March 9, 1995

New WRI Report Finds Untapped Opportunities Hidden in Shadows of Conventional Business Accounting Practices

A new World Resources Institute report using case studies from nine U.S. companies -- including Amoco Oil, Ciba-Geigy, Dow Chemical, Du Pont, and S.C. Johnson -- concludes that better accounting of environmental costs can help firms increase profits, use materials more efficiently, and protect the environment.

Green Ledgers: Case Studies in Corporate Environmental Accounting -- edited by Daryl Ditz, WRI Associate, Janet Ranganathan, Research Analyst, and Darryl Banks, head of WRI's Technology and the Environment Program -- examines how managerial accounting, one of the basic tools of business, if applied to environmental costs, can provide significant management opportunities.

According to Green Ledgers, environmental accounting practices not only uncover hidden costs, but enable firms to use this information to make better decisions about what products to manufacture, what technologies to employ, and what materials to use. As public concern for the environment increases, environmental accounting can help large and small businesses become "leaner and greener" by integrating environmental costs in their strategic and budget planning process.

The case studies reveal surprising insights into the significance of environmental costs and how traditional accounting systems hide them as overhead costs. The resulting information gaps and biases can distort apparent product profitability and hamper the identification of opportunities to reduce costs while improving environmental performance. Managers are forced to make crucial business decisions without all the relevant facts.

For example, a better understanding of environmental costs helped managers connect rising maintenance costs with their decision to treat wastes on-site. Through minor process changes, Amoco was able to lower costs and improve overall refinery operations. Linking such information with relevant decision-makers is part and parcel of environmental accounting.

Similarly, environmental accounting approaches can reduce expenditures for smaller firms. Green Ledgers cites the experience of Cascade Cabinet, a privately owned manufacturer of kitchen and bathroom cabinets in Washington state. After Cascade identified its sources of environmental costs and wastes, the firm switched from nitrocellulose lacquer -- a hazardous material and source of air pollution -- to a more benign varnish and cut manufacturing costs significantly.

"Over the past two decades, many firms have come to view environmental matters as a cost of doing business," the editors state. "Smart managers are rethinking this assumption and searching for ways to better manage environmental costs today and avoid them over the long run."

Environmental accounting doesn't require a massive overhaul of existing systems. Rather, the editors demonstrate that this is a tool that can serve a variety of purposes. Green Ledgers offers a practical guide for companies -- outlining the necessary ingredients for a pilot project and suggesting ways to fold this project into ongoing business activities.

The World Resources Institute is an independent center for policy research and technical assistance on global environment and development issues. WRI would like to thank The Hitachi Foundation, The Moriah Fund, and the U.S. Environmental Protection Agency for their support of this project.

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