the Ecosystem Capital Accounts framework developed at the European Environment Agency (Weber, 2011 ). In ENCA-QSP, an ecosystem’s sustainable capacity to deliver services is measured from the system’s characteristics of productivity, intensity of use, and resilience, ecosystems being defined as socioecological systems. The simplified framework is built from three sets of spatially based accounts, for ecosystem carbon (biomass and atmospheric CO 2 ), water, and ecological infrastructure integrity and biodiversity. The model is based on ecosystem functions and addresses ecosystem services such as the use of primary goods (biomass, water) and land. Impacts of service overuse are recorded first, consistent with socioeconomic statistics and the SNA classifications. In addition, ENCA-QSP accounts assess ecosystem functions accessibility and propose gateways for detailed assessments of specific ecosystem services. The core ENCA-QSP accounts summarize results using a multicriteria index derived from the three sets of accounts. It provides a measurement of ecosystems ecological value with a common unit called the ecosystem capability unit (ECU). A loss of total ecological value due to economic activity is ecosystem degradation; a gain is enhancement. The Quick Start Package is aimed at being supplemented in two ways. On the cost side, an ecological balance sheet (in ECU) is established for all economic sectors or agents, showing debts and credits. ECU values can be, in a second step, converted to money using restoration costs. On the benefit side, detailed accounts for key ecosystem services in physical units and in money can be connected to core accounts.

Accounting and Modeling

Accounts have three basic functions: controling the quality of the various numbers recorded in the books (taking stock of the past); measuring meaningful results regarding income and wealth (the present situation); and supporting forward-looking assessment models (the future). For example, national accounts allow for the computation of deficits or surpluses in budgets or international trade or payments, production, income, consumption, and investment and for forecasting of economic growth levels and consequences for employment and government tax revenue.

Regarding environmental accounting, several types of models can be mentioned:

Input-output modeling as a direct extension of the national accounts (De Haan & Keuning, 1996 ; Feng, Jinyan, Chenchen, & Chunhong, 2014 ).

Economic assessment of benefits, damage costs, national income or GDP (Brouwer et al., 1999 ; SEEA, 1993 ).

Valuation of ecosystem services (Ten Brink, 2011 ), Inclusive Wealth (UNU-IHDP & UNEP, 2012 ) or Total Wealth (World Bank, 2011b ).

Biophysical modeling for assimilating heterogeneous data sets to common spatial and time patterns (ENCA-QSP, in Weber, 2014 ).

Forward-looking models: InVEST (Sharp, Chaplin-Kramer, Wood, Guerry, Tallis, & Ricketts, 2016 ), ARIES (Villa et al., 2014 ), QUICKScan (Verweij, Winograd, Pérez-Soba, Knapen, & van Randen, 2012 ). Although not accounts, these models follow accounting principles and use similar data.

Further Reading

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Sustainability accounting and reporting: recent perspectives and an agenda for further research

Pacific Accounting Review

ISSN : 0114-0582

Article publication date: 8 October 2019

Issue publication date: 8 October 2019

Lodhia, S.K. and Sharma, U. (2019), "Sustainability accounting and reporting: recent perspectives and an agenda for further research", Pacific Accounting Review , Vol. 31 No. 3, pp. 309-312. https://doi.org/10.1108/PAR-02-2019-121

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Copyright © 2019, Emerald Publishing Limited

The viewpoint is based on the selection of papers presented at the 2017 Australasian Centre for Social and Environmental Accounting Research hosted by the University of the South Pacific and held from 7 to 9 December 2017 at Denarau, Nadi, Fiji. The annual Australasian Centre for Social and Environmental Accounting Research Conference provides an international forum and showcases research on the social and environmental aspects of accounting theory and practice. It also fosters and supports interdisciplinary research in accounting.

Social and environmental accounting or sustainability accounting and reporting has become one of the major issues that organisations grapple with on a daily basis. Sustainability accounting is but one aspect of sustainability ( Milne et al. , 2009 ), and yet the term sustainability accounting offers so many different perspectives ( Bebbington and Gray, 2001 ; Gray, 2010 ; Mistry et al. , 2014 ; Lodhia, 2018a ; Sharma, 2013 ). This is reflected in the different names utilised for the term, such as social and environmental accounting, triple bottom line accounting, emissions accounting and carbon accounting, amongst others. Social and environmental issues are attracting more political and media attention, reflecting increased social awareness ( Deegan and Blomquist, 2006 ; Lodhia, 2018b ). These changes in societal attention to sustainability make sustainability accounting an exciting and dynamic field of research. Sustainability and sustainable development, defined by their social, economic and environmental elements are one of the significant challenges for organisations and society ( Moran et al. , 2014 ; Lodhia, 2018a ). Research has generated a sizeable body of insights into sustainability disclosure practices. However, little is known about accounting for sustainability within specific organisations, especially in relation to the trade-off between economic, social and environmental issues. Even less is known about the integration of sustainability into management control and decision-making.

This viewpoint reflects the complexity of sustainability accounting issues based on the selection of papers presented at the 2017 Australasian Centre for Social and Environmental Accounting Research conference and covers many of the approaches that can be taken. The papers reflect diverse foci and a range of countries and approaches. Papers range from stakeholder engagement, sustainability reporting, role of culture in accounting, investor response to corporate social responsibility performance, use of photographs in annual reports to depict corporate social responsibility and social and environmental accountability firms. Research approaches include case study and interviews, quantitative methods such as panel data analysis and experiments, visual content analysis and casual layered analysis. The context of investigations includes Australian councils and companies, Sri Lankan companies, New Zealand indigenous entrepreneurs and companies.

Kaur and Lodhia (2019) explore the key issues and challenges that affect the quality of stakeholder engagement processes and outcomes in relation to sustainability reporting. They use case study research to gain in-depth insights into the stakeholder engagement practices of three Australian local councils. The findings of Kaur and Lodhia (2019) suggest that the effectiveness of stakeholder engagement can be undermined by certain difficulties and challenges faced by an organisation. These include limited resources, lack of commitment from internal stakeholders, political factors, heterogeneous concerns, inadequate representation and unwillingness to engage.

Sustainability reporting in the Asian region is also a growing area of research interest. To this end, Dissanayake et al. (2019) aim to investigate the key company characteristics which influence sustainability reporting by publicly listed companies in Sri Lanka. They use panel data to analyse sustainability reporting of 84 publicly listed companies. They found that company size and usage of the GRI guidelines are found to be the most relevant company characteristics associated with sustainability reporting by listed companies in Sri Lanka. Unexpectedly, ownership and industry sector do not show strong influences on the extent of sustainability reporting over the study period (2012-2015) compared with prior periods.

