amit accounting course work

8/3/2019 Amit Accounting Course Work

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Role of sustainability in meeting the challenges of environmental

climate changes

Introduction

Climate change and rapidly increasing destruction of Earths ecosystem are the greatest

challenges facing by the world now days. At the same time, our economies are facing resource

scarcity including energy security and food scarcity, population growth and other environmental

concerns such as pollution. All these conditions occur in the external environment affects the

businesses architecture and lead organization to operate with environmentally, socially and

economically sustainable manner.

Businesses operations are normally built on products and services provided by

ecosystems and other components of natural capital. Organizations are now increasingly

focusing on meeting these challenges and moving towards the sustainable growth to help the

society as a whole. Accounting provides key role in helping the organizations to operate in

sustainable manner and helps to link sustainability initiatives to company strategy to meet the

requirements. Companies and governments must take measures to create a global economy that

pursues both goals - economic development and maintaining natural capital, simultaneously as

stated in The Princes Accounting for Sustainability Project (A4S) 2004. According to the A4S,

better information and accounting will be essential to enable the right decisions to be made by

companies and other stakeholders in the society in order to attain sustainable growth.

Sustainability accounting and Sustainable Development

The simplest way to define sustainability is meeting the needs of the present without

compromising the ability of future generation to meet their own needs defined by United

Nations World Commission on Environment and Development, 1987, pg. 8 (Jeffrey, 2007).

There are mainly three spheres of sustainability: economic, environmental and social


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sustainability. These are spheres are the prerequisite for any organization to survive in the long

run and these three areas are necessary because:

y Economic sustainability provides us with future income and resources.y Environmental sustainability provides a stable ecosphere that supports and protects life.y Social sustainability provides well-functioning societies that protect and enhance quality

life and safeguard human rights. (Anthony, 2010)

For an organization to survive, it must attain sustainability in these three areas and if it

ignores the need for sustainability in these key areas, than it will place intolerable burden on

organization in long run and on future generation.

Global warming is causing increasingly climate change which is an important issue for

organizations now days, and that increases the importance of the organizations sustainable

development. Sustainable development means to focus on how to organize and manage

organizations operations in a way that meets the needs without sacrificing the ecological, social

and economic base. This climate change- Global warming has a significant influence on the

framework of organizations change and management accounting (Zimmerman, 2010) and this

environment forces to change the organizations business strategy. To implement the new

strategy, organization must adept its architecture, which includes management accounting and

also composed of three inter-related processes: decision making, performance evaluation and

reward system. Accounting is closely related to the companys strategy development as it

provides knowledge for decision making and control (Zimmerman, 2010) and helps to

implement organizations business strategy. In other words, organizations accounting system

provides significant information for decision making, performance measurement and control of

organizations operations.

The picture of management accounting system is now changing in big companies from

traditional accounting system towards the development of new approaches to accounting that

will enable organizations in business, investment and the public sector to better understand and

value externalities, and incorporate them into their decision-making processes (A4S). The A4S

project helps to identify and address the practical challenges that businesses are facing in

developing methodologies to integrate natural capital into decision-making and accounting


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systems. The International Integrated Reporting Committee (IIRC), established by A4S in 2010

is working toward the development of Integrated Reporting which demonstrates the linkages

between an organizations strategy, governance and financial performance, and the social,

environmental and economic context within which it operates. By reinforcing these connections,

Integrated Reporting can help business to take more sustainable decisions.

Sustainable accounting has received great attention in accounting literature, supported by

the work of Gray in 1990s. Accounting for sustainability involves linking sustainability

initiatives to businesss strategy and providing measurement, accounting and performance

management skills to ensure that sustainability is embedded into the day-to-day operations of the

company. In his work, Gray identifies three different methods of sustainable accounting:

sustainable cost, natural capital inventory accounting and input output analysis (Gray 1993). By

sustainable cost, he means the cost of maintenance of natural capital stocks for the future

generation, natural capital inventory accounting involves the recording of stocks of natural

capital over time, with changes in stock levels used as an indicator of declining quality of the

natural environment. And inputoutput analysis accounts for the flow of materials and energy

inputs and product and waste outputs in units (Gray 1993).

