The Recent Debate on Environment Published Financial Statements of UK - Coursework Example

Order 184269 ; Topic: Environmental accounting Introduction This paper seeks to discuss the proposition that recent public debate on the environments suggests that the published financial statements of UK companies as they are at present may not provide an adequate means of assessing the success of the companies’ activities. Those who believe that current financials statements are not reflective of the proper means assessing the success of the companies argue that success business is basically based on quantitative results, which may include profit, key financials ratios (liquidity, debt, working capital and investor ratios) which are all based on quantitative information of the financial statements. They argue although the quantitative results are covered by international financial reporting standards and the Auditors are duty bound to ensure that the presented finical statements provided a fair view of the financial position of the companies’ results in all material aspects, the concept of success of business must also consider the total effect of business activities including the issue on environment which has become a global concern for many countries. To sustain the concept of success of the business in terms of economic and social criteria without dealing considering the environment is to miss what is natural. Without a sustainable environment under which a business operate, companies cannot talk or even aim sustainability in its operations and to forget sustainability is to forget long-term profitability that would guarantee justified returns for investors. Thus proponents for environmental concern posits that that the success of companies’ activities, which is based on qualitative information brought about by changes in perspectives of the reasons why companies exist, not just the profit motive but must also be seen to be conscious of the environment in which they operate- taking corporate social responsibilities (CSR) of their operations. Indeed, one of the key elements of CSR is the environments in which companies operate. Governments of the world are one in their concern about the environment Almost all governments of the world have recognized the need to sustain the environment brought about the issues of global warming and unusual geological phenomena like the flooding, pollution cause by the use of the present form of energy. Since corporations and other business entities are the very organizations which are given by governments to benefits form the manipulation of the factors of production from the environment, the same governments can demand responsibility via regulation hence companies are now required to file reports on corporate social responsibilities (CSR). As to how CSR gets followed by governments, the World Bank Groups Corporate Social Responsibility (CSR) Practice in FIAS (a multi-donor service of IFC, the private sector arm of the World Bank Group) advises developing country governments on public policy roles and instruments they can use to encourage corporate social responsibility. IFC (2007) defines corporate social responsibility as “the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways that are good for business and for development” (IFC, 2007). Given the efforts given to CSR by governments, an undeniable relationship between corporate social responsibility and the investment climate could be deduced. IFC (2007) explicates the direct relationship of CSR with investment as its sees the many businesses in emerging markets to be realizing benefits from corporate social responsibility initiatives, with quantified improvements in revenue and market access, productivity, and risk-management. Although IFC (2007) observed that emerging-market companies tend to focus more on short-term cost savings and revenue gains, they noted about the reality of intangibles, such as brand value and reputational issues, which are found to be more significant for companies in developed countries. It noted however that the contemporary corporate social responsibility agenda to be relatively immature in all countries. Despite widespread expression, IFC found CSR’s impact to be still irregular. Hence, if found that in practice, the carrying out of this CSR plan by many companies is superficial and patchy (IFC,2007) Given the number of observations that it has noted, IFC was happy to report about governments’ beginning to view corporate social responsibility as cost-effective means to enhance sustainable development strategies. The same CSR was also found to be a component of their national competitiveness strategies of these countries to attract foreign direct investment and position their exports in global markets. With this, IFC (2007) found a significant opportunity for the public sector in different countries to connect business enthusiasm for corporate social responsibility in helping to achieve said developing countries’ goal of reducing poverty. What may be considered as present challenge, the government of developing countries will be naming the priorities and incentives of corporate social responsibility – those that will deliver these countries within their national context, in addition being a factor in supporting appropriate local initiatives (IFC,2007). In trying now to attain its objective for CSR Practice, IFC puts more its effort on on edifying public sector for the latter to understand the incentives and pressure points, as well as improving on strategic interactions with IFC providing country-specific diagnostics. It believes that it would be able to help governments of these developing countries to be working more effectively with businesses, utilizing the incentives more tactically in development plans, and making the most of dynamic linkages between controlled approaches and regulations (IFC, 2007). The concept of CSR is global. It is not only being supported by the governments of those in the US and those in Europe. Even Asian public sectors are very much interested in effect the necessary changes not only in rules and regulations but also in the attitude of companies in Asia. Asian Development Bank Institute (ADBI) (2007) aims to strengthen networking and advance synergy among selected Asian development institutes by improving their knowledge management and sharing strategies, and setting up a framework for collaboration in an area of corporate social responsibly. ADBI (2007) explains that about globalization requires global responses and multilateral strategies involving cooperation among key actors and stakeholders. It noted that partnership of public and private groups in sustainable development to be the leading success factor towards sustainability and efficiency. ADBI’s mission to build capacity of public officials in ADB’s developing member countries (DMC’s) to support long-term growth in the Asia-Pacific region could find its realization by promoting CSR in