Polynesian entrepreneurs also play an important role in accounting for sustainability. Yong (2019) discusses the role of accounting, accountants and the cash management processes of indigenous Maori and Pacific (collectively referred as Polynesian) entrepreneurs in New Zealand. Her paper highlights the influence of cultural values on Polynesian’s accounting decision-making processes. The paper also provides some unique insights into the interrelationships of the cultural, economic and social dynamics that sculpt Polynesians’ decision towards accounting, cash management and their accountants. In particular, the cultural values of communality, reciprocity and “gift giving” and respect for authority are important factors in shaping the Polynesians’ approach to accounting disposition and business cash management.

The effect of target and incentive consistency of unexpected positive earnings news on investors’ response to corporate social responsibility performance is also an important area. Wang (2019) examines the effect of target – and incentive – consistency of unexpected positive earnings news on investors’ use of corporate social responsibility performance in their pricing decisions. Wang’s methodology is based on experimental research. The findings reveal that target-and-incentive-consistency of unexpected positive earnings news moderates the effect of corporate social responsibility performance on investors’ pricing decisions. The findings support an unexamined theoretical underpinning for the effect of financial information on investors’ use of nonfinancial information.

Use of photographs to depict corporate social responsibility is yet another important aspect of sustainability accounting. To this end Chong et al. (2019) uncover the extent of utilisation of photographs depicting corporate social responsibility information in corporate annual reports and the possible motives for their use. Their study employed visual content analysis, based on Banks (2001) strategy of “looking through”, “looking at” and “looking behind” photographic images, to examine and analyse 4,933 photographs contained in the 2005, 2010 and 2015 annual reports of 70 companies listed on New Zealand Stock Exchange. The findings were interpreted using the impression management theoretical construct. Chong et al. (2019) findings show a marked increase in the utilisation of photographs for corporate social responsibility associated disclosures by the sample companies. Surprisingly, the quantity of photographs depicting environmental performance has declined, whereas those featuring product responsibility have increased significantly. The “messages” encoded in the photographs create idealistic images of the companies being caring and responsible corporate citizens. This suggests that companies are systematically using symbolic presentations such as photographs of children and families for rhetorical impression management. Chong et al. (2019) develop a structured approach for categorising and analysing corporate social responsibility-related photographs and contribute to the scant literature on the utilisation of photographs as a medium for corporate social responsibility information dissemination.

Holdway (2019) argues that social and environmental accountability by firms can be compromised by a lack of democracy within engagement and decision-making processes. This is particularly evident in potential conflict situations such as with unconventional gas extraction. Causal Layered Analysis was applied in a workshop setting involving participants with diverse perspectives on unconventional gas extraction. Her findings suggest that Causal Layered Analysis enables access to multiple, complex and nuanced perspectives, and facilitates a deeper understanding of participants own views, and of differing views in relation to unconventional gas extraction. Holdway (2019) emphasises that Causal Layered Analysis may well assist in moving firms and indeed civil society, closer to reaching social and environmental outcomes.

sustainable development goals and their relationship with sustainability accounting and reporting;

the influence of the integrated reporting initiative on sustainability reporting and the role of accounting and accountants in this regard;

accounting for specific environmental issues such as Carbon, Water, Waste and Biodiversity and the implications for sustainability;

accounting for specific social issues such as health and safety, product responsibility, labour, gender, diversity, human rights, equity, modern slavery and the implications for sustainability;

contaminated sites and the impact on sustainability reporting;

the role of social media, Big Data and the Internet of Things in sustainability accounting and reporting; and

sustainability accounting and reporting in developing countries, especially within the Asian and South Pacific context.

We are confident that more accounting researchers will take up the challenge to research these fascinating sustainability topics. We are also calling for collaboration (multi-disciplinary, interdisciplinary and transdisciplinary approaches) with disciplines such as biology, environmental sciences, geography and engineering to address true sustainability from new and creative perspectives.

Banks , M. ( 2001 ), Visual Methods in Social Research , Sage , London .

Bebbington , J. and Gray , R. ( 2001 ), “ An account of sustainability: failure, success and reconceptualization ”, Critical Perspectives on Accounting , Vol. 2 No. 5 , pp. 557 - 588 .

Chong , S. , Narayan , A. and Ali , I. ( 2019 ), “ Photographs depicting CSR: captured reality or creative illusion? ”, Pacific Accounting Review , available at: https://doi.org/10.1108/PAR-10-2017-0086

Deegan , C. and Blomquist , C. ( 2006 ), “ Stakeholders influence on corporate reporting: an exploration of the interaction between WWF-Australia and the Australian minerals industry ”, Accounting, Organisations and Society , Vol. 31 Nos 4/5 , pp. 343 - 372 .

Dissanayake , D. , Tilt , C. and Qian , W. ( 2019 ), “ Factors influencing sustainability reporting by Sri Lankan companies ”, Pacific Accounting Review , Vol. 31 No. 1 , pp. 84 - 109 .

Gray , R. ( 2010 ), “ Is accounting for sustainability actually accounting for sustainability and how would we know? An exploration of narratives of organisations and the planet ”, Accounting, Organisations and Society , Vol. 35 No. 1 , pp. 47 - 62 .

Holdway , M. ( 2019 ), “ Crossing disciplines: exploring the contribution of a critical futures approach to democratising community engagement with a focus on the gas industry ”, Pacific Accounting Review , Vol. 31 No. 1 , pp. 159 - 180 .

Kaur , A. and Lodhia , S. ( 2019 ), “ Key issues and challenges in stakeholder engagement in sustainability reporting: a study of Australian local councils ”, Pacific Accounting Review , Vol. 31 No. 1 , pp. 2 - 18 .

Lodhia , S. (Ed.) ( 2018a ), “ Mining and sustainable development ”, Mining and Sustainable Development: Current Issues , Routledge , London , pp. 1 - 8 .

Lodhia , S. (Ed.) ( 2018b ), “ Sustainability reporting in the mining industry: current status and future research directions ”, Mining and Sustainable Development: Current Issues , Routledge , London , pp. 159 - 175 .

Milne , M.J. , Tregidga , H. and Walton , S. ( 2009 ), “ Words not actions! the ideological role of sustainable development reporting ”, Accounting, Auditing and Accountability Journal , Vol. 22 No. 8 , pp. 1211 - 1257 .

Mistry , V. , Sharma , U. and Low , M. ( 2014 ), “ Management accountants' perceptions of their role in accounting for sustainable development: an exploratory study ”, Pacific Accounting Review , Vol. 26 Nos 1/2 , pp. 112 - 133 .

Moran , C. , Lodhia , S. , Kunz , N. and Huisingh , D. ( 2014 ), “ Sustainability in mining, minerals and energy: new processes, pathways and human interactions for a cautiously optimistic future ”, Journal of Cleaner Production , Vol. 84 , pp. 1 - 15 .