Organizations are now identifying the need for managing and controlling social and

environmental performance of the organisation. Many of the organization are now committed to

sustainable development by recognising that sustainability can create financial value through

enhanced revenue and lower cost.They are now becoming more sensitive towards the social and

environmental issues. For sustainable development the business enterprise must adopt business

strategies and activities that meet the needs of the enterprise while protecting, sustaining and

enhancing the human and natural resources that will be needed in the future. Managers must

make significant changes in their business strategy to manage the impact of the organization on

the society by ensure the efficient utilization of the available resource and minimizing the impact

on the natural resources. Accounting system provides useful knowledge to managers for thedecision making regarding the business strategy and mmanagement accountants have a key role

to play in driving sustainable strategic and operational decisions. Management accountants job is

to apply targets, key performance indicators (KPIs) and scorecards to ensure their organizations

sustainability strategy is delivering results.


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Accounting has a variety of roles to play in the effective response to the challenges of

balancing financial, environmental and social sustainability at the organization level. It can help

to identify the potential future environmental and social impact and benefits from their activities,

to formulate and implement strategic solution which can help to improve sustainability and

performance of the organization and to give an account of an organizations sustainability

policies, practices and impact to which organization is responsible. Underlying all these roles is

the potential of accounting to make visible a broad range of financial, environmental and social

consequences of organizations strategies, action and implication of economics, environmental

and social trends for the organizations financial performance (Anthony, 2010). Many guidelines

such as Global Reporting Initiatives sustainability report framework and the AccountAbility

1000 series have been developed to help the organization to communicate their sustainability

performance to stakeholders by developing social and environmental reporting.

Sustainability at BMW group

With the issue of sustainable development as a main concern in major industries, the

automobile industry is facing the need for change in their operation because of the scarcity of the

future resources and fear about the climate change caused by the global warming. BMW, one of

the key players in this industry, has achieved significant success in meeting these challenges,

being the sector leader in the Dow Jones Sustainability Indices for the last five years. What they

did is, they integrate sustainability throughout their entire value chain and its underlying

processes creating a benefit for the company, the environment and society. They believe that

commitment to environment and social sustainability are important to securing their own future.

To identify and manage environmental risks and impacts, they established environmental

management systems (EMS) in all of its manufacturing facilities. In their sustainability operation

report they mentioned one important goal of sustainability strategy to manage the issue of

sustainability centrally and establish it as a core strategy within their organization and

incorporated Sustainability and Environmental Protection department directly into Corporate

Strategy unit since 2007. Its responsibilities include the continued enhancement of sustainability

strategy and the strategy and management of business, environmental and social sustainability.


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They implemented large number of structural and organizational innovation to ensure the

efficiency in their day-to-day operation by establishing sustainable corporate targets in each

group, which will be measured by means of balance scorecard and detailed guidelines have been

developed for all BMW Group divisions. In their sustainability report, despite of the increase in

their production they were able to reduce the energy consumed per vehicle produced through

their technology and innovations. The first task was to develop a framework to ensure that

environmental, economic, and social concerns that would be incorporated throughout the

organizations decision-making processes. They identified the sustainability issues like the over

consumption of resources and need to reduce CO2 emissions and its impact on the environment

and to tackle with these issues they established Sustainability Circle, consisting of one

representative from each division responsible for developing sustainable strategy and

implementing sustainability activities across the Group and the Circle is headed by the Group

Representative for Sustainability and Environmental Protection.

In their sustainability strategy, they introduced holistic accounting methods to access the

sustainability of their process and products across their entire life cycle inline with their

sustainability strategy. This accounting system provides them a truly comprehensive view of the

impact of their products and production processes are having on the external environment which

helped them to achieve maximum resource efficiency with minimum impact on the environment

and society. They are working towards the efficient use of resources and minimize emissions

across the life cycle of its products and employing a wide range of strategies and measures like

innovative materials and construction techniques, increasing resource efficiency across

production network, enhancing supply chain by making sustainable purchasing requirements and

by surveying suppliers accordingly, recycling or reuse components with the least possible impact

on the environment at the end of vehicle life cycle with the help of their holistic accounting

methods.

The BMW Group places great value on designing products which are optimized forrecycling as well as separating and utilizing waste materials which accrue during production.

Care is taken, for example, only to transfer waste materials to recovery and cleanup partners who

have passed the BMW Group's recovery audit. Their goal was to not accrue waste materials in

the first place. Each location has responsible employees who use a waste material information

system to optimize processes and procedures. This system enables a precise overview of the flow


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of waste materials. This enables the continual development of further strategies for waste

reduction and avoidance.

