News
Environmental Accounting and Social Responsibility
28-Jan-2021
By Dr. Muhammad Abdulla Al Sawan, IASCA Board Member
Despite its prominent role in the protection of the environment and the conservation of a safe and disease-free climate, environmental accounting does not receive the adequate attention it deserves from the scientific community. The protection of the environment is reflected on the reduction of the annual losses and costs incurred by governments due to the absence of those interested in the environmental accounting. Unfortunately, this happens in spite of the fact that sustainability now occupies the center of the world’s attention along with its role in the preservation of national economies and environment.
Therefore, and in line with its vision, the Government of Dubai has worked, in cooperation with its business sectors, on developing its various plans to build and establish the infrastructure projects, and to reach a disease-free, healthy, and safe society. The Government of Dubai has turned desert into a green land that covers huge areas of the Emirate and coexists with other green projects, such as Mohammed bin Rashid Al Maktoum Solar Park (future fuel). The synergy between all these projects and the efforts of the Government can face the challenges of the global climate changes and the protection of the environment, while contributing, at the same time, to the comprehension of the economic impact of these actions on the future of the Emirate.
Accordingly, when we tackle environmental accounting, that means that we are addressing a relationship that combines the environment, the economy, the infrastructure, the natural disasters, and the risks of pollution and epidemics that the world witnesses nowadays, as well as the impact of these matters on the health of humans and the society from one hand, and on the savings and wealth of the Emirate from the other hand. Nobody, whether an individual or an organization (an entity or factory) has the right to act in a manner that harms the environment.
From here, the Government of Dubai came to the idea of paying attention to measuring the impact of the environmental accounting and social responsibility in order to enshrine the concept of economic security and the sought sustainable development that serve the future generations and make them ready for challenges, and instill in them the concepts of the diversification of the sources of sustainable energy, and how to build a national economy with human capital. Furthermore, the Government of Dubai attached a great deal of importance to the calculation of the environmental cost of the works it implements, whether within the initiative of reduction of energy and water expenditure to reduce the environmental carbon footprint by using the solar panels, or by rehabilitation of the government’s buildings, water recycling and treatment, gardens’ planting and the relevant services, paying attention to farms and their owners, or implementation of industrial and services projects that produce green products.
This doesn’t mean that the Government will translate the environmental cost into direct financial figures or projects’ budgets, however, the Government will measure the achieved prospect impacts as revenues. Moreover, to serve the future generation, the Government, for example, builds a safe road network that reduces injuries (reduction in the medical treatment costs), limits the waste of properties that are considered a part of the national income (extending the lifetime of the means of transportation), builds a sewage network, a clean environment, green areas, and comprehensively manages wastes and the environment, and plants gardens and trees. All of these efforts are exerted to keep pace with the expansions of the future and preserve the right of the future generations to lead a good life, and ensure the achievement of the required sustainable development.
It is worth noting that the interest in environmental accounting is not limited to a specified country or region, everyone will bear a part of the environmental cost (the cost of polluting the environment), because such impact is not limited to a specified environment or country, but it covers the whole world, for example, the natural disasters and floods, the impact of the ozone hole, the increase in the earth’s temperature, the erosion of tropical forests, and the consumption of oil and fresh water resources, all of these matters affect the whole world. unfortunately, the developing countries, the ones most in need, are less concerned with the environmental accounting despite the fact that these countries are the most affected by water pollution, consumption of natural resources, waste of water, and eradication of cultivable land.
In Dubai, there is a close link between the legislations, sustainability, and environmental accounting, as the Government seeks, through the laws and regulations it issues regarding the controls and inspections, to preserve the public health, make the society safe, preserve the plants and wealth, reduce the consumption of energy in the Emirate, provide protection against wrong environmental practices, dispose of wastes in a proper manner, curb trespassing on government property, emphasize the importance of green purchasing, and reduce emissions and noise. The Government can achieve the aforementioned by ensuring compliance with the laws, and punishment of the violators; the violations adversely affect the economy of the Emirate and waste the public funds and the Government’s budget. Therefore, in the next time we will address the importance of disclosing the environmental damage, the accounting treatment, the financial reporting for the environmental costs (environmental accounting), in order to oblige the ones who, cause environmental damage to pay proper compensation for the damages they caused to others.