Sharma , U. ( 2013 ), “ Lessons from the global financial crisis: bringing neoclassical and Buddhist economics theories together to progress global business decision making in the 21st century ”, International Journal of Critical Accounting , Vol. 5 No. 3 , pp. 250 - 263 .

Wang , L. ( 2019 ), “ Effect of target-and-incentive-consistency of unexpected positive earnings news on investors’ responses to corporate social responsibility performance ”, Pacific Accounting Review , Vol. 31 No. 1 , pp. 63 - 83 .

Yong , S. ( 2019 ), “ Pride or prejudice: accounting and Polynesian entrepreneurs ”, Pacific Accounting Review , Vol. 31 No. 2 , pp. 182 - 207 .

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Accounting for Climate Change

• Robert S. Kaplan
• Karthik Ramanna

Corporations are facing growing pressure—from investors, advocacy groups, politicians, and even business leaders themselves—to reduce greenhouse gas (GHG) emissions from their operations and their supply and distribution chains. About 90% of the companies in the S&P 500 now issue some form of environmental, social, and governance report, almost always including an estimate of the company’s GHG emissions. The authors describe these as “catchall reports that are often made up of inaccurate, unverifiable, and contradictory data.” They propose a remedy: the E-liability accounting system, whereby emissions are measured using a combination of chemistry and engineering, and principles of cost accounting are applied to assign the emissions to individual outputs. The authors provide a detailed method for assigning E-liabilities across an entire value chain, using the example of a car-door manufacturer whose furthest-removed supplier is a mining company, which transfers its products to a shipping company, which transports them to a steel company, and so on until the car reaches the end customer.

The first rigorous approach to ESG reporting

Idea in Brief

The problem.

Climate change is an existential threat to life as we know it, but corporations’ progress in reducing greenhouse gas (GHG) emissions remains slow, despite the time and energy companies spend on their ESG reports.

Why It Happens

The GHG Protocol—used by more than 90% of Fortune 500 companies for those reports—has numerous basic accounting problems, resulting in a misleading picture.

The Solution

An alternative, comprehensive system, based on established accounting practices, enables the measurement and transfer of GHG emissions along an entire corporate value chain. The authors explain their E-liability system and describe its considerable benefits, for both corporations and society at large.

The August 2021 report of the UN’s Intergovernmental Panel on Climate Change warns that pollution caused by humans has led to an increase in extreme events such as heat waves, heavy precipitation, droughts, and tropical cyclones. Greenhouse gas (GHG) emissions from global economic activity are at the heart of climate change, with atmospheric CO2 already 50% above its pre-industrialization levels.

• Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).
• Karthik Ramanna is a professor of business and public policy at University of Oxford’s Blavatnik School of Government. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).” He is a cofounder of the E-Liability Institute , a global not-for-profit advancing the urgent accounting upgrade needed to drive green innovation.

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A framework for a green accounting system-exploratory study in a developing country context, Colombia

• Open access
• Published: 04 June 2022
• Volume 25 , pages 9517–9541, ( 2023 )

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• Candy Chamorro Gonzalez 1 &
• Jesús Peña-Vinces   ORCID: orcid.org/0000-0001-8962-7608 2  

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Current accounting systems assume a purely financial approach, without including environmental information, such as environmental costs and companies’ expenses. On the one hand, this study proposes a framework that considers the environmental impact of firms within their accounting system, the Green Accounting System (GAS). On the other hand, and in the context of developing countries, Colombia carried out an exploratory study. With a sample of 150 Colombian industrial and commercial companies, this research revealed that 100% of them had not yet implemented environmental practices within the accounting system. Therefore, this research would be useful not only for academia, but also for practitioners and governments. As GAS would contribute to traceability in the quantification of environmental accounting, it would simultaneously generate a movement toward cleaner production that would increase environmental quality.

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1 Introduction

Few companies currently have a financial management system that not only focuses on the company’s economic aspects, but is also concerned about their environmental impact. Because of this, researchers constantly express the need to include new environmental processes and data in the General Accounting System (Aznar & Estruch, 2015 ; Van Thanh et al., 2016 ), constituting the basis for green or environmental accounting, therefore, enabling the identification and quantification of the use of natural resources. It also includes the costs of environmental management generated by cleanup of contaminated areas, environmental fines or taxes, green technology acquisitions, waste treatment, and the integration of environmental externalities, among other factors. With time, it will be recognized that environmental data must be a structural element in financial reports to provide information for third parties and as a basis for entrepreneurial decision-making.

Maunders and Burritt ( 1991 ) were pioneers in introducing the concept of green accounting. Lee et al. ( 2017 ) referred to the positive and negative interdependencies between economics and ecology, while Hens et al. ( 2018 ) advocated for the importance of implementing green accounting in the accounting system through the measurement of physical and monetary units.

Thus, building and applying green accounting models that lead to the incorporation of environmental processes, units, and activities is crucial as it impacts financial information. In turn, this will enable organizations to issue more complete and reliable financial information, based on both economic and environmental indicators that facilitate determining the evolution and current situation of organizations, which is useful for decision-making (Ojito et al., 2017 ).

In simpler terms, green accounting will translate into overall care for the environment, in particular helping to avoid pollution and deforestation (Schaltegger & Burritt, 2017 ; Zandi & Lee, 2019 ). The following will, therefore, utilize the term “green accounting” possessing the same definition as that of “environmental accounting” (El Serafy, 1997 ). Samaraweera et al. ( 2021 ) suggest including the term green because that color means loyalty and harmony, which, articulated with an accounting system, is understood as a subdiscipline designed to minimize the negative effects that organizations cause on the environment through measurement and assessment of processes to improve their eco-efficiency.

A series of definitions have been proposed for green accounting in the literature (Deegan, 2013 ; Gallhofer & Haslam, 1997 ; Greenham, 2010 ; Yang & Zhao, 2018 ; González & Herrera, 2020), however in the following research, the definition of Singh et al. ( 2019 ) will be used. They maintain that “Green accounting reflects the environmental impact generated by companies during all implemented productive and corporate activities.” (p. 482).

At a global level, there have been different proposals for green accounting (Aronsson et al., 1997 ; Mylonakis & Tahinakis, 2006 ; Nakasone, 2015 ; Vassallo et al., 2017 ). Some establish measurement units based on general equilibrium models that hinder quantifying environmental inefficiency and efficiency factors to enable the improvement of future actions (Aronsson et al., 1997 ). Researchers Mylonakis and Tahinakis ( 2006 ) propose the use of environmental accounting in the accounting information system of the cost-benefits sphere, without specifying other significant capital such as income or environmental assets.