For the efficient use of available resource and recycling used cars, they established

Recycling and Dismantling Centre (RDZ) in Munich which works continuously to come up with

new solutions for vehicle recycling that make accessible to external recycling businesses. In line

with the principle of Design for Recycling at BMW, they create vehicles in such a way that their

components can be reused or recycled with the least possible impact on the environment once the

vehicle reaches at the end of its life cycle. The RDZ is currently trialing recycling concepts for

the new vehicle components found in hybrid and electric models. Batteries from vehicles of this

kind can either be passed on to existing networks of recycling businesses or they can be used to

produce photovoltaic systems. They built an extensive network of recovery centers in Europe

where customer can return their used BMW cars. These cars then professionally recycled free of

charge. Only 5 % needs to be professionally disposed of, without harming the environment

while 95 % of the materials from a BMW Group vehicle can be recycled and reused which can

help to maximize the utility of natural resources. Up to 15 % of the plastic parts used in BMW

Group vehicles consist of recycled materials obtained from production waste or used parts that

have been recycled which ensures efficient utilization of available resources. And when it comes

to reduction of CO2 emissions of vehicle they define specific CO2 targets for each product line

and each new vehicle project which are communicated to each group through internal accounting

system. For years they have been working extremely hard to reduce fleet consumption. Between

1995 and late 2008 they managed to cut the CO2 emissions of vehicles sold in Europe by almost

27 % by developing 32 new BNW group models which produce 140 grams of CO2 or less per

kilometer.

In 2010 Group-wide environmental protection activities of the BMW Group were able to

reduce its energy consumption with the further reductions for other key indicators, such as water

consumption, process wastewater and waste reduction, enabled cost savings of some euro 0.7million. Quantities of waste for disposal, solvents emissions and water used per vehicle produced

dropped significantly compared with the previous year. Overall, the environmental efficiency

index shows that the efforts to use resources more efficiently have resulted in figures within

agreed target range that is the most efficient possible use of resources in intelligent systems.


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The BMW has not only focused on the environmental issues but they also take the

responsibility to give something to the society where they operate. They started the initiative in

education for children and teenagers and they are also committed not only for the safety of their

own customers but to that of all road users by promoting maximum road safety. They also

established two foundations named the BMW Foundation Herbert Quandt and the Eberhard von

Kuenheim Foundation concentrating on social issues to help the local community.

Conclusion

Because of the global warming and climate change, many organizations face the need for

developing sustainable strategy to meet the challenging issues and minimizing the impact of their

operation on the environment, economy and society. The framework of organizations change

and management accounting (Zimmerman, 2010) provides the useful knowledge to accountants

to deal with the environmental issues and organization internal accounting system has a

significant role to play in this matter. We have seen in BMW Group that they have established

the holistic accounting methods to access the sustainability of their company and identify the

issues relating to sustainability like the level of CO2 emission and the demand for renewable or

alternative source of energy by recycling their vehicles integrated these sustainability issues in

their business strategy and accounting.

They integrated their sustainability strategy into their production process and their day-

to-day operation focusing on the future challenges of the natural resources and entrenched

throughout their entire value chain and identify their social responsibility. Sustainability became

an integral part of the BMW Group's corporate strategy. As a result of this, since 2005, the

BMW Group has been the worlds most sustainable premium automobile manufacturer

according to the results of Dow Jones Sustainability Index for last six years and the BMW Group

is the only company in the automotive industry to have been listed in this group of sustainability

indexes ever since it was established in 1999. The main issues of concern relating to

sustainability - CO2 emission, water pollution, air pollution and the demand for renewable

source of energy are clearly identified, identifying these is just what any organization can do,

but integrating sustainability issues in the business and accounting is not so easy.


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References:

y Anthony Hopwood, Jeffrey Unerman & Jessica Fries, Accounting for sustainability:practical insights, Washington, DC, 2010

y BMW, Sustainability by Design, Taking Responsible Action, Aktiengesellschaft,September 2009.

y BMW, Sustainability Value Report, Aktiengesellschaft, 2008.y BMW, Sustainability Value Report, Aktiengesellschaft, 2010.y CIMA,Accounting for climate change, February 2010.y Henri, J., and Journeault, M. (2010) Eco-control: The influence of management control

systems on environmental and economic performance, Accounting, Organizations and

Society. Vol. 35, pp. 6380.

y HRH, The Prince of Wales, The Princes Accounting for Sustainability Project (A4S),2004.

y Jan Bebbington,Accounting for sustainable development performance, CIMA 2006, Vol.2 No. 15.

y Jeffrey Unerman, Jan Bebbington & Brendan O'Dwyer, Sustainability accounting andaccountability, Routledge 2007.

yR. Gray, Accounting for the environment, Paul Chapman, London, 1993.

y Zimmerman J. L., 2010, Accounting for decision making and control. 7th ed., McGraw-Hill

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