There is a need to demonstrate the environmental damage and to show how it is calculated. Also we need to address the accounting treatment of the environmental costs (environmental accounting), and to ensure the application of penalties and fines on the ones who cause environmental damage due to the harm they cause to others. The Government of Dubai is spending on the activities and projects of environment protection, so the costs of these contributions should be calculated and considered in the laws and regulations relevant to the environment in order to eliminate the violations of others on the environment from one hand, and to specify the environmental and social responsibility of projects’ owners and factories, on the other hand, while requiring those parties to allocate a portion of their profits to contributions that will be spent on social projects and cover a part of the Government’s expenditure in relation to the environment.
Of course, some consider the environment as a double edged weapon for the national economy and the sustainable development; development means the establishment of factories and projects which yield huge revenues but at the same time harm the environment and cause pollution, which in their turn need a reform process that affects the GDP of countries and depletes the financial resource.
In the field of industry for instance, there are food, chemical, engineering industries, etc. all of which create wealth to their owners, yet at the same time they are considered a sources of pollution due to wastes (liquid or smoke) that pollute air and water, or a source of noise that adversely affects comfort, quietness, and hearing.
In the field of environmental agriculture, the process of development and land reclamation and increasing the green areas, faces obstacles such as urban expansion and the increase in the population on the expense of agricultural land. Some areas suffer from desertification and land salinization, in addition to scarcity of water resources and use of chemical fertilizers and pesticides, the consequences of which will be reflected on the health of humans and hence the national economy.
In the field of energy and transportation, natural gas and electricity are used to keep pace with the technological advances and the usage of the modern means of transportation (air, sea and land transportation) which cause environmental pollution such as the emission of harmful gases.
The budget of the Government of Dubai, represented by Dubai Municipality, for instance, bears the largest portion of environmental and infrastructure expenditure such as: establishment of public gardens and enlargement of green areas, building sewage and sanitation networks, treatment of gases and wastes recycling and disposal, protection of the environment and the public health and safety. On the other hand, there is a social responsibility that obligates the involvement of projects’ owners and factories and hold them responsible, and oblige them to indemnify the government for the damages because they are the main reason behind pollutants.
From here the existence of environmental accounting and addressing it at this time means that the government will require the companies and the factories’ owners to provide information about the environmental effects of their factories and projects, and will ask them to demonstrate these effects in the business results and the financial position when they prepare the closing balances and the financial reports about a specific period, they will also be required to provide evidence about the extent of involvement of the companies and projects’ owners, in the social responsibility towards their communities, in addition to the calculation of the cost of the protection and preservation of the environment, as they should treat such costs as costs of production that will eventually lead to the recognition of the social costs which are considered an important element in the accountancy function.
The protection of the environment in which we live is required by everyone, nobody, whether an individual or an entity has the right to mess up on the expense of others; this is a public right, and whosoever tries to do so, shall compensate others. At this point we emphasize the importance of measuring the costs and benefits related to the protection of the environment, and we also emphasize that companies must include in the financial period, while they prepare the closing financial statements, the revenues and expenses, including the expenses paid as donations to social institutions concerned with the environment, or the payment of the fees defined in the commercial licenses relevant to the environment.
Definitely, it is difficult to measure the environmental harms, financially wise, without knowing the accounting treatment of the environmental costs (one of the components of the environmental accounting) that takes into account the calculation of the costs of harming the environment, and holds the ones who caused the problems responsible. This is a mutual responsibility between the Government, the Ministry of Economy, and the accounting society, to oblige the companies and factories to disclose their policies, objectives, and environmental programs, as well as showing the damages that may be caused to the environment and how to handle such damage, and clearly stating such problems in the financial reports. Companies and factories must also explain the auditing standards, issued by the International Accounting Standards Board, which require companies to include in their disclosures the environmental effects of the businesses and the environmental initiatives, and oblige them to report data about the emission of gases, whether for the purpose of compliance with the laws and regulations, or voluntary. Government entities, investors, and clients will read such disclosures; credibility about greenhouse emissions of these factories and companies should be maintained in order to enable the competent authorities of making informed decisions based on the information provided in these reports and to work for the public interest.