Nakasone ( 2015 ) regards the green accounting model as a concern solely for mining, oil, and gas companies, leaving aside other industrial, commercial, and service sectors that also negatively impact environmental quality. Vassallo et al. ( 2017 ) propose robust methodologies and indicators in green accounting, but from the biophysical and trophodynamic perspective, without referring to the financial aspect.

In general, the proposals are diverse and use different green accounting methodologies that aim to measure and assess an organization’s environmental performance—these points of view do not aim to standardize all environmental activities or processes undertaken by organizations to be communicated in financial reports. Also, the grouping of environmental assessment and measurement methods are not coordinated with the general accounting plan, therefore are not communicated in comprehensive or independent financial reports. The main issue that green accounting models share is that they are conceived in developed countries and fail to consider the particularities of developing economies, such as that of Colombia. Some particularities are: (1) the economic is based on the primary sector, (2) low organizational culture related to the environment, (3) corrupt political regime, (4) lack of environmental and democratic institutions (5) these countries are laboratories in innovation of different ways because they do not have the levels of established infrastructures that are in the developed ones (6), little acceptance for the adaptation of new economic forms that reduce pollution.

In Latin America (LA), Colombia is one of the countries that promote the introduction of green accounting practices among its national companies (Galvis & Guevara, 2019 ; Martínez & Sánchez, 2019 ); Ceballos et al., 2020 . According to the goals of sustainable development, the previous government, and the current government of this country, want to reduce the level of CO 2 that comes from its national industry. Thus, promoting environmental practices by governments is a way to promote cleaner production (Chamorro, 2016 ). Therefore, it is appropriate to discuss green accounting in the context of the Colombian economy. Although it cannot represent all LA-economies, it can become a laboratory of innovation and practice in different ways because they do not have the established infrastructure levels that exist in developed ones (similar situation in all countries with developing economies.

Furthermore, it is relevant to build a new model for the adoption of green accounting in the accounting system. This is based on the models of Novillo and Hachi ( 2014 ), Higuera ( 2015 ), Urraca and Silvia ( 2017 ), who agreed on the essential points for including green accounting in the accounting discipline, taking into consideration important environmental parameters to be communicated in financial reports, such as prevention, integration and good practices.

Green accounting in Colombia dates back to 1990 with the publication by Araujo ( 1995 ) was relevant. The National Council for Economic and Social Policy [CONPES] developed in 1991 an environmental policy that sought to implement and quantify the national natural and environmental patrimony. The following year, the Institutional Committee for Environmental Accounts [CICA] presented an environmental program for Colombia. In 1994, the integrated environmental-economic accounting document for Colombia (Ortiz, 2017 ) was issued and in 1999, an International Environmental Accounts Forum was held, helping to establish the importance of implementing environmental accounts in the Colombian accounting system (Carvalho & Pozzetti, 2019 ).

Although Colombia has an interesting background in green accounting, there is no structure to support the integration of this type of accounting in financial reports (Chávez, 2020 ; Vélez et al., 2007 ; Yepes, 2008 ). This is due to the fact that most Colombian companies use financial accounting instead of green accounting. Therefore, this study attempts to fill the gap in the accounting and environmental literature from a double perspective, theoretical and exploratory. From a theoretical perspective, this study proposes a green accounting system that combines various categories of complete and reliable environmental information. As a result, companies could then identify areas of environmental inefficiency and efficiency, helping to improve decision-making in their productive and financial processes. And, from an exploratory perspective, we examine the degree of implementation of green accounting in firms in developing countries, by doing so; we have used a sample of 150 Colombian companies, allowing for the detection of formative problems and the development of essential bases from an academic approach. In turn, this will help those responsible for financial information and monitoring to integrate and communicate environmental damage along with investments made for ecological improvements through various ledger accounts that must demonstrate this.

The following research also contributes positively to Sustainable Development Goals [SDGs] because the study aims to establish the ninth goal (actions regarding climate) and thirteenth goal (industry, innovation, and infrastructure). Specifically, the main objective is to design a proposal for a Green Accounting System that allows companies to build administrative, commercial, and operational processes in an inclusive and sustainable manner and, consequently, to promote innovation in new forms of responsible production in the management of natural resources, an activity that will contribute to the environmental crisis.

More specifically, this research strengthens an academic circle with the methodological proposal that utilizes accounting knowledge and integrates environmental parameters in their financial records. Scientifically, it produces new methods and practices that reflect the convergence between the environment and accounting. This is an important initiative that organizations must implement globally.

In summary, this research will explore the following sections: a summary of the literature review referencing the main points associated with green accounting, a description of the methodology used to conduct the research and apply the data from the surveyed companies, an analysis of the results as they relate to the discussion, and finally the conclusions and implications of the research.

2 Green accounting system-literature review

Sustainability is one of the leading and most urgent new SDGs. In this context, tools and processes arise that aim to contribute to environmental care by organizations, offering various elements to combat competitive processes for companies’ social development. This is why productive environmental systems within organizations seek effective adaptation to climate change through their implementation of policies, processes, mechanisms, and tools, in order to develop and strengthen the companies' environmental productive activities (Fogarassy et al., 2018 ; Homan, 2016 ). This system also enables the possibility to undertake projects aimed at increasing resilience in communities in the area, achieving recovery and maintenance of the ecosystem (Cavalleti et al., 2020 ; Montagnini et al., 2015 ; Tiwari & Khan, 2020 ).

Alternatively, Moreno ( 2019 ) and Lehman ( 1995 ) mention that it has been axiomatic to incorporate environmental issues in research and education agendas that address evaluation mechanisms which would help companies and professionals implement systems or tools on behalf of the environment, such as green accounting (Angell & Klassen, 1999 ; Nilsson et al., 2017 ).

The nomenclature of green accounting (GA) is recognized as having begun with El Sefary ( 2000 ), who established the need to associate accounting with its green contribution; in other words, environmental protection and pollution prevention. In that regard, green accounting, in addition to being a social tool that enables reporting on qualitative and positive aspects of the environmental impact generated by organizations (Saleh & Jawabreh, 2020 ; Scarpellini et al., 2020 ), is also included in corporate sustainability and in the coordination of environmental and social processes. This ensures the responsible, ethical and continuous success of an enterprise (Hernádi, 2012 ; Ignat et al., 2016 ; Slawinski & Bansal, 2015 ).

The information provided by green accounting has four main objectives: (1) demonstrate environmental wealth, (2) represent temporary spaces for the existence and circulation of this type of wealth, (3) plan possible venues to monitor the behavior and circulation of environmental wealth using the quantitative and qualitative valuation, and (4) indicate a prospective aspect (Capusneanu, 2008 ; Geba et al., 2010 ; González, 2015 ; Zou et al., 2019 ). In short, green accounting is a technoscientific framework for a document that supports decision-making.