Asian countries. There are indeed moves to further develop CSR in Asia, and hence governments are should be more concerned to prepare both legislative and administrative environments to support and accelerate the initiatives by the private sector in Asia. The need by government officials to deepen their knowledge on CSR to foster sustainable development and poverty alleviation is a thing that is expected to happen given the present situation that the majority of businesses in Asia are small and medium sized enterprises (SME’s) ( Asian Development Bank Institute, 2007). Hence, the birth of environmental accounting. To properly understand the issue there is a need to properly understand what environmental accounting is. Environmental accounting aims to incorporate both economic and environmental information that identifies measures and communicates costs from a company’s actual or potential impact on the environment. These costs embraces costs to clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies and waste management costs. As a system, environmental accounting consists of environmentally differentiated conventional accounting and ecological accounting. The first one (differentiated conventional) measures impacts of the natural environment on a company in monetary terms while the second one (ecological accounting) measures the impact a company has on the environment, but in physical units which may be expressed on kilograms of waste produced, kilojoules of energy consumed more important than in monetary units. To further understand what has been discussed earlier as to the possible causes for the birth of environmental accounting, it is also nice to look at prospectively for possible reasons in putting or adopting environmental accounting. There are several reasons why businesses may consider adopting environmental accounting as part of their accounting system. One possible reason is the noteworthy reduction or elimination of environmental costs. Companies just believe that it may be able to significantly reduce it costs by adopting the proper procedures of accounting for costs. Another reason is possibility of generating revenue which the company may offset against cost from the environment. To understand this, this could taken by analogy with the concept of indirect tax where the company may just past on the customer these indirect taxes being imposed by the government. Environmental account may also help the company to advance environmental performance which may have an encouraging effect on human health and business success. Companies make this a reason since man no matter how motivated it may be for profit could only understood humanity in broader context by sharing in the social burden of promoting human health. Another possibility that companies may look into is the possibility to have a costing method that is more accurate and more reflective of the true cost of the product. Generically, accounting has always been aiming for accurate reporting of its cost, otherwise companies may just be miscalculating their incomes. They may be made to believe that they are earning when in reality they may be losing money because profits normally take a long time to really realize. Under the going concept of accounting, a business entity is assumed to continue existing indefinitely. It is therefore difficult or even imagines accurate short term profitability. The real test of profitability is solvency of the company- that is the capacity of the company to survive short run hurdles. Hence it is not surprising to see companies with high stock prices may show short run losses but the long term period is showing a rosy picture. The simple explanation is that investors are interested in the long term health to the companies hence adoption of environmental accounting may actually provide the answer. Another possible reason why companies adopt environmental accounting is the fact the companies realizes the competition in business will always be there. A management that plans strategically may always be assumed to have the edge to outsmarting its competitors. Thus in the design of its strategies, companies want to have competitive advantage. Since environmental accounting may provide the company the chance to have environmentally friendly products and services as customer becomes more environmentally conscious, company who will be first to benefit from its application will the declared victors among competitors. Environmental accounting has therefore given birth to different environmental accounting disciplines which include Global Environmental Accounting, National Environmental Accounting and Corporate Environmental Accounting, which is further sub-divided in to Environmental Management Accounting and Environmental Financial Accounting. Global environmental accounting t deals with energetics, ecology and economics at a global scale, which treats the earth as a system of interest with the input, sequestration, and dissipation of solar energy – the latter constituting its energy budget (Odum 1996, Tennenbaum 1988). National environmental accounting deals with economics on a national level, with one part involving a macroeconomic measure that looks at the use of natural resources and the impacts of national policies on the environment (Environmental Protection Agency,1995;Jasch, C.,2006). On the contrary, corporate environmental accounting focuses on the cost structure and environmental performance of a company In furtherance of the analysis made, it may be stated that environmental management accounting is applied by companies to make internal business strategy decisions. It may defined the as the identification, collection, analysis, and use of two types of information for internal decision making. These types of information may take the form of physical information such as flows and fates of energy, water and materials (including wastes). It may also take the form of monetary information that is used as basis for environmentally related costs, earnings and savings (Jasch, 2006). On the other hand, environmental financial accounting provide information that will be needed by external stakeholders on a company’s financial status for the use of investors, lenders and other interested parties. To determine whether there is basis to the arguments, it may be proper to look at an example of UK banks to determine whether there is basis to agree to with the application of environmental accounting in real life. Barclay PLC The case of Barclay PLC could be used to as first. The company’s Corporate Responsibility Report for 2006 states that a watershed year 2006 may prove to be a watershed year for the issue of climate change. The reports is extending its thanks to high profile events such as Al Gore’s film An Inconvenient Truth and the publication of the Stern Review, that has created s more public awareness than ever before, as well as a growing impetus to address the issue of the environment. In the CSK, the