It is difficult to measure the environmental damage financially without knowledge of the accounting treatment of the environmental costs and without obliging the ones who caused such damage to compensate others. Regarding the environmental damages, there is minor pollution that we can live with, and there is also dangerous pollution that has negative impacts on the health of humans and the environment (for example, industrial wastes), and there is pollution that damages the environment and humans altogether (for example, chemical weapons, earthquakes, and volcanoes). Pollution could be obvious such as the piles of garbage, or could be in the form of black smokes emitting from factories, or pollution of the agricultural produce, or could annoy humans and other livings in the form of noise caused by the traffic or airplanes or machines. The costs of pollution differ according to its types.
This topic attracted the attention of the intergovernmental team of experts that is concerned with the International Financial Reporting Standards (IFRS), therefore, IASCA (the International Arab Society of Certified Accountants) published a worksheet about the accounting treatment and the financial reporting about the environmental costs (environmental accounting). The worksheet showed that the environmental accounting is relevant to businesses, NGOs, government organizations such as municipalities and state institutions, where the pollution issue is an economic, social, and political problem on the global level. The responsibility to protect the environment and reduce or mitigate the effects of pollution is a social responsibility in which individuals, businesses, and governments are involved.
As we know that the closing balances of any factory or business are prepared according to the accounting standards, so managements, which are responsible for the preparation of these balances, should charge financial periods with the revenues and expenses relevant to each period. Since the protection of the environment is ensured by laws, and nobody has the right to act in a manner that harms the environment, whosoever tries to do so should pay compensation to indemnify others for the damages caused by his/her actions. Accordingly, businesses, factories, and auditing firms started to create liabilities and reserves in the financial statements to face any obligations caused by environmental damages. These obligations and reserves could be paid to third parties in the form of compensations, fines or government penalties. Therefore, we considered that in this context, it will be better to benefit from the publications of UNCTAD in this regard, as it seems that the scope of application of the accounting standards needs to include the environmental accounting and environmental liabilities, as well as their relation with the environmental costs which include the costs of the actions taken, or required, to manage the environmental damages caused by the activities of businesses in an environmentally responsible manner, in addition to other costs that result from the environmental objectives and requirements of the organization. Environmental costs include, but are not limited to (the costs of: waste disposal and avoidance, the preservation and enhancement of the quality of air, cleaning up oil spills, environmental research, etc.)
The financial position of businesses is often affected by their environmental performance and the method by which the financial information relevant to that performance is used to evaluate the environmental risks. The investors, and their experts and consultants along with the creditors, are concerned with the method by which these risks are managed. For example, if the costs of establishing a factory are all financed by banks in exchange of a land mortgage, the factory may be required to reform the environmental risks arising from its activities. However, the amount charged for the damages may exceed the value of the original loan and the mortgage (i.e., the factory did not repay the debt to a certain entity (the government or individuals)), eventually the factory defaults.
What we need to say is that auditors, investors, or shareholders in factories should give the required attention to the accounting concepts, and recognize the environmental costs and the liabilities of creditors which could be reflected on the return of investment and capital. In this case, environmental costs should be recognized within the period of the annual report, particularly if they meet the recognition criterion of assets that should be capitalized or amortized in the income statement over the current and the appropriate future periods. Otherwise, the costs should be recorded in the income statement taking the needed provisions into account (provisions of environmental liabilities). The presentation of the information and data relevant to the material environmental impacts and the disclosures thereof should be stated in the notes by providing additional information that completely and clearly reflects the various environmental impacts that arise from the activities of the business or the factory.
In general, the environmental assets or costs and the treatment of them need more clarifications, we wish that such clarifications would be addressed in the future. Such clarifications include for example: capitalization of the environmental costs, recognition of the environmental liabilities, measurement of the environmental liabilities, the accounting policy, and the methods of data collection and disclosures.