With this knowledge, companies must develop an internal environmental policy (Haque & Ntim, 2018 ; Evangelinos et al. 2015 ). In general, green accounting is considered an instrument that reduces a company’s environmental impact (Montemayor et al., 2019 ). Green accounting will support economic efficiency and promote an organizations' capacity for innovation and eco-efficiency (Islam & Managi, 2019 ; Rusell et al., 2017 ).

For this reason, it is important to communicate the processes, activities, strategies and practices that decrease an organization’s environmental impact. According to Rossi et al. ( 2016 ) and Higuera ( 2015 ), such communication must be presented through accounting recognition supported by a comprehensive or independent financial report. This would report on the monetary quantification of the main elements of green accounting: assets, liability, patrimony, expenses, costs, and provisions, among other accounts that categorize the environmental wealth of the organization which must be reflected in an independent environmental report (Bennett & James, 2017 ; Fleischman & Schuele, 2006 ; Gray & Laughlin, 2012 ).

According to the proposals presented in diverse models (Craig & Glasser, 1994 ; Cortes, 2016 ; Cairns, 2009 ; Mason & Simmons, 2014 ; Rodríguez, 2015 ), the characteristics that identify the integration of green accounting in a company are (A) implementation of environmental policy, (B) development of environmental strategies, (C) establishment of environmental financial reports, (D) introduction of environmental accounts, and (E) presentation of environmental reports that document the processes for reducing environmental impact.

Other models stress that green accounting must be established as a socioeconomic tool to facilitate company adaptation of principles and activities. This is vital to mitigate the environmental impact of their organizations through business processes and accounting recognition of the different environmental activities (Novillo & Hachi, 2014 ). According to Vasallo et al. ( 2017 ) and Zandi and Lee ( 2019 ), the implementation of environmental accounting is established as a competitive process that points towards new strategies such as the decrease of risks to environmental reputation, strategic innovation, entry into international markets, adaptation to the global market, among other benefits that contribute towards human and social development at companies.

In this scenario, organizations require accounting professionals with added knowledge in environmental matters since currently there are different standards that require measuring and evaluating environmental assets, liabilities, income, costs and expenses (Alvarado et al., 2016 ; Chamorro et al., 2019 ; Lieder & Rashid, 2016 ; Medina, 2019 ; Hernández, 2012 ).

3 Methodology

To develop the green accounting system, we carried out a thorough review of the literature on green accounting. Scopus and ISI web knowledge datasets were used mainly. The results revealed the scarcity of literature on the topic. To broaden the data to be evaluated, other databases such as Science Direct, Emerald, and Google Scholar (for Google, we used versions in both English and Spanish) were consulted. Astonishingly, the result was almost identical—little information was available. In fact, there was a proposal related to the context of developing economies that became part of this examination of gaps in the research. It also justifies the need for extensive research on green accounting topics.

The exploratory study is based on a sample of 150 Colombian companies. Thus, we first develop the green accounting system and then we continue with the exploratory analysis, which supports the idea that firms must count on an accounting system that can gather the environmental effects of corporative activities.

4 Green accounting system: an exploratory study in the colombian case

Our research identified that 6793 companies exist in the database maintained by the Chamber of Commerce in Colombia, but only 3771 are industrial and commercial companies (object of study). However, of 3771 companies, only 1000 were selected because the remaining did not count on financial managers.

The questionnaires were collected by email only; the financially responsible persons were invited to participate in the study. The letter of invitation indicated, on the one hand, the objective of this study (green accounting practices) and, on the other, the anonymity of the responses, assuring that the information received will be used on a global scale and never at an individual level. Of the 1000 selected companies, only 150 responded to the survey (56% industrial and 44% commercial). According to the studies by Malca et al. ( 2019 ) and Peña-Vinces et al. ( 2019 ), this is figure (i.e.,150) is considered acceptable within the Latin American context. The selected companies (1000) are recognized as large companies under Decree 30,233 of 2013 (see characteristics of the companies in Table 2 ). These companies were specifically selected due to their high degree of productive activity, which requires them to implement environmental strategies that guarantee national sustainability.

The exploratory survey aimed to determine the degree of implementation and knowledge about environmental accounting (EA), 64% of the professionals who filled out the survey were men and 36% were women, with an average age between 35 and 55. The great majority (52%) were between the ages of 45 and 54. Regarding the time in which these professionals have been managing their company’s finances, most have worked at their firms for at least 10 years.

The exploratory questionnaire was adapted to the Colombian context, based on the work of Moreno ( 2019 ) and Masud et al. ( 2017 ). It evaluated to what extent the companies had knowledge concerning green accounting, the application of green accounting, and communication about the factors associated with this type of accounting. In this regard, three experts in GA verified that the instrument was well structured and responded to the purpose of the study. Table 1 presents the questionnaire with the questions evaluated:

This diagnosis makes it possible to determine the importance of creating a methodological proposal for green accounting. This would enable Colombian companies to carry out processes and activities for the execution or implementation of green accounting.

4.1 Results of the exploratory analysis

Data were analyzed using SPSS version 22 software in order to determine the priority of corrective actions and the prevalence of variables for the incorporation of green aspects into the accounting system in Colombia.

The main objective was to determine from the results if there is a need to implement a GA system. Otherwise, there would be no logic in establishing the proposal. Similarly—and considering that this research does not pose as a confirmatory study—it does not justify the need to conduct a CFA or EFA since this research aims to evaluate the degree of implementation of GAS rather than to test it.

The early findings (Table 2 ) show that all companies analyzed had knowledge of green accounting (Q1), and that this knowledge was received from diverse sources such as scientific publications (8%), and personal research (52%). Secondly, they reveal that 54% of the companies have not established methods or strategies to implement green accounting (Q2), however, 86% are implementing environmental policies in their organizations (Q3). Under these circumstances, the adaptation of company principles and activities that would enable accounting and recognition of different environmental activities is important (Mason & Simmons, 2014 ).

Other results from the study on the application of green accounting showed that the organizations report environmental accounting factors such as assets, liabilities, income, costs, and expenses, but merely 12% record these factors in their financial reports (Q8).

In addition to this behavior, other latent factors hinder the evolution of green accounting in Colombia, however, all companies surveyed report that it is important to standardize a green accounting model (Q9) that would serve as a guide for its implementation in the accounting systems of organizations (Aznar & Estruch, 2015 ). Those responsible for financial information would thus be able to record, measure, and assess their organization’s environmental impact while providing financial reports in which environmental management headings are recognized (Chamorro, 2015 ; González & Herrera, 2020 ). This is why it is recommended that regulations are established that would encourage organizations to implement green accounting in the Colombian accounting system.