company claimed to have its carbon emission having gone neutral in UK. Barclay also claimed that in 2005, the greenest form of energy is the energy that one does not use. It therefore plans for the next five years after the 2006 CSR, to increase UK energy efficiency by another 20%, as the result of a multimillion pound ‘invest to save’ programme. It cites the fact that it is now investing “in energy-efficient technology such as boiler upgrades, low CO2-emitting IT equipment, and modern air conditioning units.” Barclays (2006) represents to have increased the amount of green energy its uses. It claims that twelve percent (12%) of its UK retail network is already powered by renewable electricity, and from April 2007 is has a new three year contract with EDF Energy to supply renewable electricity for the majority of our UK offices and large branches. As a result, over 50% of its UK operation is supplied from renewable sources, reducing our carbon emissions by 80,000 tonnes in 2007, equating to the emissions of some 13,000 homes. However, it state that even with these actions there are still CO2 emissions that the company cannot avoid. It said to have offset these emissions from its energy use and business travel, making its UK operations carbon neutral for 2006 (Barclays,2006). The company’s plan now is to make its global operations carbon neutral, but its has started with the UK because we have a large number of operations there. Its climate change strategy Barclays has a five-point strategy for dealing with climate change by: increasing energy efficiency, buying green energy, making our UK operations carbon neutral, offering climate products and services for our customers, and engaging in the climate change debate (Barclays,2006). As far as its CO2 emissions from energy and travel Barclays claims to have taken significant first steps in cutting CO2 emissions both across its operations and through its presence in renewable energy and carbon markets (Barclays, 2006). Standard chartered bank Another bank that can be used as example is Standard Chartered, which offers retail banking, fund management and account services and employing about thirty thousand people in over 500 offices in more than 50 countries. The compliance of the company to its environmental obligations may be seen on how the company faces the problem of climate chance which represents commercial risks and/or opportunities for the company (Telegraph.co.uk, 2007). The bank’s Carbon Disclosure Project claims that climate change poses a variety of commercial risks to the Bank which are both direct and indirect, as well as being short and long term in nature. It claims that is has a considerable global market presence, with the majority of investments and assets based in its core markets of Asia, Africa and the Middle East. Hence, the Bank has operations in geographies which, in keeping with the expectation of environmental disruption directly attributable to climate change, will be impacted. The company admits however that while it considers the effect of climate change on our property assets will be affecting certainly its future planning, it expressed principal concern for its employees and customers that experience adverse effects first hand. The company foresees this effects to include damage to land and property, production downtime, scarcity of basic needs such as food and water and Health concerns such as increased exposure to diseases. It is said that in every problem there are opportunities. The company takes the climate chance challenge in the design of its financing initiatives to combat climate change,. This of course implies that the company may opt to displace fossil fuel derived energy with renewable energy production, or to finance cleaner fossil fuels or financing initiatives that will generate carbon emission reduction certificates. The company does takes advantage of the business opportunities created in this area are pursued through its Renewable Energy Team, which the company considers as part of its global Project and Export Finance group, which is responsible for debt and equity capital raising for said types of project (Standard Chartered Bank, 2006). Conclusion There is basis to agree on the recent debate on the environment that the published financial statements of UK companies as they are at present may not provide an adequate means of assessing the success of the company’s activities due to the evidence that this paper has gathered. The published financial statements of companies consist of income statement, balance sheet, cash flow statement and notes to the financial statement. What may provide then better way of accessing success of companies’ activities towards protecting the environment is better seen in the CSR report. But then a word of caution may still to be emphasized considering the fact the Corporate Responsibility Report are still presumed to prepared with bias towards the company. Although companies now prepare the Corporate Social Responsibility Report, it takes a third party like a government regulating agency to make declaration as to compliance with environmental laws. In the absence however of other means to assessing success, the CSR report may stand a good chance of evolving into reliable means of assessment. CSR reports are normally qualitative in character and the public sectors have more work to do in declaring the standards that must be contained in the CSR including a means for verification of whatever is stated in the CSR report. In the same way that financial statements are prepared by management and audited by auditors, the same principle may be done with CSR report with the end view of furthering the objectivity of reporting. References: Asian Development Bank Institute (2007) Enhancing Corporate Social Responsibility, {www document} URL http://www.adbi.org/event/2349.enhancing.corporate.social.responsibility/, Accessed September 21, 2007 Barclays (2006) Corporate Social Responsibility, {www document} URL http://www.barclays.com/corporateresponsibilitypdf/barclayscr2006.pdf IFC (2007) Corporate Social Responsibility, www document} URL http://www.ifc.org/ifcext/economics.nsf/Content/CSR-IntroPage, Accessed September 21, 2007 Jasch, C. (2006). "How to perform an environmental management cost assessment in one day". Journal of Cleaner Production 14 (14): 1194-1213. Odum, H. (1996) Environmental Accounting: Emergy and Environmental Decision Making, Wiley, U.S.A. Standard Chartered Bank (2006) Carbon Disclosure Project (CDP4) {www document} URL, http://www.standardchartered.com/sustainability/files/sc_policy_environment.pdf, Accessed September 21, 2007 Telegraph.co.uk (2007) Standard Chartered Overview ) {www document} URL http://shares.telegraph.co.uk/security.cgi?csi=10089&action=profile&username=&ac=, Accessed September 21, 2007 Tennenbaum, S. (1988) Network Energy Expenditures for Subsystem Production, MS Thesis. Gainesville, FL: University of FL, 131 pp. (CFW-88-08) Read More