Finally, with the aim of evaluating whether there was a significant difference between the set of pair-studied questions, a McNemar test was carried out. We must point out that we grouped the variables that would make logical sense in the study of GA. The results in Table 3 indicate that there was a significant difference in the relationship between Q2 and Q7 ( p  < 0.00). Figures indicate that approximately half of the companies analyzed (47%) do not count on an accounting system which promotes the implementation of green accounting practices, which is coherent with the firms’ financial statements (FS) of the companies. In fact, a scarce number of them (7%) gather environmental practices in their FS. In the same vein, the results have shown statistical differences between Q3 and Q8 ( p  < 0.00). This indicates that the vast majority of companies (75%) had implemented an environmental policy. However, such environmental policy does not see reflected in the companies’ financial reports due to a reduced number of them doing this alone (7%). The results found support for such findings because the relationship between Q3 and Q7 ( p  < 0.00) has shown that a reduced number of companies (4%) have put into practice the environmental policy established by the company, as they do not include it within the FS. In the same direction, the association between Q3 and Q5 ( p  < 0.00) goes, indicating that a limited number of companies (10% only) maintain records of environmental income and expenses. This is coherent without including it in the FS because if the figures were not recorded by the company, it would be impossible to take the FS into account.

4.2 Green accounting system-framework

In this section, the technical models were selected to define the variables to use and process in the interrelationship between the elements of green accounting. Of all the models and theories identified in the literature, the proposals built by Novillo and Hachi ( 2014 ), Higuera ( 2015 ) and Urraca and Silvia ( 2017 ) were used. Subsequently, duplicate variables were eliminated. This research has a large, robust, and complete structuring in terms of the inclusion of green accounting. Similarly, in the structuring of the Green Accounting System, certain factors developed in the selection models were used as references. Novillo and Hachi ( 2014 ) select the initial principles for the execution of environmental accounting models. Higuera ( 2015 ) developed a deployment of environmental accounts to incorporate in the independent reports. Urraca and Silvia ( 2017 ) present coefficiency processes for the dissemination of environmental aspects. The model incorporates new factors for the process, structuring, and disseminating of environmental accounting aspects and introduces two equations for the development of reports on (1) environmental balance and (2) environmental profit and loss statement. Figure  1 thus summarizes the green accounting proposal:

Green accounting system

The structuring of the model (Fig.  1 ) arises as a conceptual and practical proposal to interrelate the productive and commercial factors of the organizations that affect the ecosystem. This model is useful because it will allow the identification and reporting of environmental assets, liabilities, income, costs, and expenses, information that will allow decision making and operationalization in concrete actions and organizational processes of different environmental public policies that exist at the national and international levels.

This model is different from other frameworks found in the literature because it initially determines that organizations should create principles of prevention, integration, and good environmental practices, which in turn allow the development of socio-environmental initiatives in organizations from the perspective of eco-efficiency in the search to respond toward sustainable and sustainable development.

Moreover, with the aim of clarifying our GAS proposal concerning existing models. The following Table 4 details the similarities and differences with respect to other environmental accounting systems.

However, it is clear that globalization and the need to express global economic and financial operations in a universal language have accelerated the implementation of the International Financial Reporting Standards [IFRS]. The aim is to provide transparent financial information allowing users to obtain knowledge of the business under a real and objective scheme, avoiding overestimation or underestimation of the operations reflected in the accounts for assets, liabilities, income and expenses.

Details must therefore be provided about possible environmental aspects, issues, and concerns that can more explicitly be accounted for and reflected in the Financial Statements, in addition to showing a generic reclassification of the accounting ledgers.

Initially, the proposed model became valid through cleaner production, as affirmed by Novillo and Hachi ( 2014 ). This can be implemented to any process in the company; it ranges from basic changes and immediate execution of operational procedures of the product and service to large-scale changes that require the substitution of various factors, such as costs, raw materials, suppliers or production lines that allow greater efficiency.

Another differentiating factor of the GAS model is the interrelation with the cleaner production process that aims at the conservation of raw materials, water and energy, and the reduction of toxic raw materials, emissions and waste. Cleaner production is applied during the life cycle of a product from the extraction of raw materials to the final production of waste, the concept promotes environmentally friendly design according to the needs of future markets (Crissien-Borreroa, et al., 2016 ). In this proposal, three cleaner production processes will be taken into account for the integration of environmental processes into the accounting system: the prevention, integration, and good practices process (incorporating accounting practices). Their components are interrelated and are defined below:

4.2.1 Principle of prevention

The preventive principle refers to the search for changes in the chain of production and consumption of companies (Duvic-Paoli, 2018 ). The cleaner production suggests that the new solution must reconsider the design of the product, the amount of assets and services, the level of materials consumption, and others factors of the company's financial activity.

4.2.2 Principle of integration

Integration implies the adoption of a holistic vision throughout the production process and a method that allows introducing that idea in the lifecycle analysis of a product or service. However, there exist various difficulties with the preventive solution—one of them being the integration of measures referring to environmental protection through systemic frontiers (Ellingson et al., 2015 ). The traditional regulation associated with the phrase “at the end of the line” is generally applied up to a specific point in which measures for integrated processes to reduce pollution apply. By reducing the need for emissions of such substances into the environment, these measures provide integrated protection for the whole environment.

4.2.3 Principle of good practices

This refers to good environmental practices focusing on waste management, paper management, efficient use of water, energy and fuels, training, responsible purchases and mechanisms that contribute to the environmental sustainability of the company (Taleb, 2015 ). Green accounting becomes important through the integration of environmental accounting practices with the aim of revealing them in financial reports for administrative decision-making, which constitute an information system for third parties who also measure the environmental success that the company will have achieved.

The good environmental accounting practices set forth in this proposal according to the formulations of Novillo and Hachi ( 2014 ), Higuera ( 2015 ), Urraca and Silvia ( 2017 ) are: (1) identification and revelation of the costs, (2) implementation of Eco-Efficiency activities, (3) recording of environmental aspects in the accounting, and (4) the showing of environmental financial statements. These aspects are explained as follows:

4.3 Identification and revelation of environmental costs

Environmental accounting identifies and measures the use of resources, their impact, and cost, which include cleanup of contaminated areas, environmental fines, taxes, purchase of green technology, waste treatment, and the integration of environmental externalities. An environmental accounting system consists of an ecological account and an adapted conventional account. The adapted conventional account measures impacts on the environment in monetary terms. The ecological account measures the impact that a company has on the environment in physical terms; kilograms of waste produced, kilojoules of energy consumed (Cabello, 2016 ; Banguat, Url and Iarna, 2009 ), etc. In other words, it measures how much it costs a company to take care of (or not take care of) the environment. Environmental costs may be divided into the following categories:

Costs of prevention

Costs of detection

Costs of internal failures

Costs due to external failures

These costs will provide the parameters to examine the outlays made for each cost. Environmental costs that are not included in a company’s accounting ledgers are called externalities and are costs supported by the rest of the society. Businesses can obtain exact numbers for various environmental costs through company-implemented measurement processes or purchase price diagnostics. However, this is a process that all companies normally do according to their internal policies or processes, which can also be applied for environmental costs.

4.3.1 Eco-efficiency

One of the most important concepts used in green accounting is that of Eco-Efficiency, which implies that an organization may create more and better goods and, simultaneously, reduce its consumption of resources and its costs (Burritt & Saka, 2006 ; Figge & Hahn, 2013 ). This concept involves four main ideas:

Establish environmental policies (Fogarassy et al., 2018 ; Homan, 2016 ).

Improvement of financial performance and of ecological efforts by the company must go hand-in-hand (Möller & Schaltegger, 2005 ).

Greater concern for the impact that the company’s activities may have on the environment. This must not be viewed as a mere question of social responsibility or even charity, but instead as a key factor for competitiveness. (Burritt & Saka, 2006 ; Correa et al ., 2019 ; Passetti & Tenucci, 2016 ).

Eco-Efficiency is complemented by, and supports efforts by, companies to achieve sustainable development; to satisfy current demands without sacrificing the possibility for future generations to satisfy theirs (Figge & Hahn, 2013 )

4.3.2 Record environmental aspects in accounting

It is proposed that organizations record in their environmental accounting ledgers all activities that generate income, expenses, and environmental costs for the company (environmental assets and liabilities). The following (Table 5 ) are the activities that may be recorded (Higuera, 2015 ):

4.3.3 To make environmental reports

Initially, Tables 6 and 7 display the assets, passives, patrimonies, income, expenditure and costs that should appear in green environmental reports. The items refer to the environmental impacts interpreted as economic figures that are useful for decision-making.

Environmental balance

4.3.3.1 (EA) Environmental assets

Goods and investments to preserve and protect the environment and to reduce the environmental damage that could occur. Some of the assets are in the inventory of materials used in the production process to minimize pollution, such as the properties, installations, and equipment used for that purpose (Aznar & Estruch, 2015 ).

4.3.3.2 (EP1) Environmental liabilities

Liabilities that coincide in recognizing an environmental cost associated with the acquisition of assets to avoid environmental impacts (González, 2017 ). Contingent environmental liabilities are derived from environmental liabilities. These are defined as liabilities for future events or payments caused by current situations that damage the environment.

4.3.3.3 (EP2) Environmental patrimony

Consists of environmental goods and obligations pertaining to the organization. It constitutes environmental duties and rights in relation to the surroundings for which every organization must respond (Ellingson et al., 2015 ; Gómez, 2004 ).

Environmental report (profit and loss statement)

4.3.3.4 (EI) Environmental income

Economic benefits that a company obtains thanks to its environmental management. For example, the sale of recycled waste, savings in energy and materials, and savings from the use of nonpolluting or less polluting materials (Kitchen et al., 2019 ).

4.3.3.5 (EE) Environmental expenses and costs

Costs that are recognized as a decrease in a company’s economic resources resulting from the cost of environmental measures adopted to mitigate their impacts on the environment (Chamorro, 2016 ). Environmental expenses include any cash flow aimed at avoiding, repairing, and reducing environmental damage.

4.3.3.6 (EU) Environmental utility

The benefits or profits the organization obtains in environmental aspects. It is derived from diverse aspects, such as income, assets, patrimony goods, etc. (Hens et al., 2018 ; Jara et al., 2017 ).

5 Conclusions

This research suggests that environmental performance factors require incorporating green accounting into the accounting system. In this sense, the proposal for a Green Accounting System [GAS] aims to contribute by measuring and reporting on the environmental performance of organizations in their accounting reports. This will in turn enhance traceability in the quantification of green accounting (Taleb, 2015 ). One advantage of the GAS proposal is that it is adaptable to any type of financial accounting system looking to reflect environmental impacts in its financial statements. The GAS implies that companies record and report data on materials, water, energy, the rational use of (toxic) raw materials, and emissions and wastes throughout the life cycle of their products from raw materials extraction to final waste disposal (Fowler, 2008 ; Soto & Mendoza, 2016 ; Van Thanh et al., 2016 ). Undoubtedly, the implementation of a GAS by companies could be the first step toward cleaner production.

The exploratory analysis revealed that the Colombian companies that were investigated do in fact demonstrate environmental accounting movements. However, these actions are not reflected in their accounting reports. The GAS model thus becomes a useful tool for green accounting since it enables the integration of all environmental elements into the financial context. Contrastingly, while the results show that the companies analyzed were familiar with the term green accounting, the data suggests it is not formally put into practice. Other researchers such as Wójcik ( 2015 ) and Taleb ( 2015 ) point to the importance of training employees on EA, because if they are not trained, it will be difficult to implement inside the organization.

Similarly, the data showed that the great majority of Colombian companies had developed environmental policies (86%). This concludes that these companies are aware that their economic results depend not only on economic-financial management, but are also influenced by their environmental management (Ikram et al., 2019 ; Opdam & Steingröver, 2018 ;). Unexpectedly, the organizations studied neither execute nor implement processes to build accounting structures or systems that recognize and inform their social and environmental responsibility (54%). In any case, this limitation on processes also hinders the creation of economic and accounting valuations assessing the use of scarce resources, which would make it possible to compare and contrast the well-being of a company with its environmental quality (Finsterwalder & Kuppelwieser, 2020 ; Pecl et al., 2017 ).

Focusing on more specific aspects of EA, it was found that half of the companies (50%) researched recorded accounting matters of an environmental nature as assets, liabilities, income, costs, and expenses. However, those responsible for directing the accounting at their organizations are not carrying out the accounting process as required; for example, they enter an environmental asset as a financial asset without specifying that it is environmental. This situation is not in accordance with the theory, and therefore, inadequate decisions may be made which could lead to false environmental solutions (Hernandez & Solorzano, 2017 ; Vasallo et al., 2017 ). Additionally, most of the companies surveyed recognize the importance of standardizing a green accounting model in order to recognize the environmental aspects in the accounting systems of their organizations (99%), which would constitute making larger investments in actions to repair damage caused to the environment (García-Sánchez et al., 2015 ).

This research has some interesting implications for both economies and businesses. In one aspect and according to empirical evidence for the context of developing economies (Peña-Vinces & Delgado-Marquez, 2013 ), very rarely have companies from those economies implemented proenvironmental practices by themselves. Most of the time, they react to pressure from stakeholders, customers, or the government. Therefore, to implement a Green Accounting System in Latin America, and particularly in Colombia, it is necessary to involve policymakers as their influence is needed to develop a national framework for GA. However, moving from financial accounting toward a Green Accounting System will not be an easy transition. In this regard, the government could provide tax reductions or payback incentives for companies who implement a Green Accounting System, as has been proposed here.

In contrast, and at the level of firms, a proposal that Latin American companies progressively adopt a Green Accounting System should be considered, since most still continue to work exclusively using the financial accounting system. A GAS provides advantages for companies and for the planet. Primarily, a GAS allows companies to have clarity about the amount of natural resources they use in manufacturing their outputs. This is crucial in the Latin American context, where industrial production makes intensive use of natural resources, particularly commodities (Peña-Vinces & Audretsch, 2021 ). Companies, therefore, would become more aware of environmental care since they use natural resources that may not be renewable. As a result, the goal would be to avoid future environmental consequences as their future could be at risk.

Ultimately, it is important to mention that green accounting must be integrated into existing systems in Latin America (Altamirano, 2020 ). Colombia and Mexico are in the vanguard of this process with the aim of issuing reports and demonstrating the concept of operating sustainably through information flow and transparency, as expressed by Alba and Torres ( 2018 ). However, Honduras, Panama, Nicaragua, Dominican Republic, and other countries are just beginning this process (Doria et al., 2020 ; Soto & Mendoza, 2016 ; Van Thanh et al., 2016 ).

In summary, the GAS proposal aims to measure and evaluate the environmental performance of all activities or processes developed by organizations to be communicated in environmental reports. This model is different from other systems because it integrates three categories: prevention, integration, and good practices. In addition, it considers the particularities of developing economies such as Colombia. For that reason, this model will be better for Latin American countries, since it includes the peculiarities of those developing economies, which are very different from developed countries. An important point of the model, unlike others, allows one to identify areas of inefficiency and environmental efficiency, helping to improve decision making in the production and financial processes. Finally, the proposal specifies and expresses the clarifications in (1) the identification and disclosure of the costs, (2) the implementation of Eco-Efficiency activities, (3) the recording of environmental aspects in the accounting, and (4) the showing of environmental financial statements.

One of the main limitations of green accounting's evolution can be seen in a series of barriers for effective implementation of environmental management, summarized as situations of administrative, political, and cultural nature. There are also limitations where Colombian accountants may become encouraged to adopt “green accounting” concepts due to lack of infrastructure and the scarce offering of environmental education for professionals.

A particular limitation of the research is associated with the availability of data, leading to a reduction in the variables considered in the construction of the GAS. Thus, future research should overcome the limitations indicated; it is important to undertake an analysis of robustness based on the comparison of these results with those of other proposals, to try to consolidate new principles and postulates that complement the GAS.

Regarding future research, it should be noted that there is an overwhelming amount of published research on environmental economics and environmental management and marketing. However, few studies have addressed the topic of green accounting. Therefore, a future line of research could be to investigate to what extent other companies in Latin America would be willing to implement GAS, as this research revealed that 100% of Colombian companies are eager to do so. However, the question arises as to whether companies in Peru, Chile, Ecuador, or other developing countries would be willing to adopt and implement it.

Finally, it would be interesting to investigate the role played by CEOs in the implementation of a GAS. Based on the above analysis, it is logical to believe that commitment by the board is essential to ensure its successful implementation, as efforts by the financial department alone may be insufficient.

Data availability

Upon request to the corresponding author.

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Gonzalez, C.C., Peña-Vinces, J. A framework for a green accounting system-exploratory study in a developing country context, Colombia. Environ Dev Sustain 25 , 9517–9541 (2023). https://doi.org/10.1007/s10668-022-02445-w

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T1 - Environmental Accounting in the European Accounting Review

T2 - A Reflection

AU - Bebbington, Jan

AU - Laine, Matias

AU - Larrinaga, Carlos

AU - Michelon, Giovanna

N1 - Funding Information: The Authors are grateful to Stuart Cooper, Michel Magnan, Thorsten Sellhorn, Ian Thomson, participants to the EAR 30 years EAA virtual seminar and an anonymous reviewer for their comments and suggestions. We are especially indebted to Beatriz Garcia Osma for her support in the development of this paper and her leadership at the EAR. Publisher Copyright: © 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.

PY - 2023/11/1

Y1 - 2023/11/1

N2 - We reflect upon how European Accounting Review has conceived of environmental accounting (and to some extent social/sustainability accounting work) over its 30-year history, with the aim of discussing ways in which environmental accounting research can further develop, both within and beyond this journal. After outlining the broader social and ecological context from which environmental accounting has emerged (and noting that this context is evolving in substantive ways), we provide an overview of the types of research published in EAR. We combine these elements to identify three themes that we argue are critical for the direction of future research: the financial materiality of ecological issues and the impact this has on risk; how environmental accounting practices are constructed; and how a new relationship between nature and society may affect accounting practices. We finally conclude by envisioning a future of environmental accounting research that dovetails with the sustainability ambitions that can be draw from an examination of the detailed targets that underpin the Sustainable Development Goals.

AB - We reflect upon how European Accounting Review has conceived of environmental accounting (and to some extent social/sustainability accounting work) over its 30-year history, with the aim of discussing ways in which environmental accounting research can further develop, both within and beyond this journal. After outlining the broader social and ecological context from which environmental accounting has emerged (and noting that this context is evolving in substantive ways), we provide an overview of the types of research published in EAR. We combine these elements to identify three themes that we argue are critical for the direction of future research: the financial materiality of ecological issues and the impact this has on risk; how environmental accounting practices are constructed; and how a new relationship between nature and society may affect accounting practices. We finally conclude by envisioning a future of environmental accounting research that dovetails with the sustainability ambitions that can be draw from an examination of the detailed targets that underpin the Sustainable Development Goals.

U2 - 10.1080/09638180.2023.2254351

DO - 10.1080/09638180.2023.2254351

M3 - Article (Academic Journal)

SN - 0963-8180

JO - European Accounting Review

JF - European Accounting Review

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An Introduction to Environmental Accounting as a Business Management Tool: Key Concepts and Terms

This primer focuses on the application of environmental accounting as a managerial accounting tool for internal business decisions. Moreover, the term environmental cost has at least two major dimensions: (1) it can refer solely to costs that directly impact a company's bottom line (here termed "private costs"), or (2) it also can encompass the costs to individuals, society, and the environment for which a company is not accountable (here termed "societal costs"). The discussion in this primer concentrates on private costs because that is where companies starting to implement environmental accounting typically begin. However, much of the material is applicable to societal costs as well.

• Introduction to Environmental Accounting (pdf) (206.6 KB)
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