Green Accounting as the Path to a Sustainable Future

Green Accounting as the Path to a Sustainable Future

Growth can no longer be measured in strictly economic terms such as the monetary value of output, income or expenditure per head. Additional criteria are needed for green growth.

According to UK economist Tim Jackson: “Prosperity consists in our ability to flourish as human beings -- within the ecological limits of a finite planet. The challenge for our society is to create the conditions under which this is possible.”

Green growth will come from applying green public procurement and green research and development. Appropriate penalties such as making the polluter pay for pollution and incentives like tax breaks for investment in green R&D are required. However, measuring green growth will need additional criteria such as sustainability, greenness, happiness or well-being.

Green or environmental accounting could be the answer. At the corporate level, this requires the identification and monetary measurement of the traditional private internal costs that directly affect the bottom line of the balance sheet. These are direct costs, such as materials and labor, which are attributed to a product or department and indirect costs, or overheads, such as rent, administration, depreciation, fuel and power.

Above all, externalities such as social and economic environmental costs that impact the external environment must also be taken into account. Although often ignored, their inclusion as internal items in corporate accounts could mean that scarce resources are more efficiently allocated.

Effective Balance Sheet

An effective green balance sheet would be either in the red (a loss) or black (profit). However, this would only be after including all internal and external cost categories, such as health problems for workers, emissions and pollution of air, land or water, degradation of the natural environment and depletion of finite resources. Internal and external benefits must also be calculated and quantified using monetary measures. These could include savings from new cleaner technologies resulting in lower pollution and better health, new markets and substitution of raw materials or production processes.

Green accounts are a vital part of corporate social responsibility and can help with decision making and triple bottom line profitability. Essentially an organization needs to compare the costs of avoiding or preventing environmental damage against the cost of remedial activities.

Using a framework of green accounting would mean that investment decisions are made by comparing the overall private and social costs against the private and social benefits. Using a lifecycle assessment means that organizations can make decisions based on calculating environmental impacts at every stage of a product’s life, from raw materials, through production, distribution and final disposal or recycling.

With the EU set to introduce more environmental accounting at national level -- see "GDP and Beyond" below -- this could filter down to the corporate enterprise level. Increased consumer, citizen and shareholder awareness of sustainable green growth requires a pricing policy that fully reflects the true costs of development. Transparent green accounts would be a key component of a policy based on Beyond GDP.

GDP and Beyond

In its 2009 Communication "GDP and Beyond: Measuring progress in a changing world," the European Commission proposed five actions as part of the EU roadmap for the development of indicators relevant to the challenges of today:

  1. Complementing GDP with environmental and social indicators;
  2. Near real-time information for decision making;
  3. More accurate reporting on distribution and inequalities;
  4. Developing a European Sustainable Development Scoreboard; and
  5. Extending national accounts to environmental and social issues.

A key element of the communication is that the time is ripe for measurement systems to shift emphasis from measuring economic production to measuring people’s well-being. This theme was also explored in a report presented to the Franco-German Ministerial Council in December 2010. This proposed a compact dashboard of indicators that assess human welfare. And three major areas -- economic performance, quality of life and sustainability -- were identified in a report by the Commission on the Measurement of Economic Performance and Social Progress -- a French government initiative launched in 2008.

Now at the discussion stage, reactions to the Commission Communication reflect the needs of stakeholders. The European Parliament Committee on Regional Development has suggested in a draft opinion that GDP should be retained as the main criterion for determining eligibility for regional assistance at European level. The EP Committee on the Environment, Public Health and Food Safety in its draft opinion criticizes the lack of a clear overall strategy on the application of the Beyond GDP approach in practice.

More information and resources on these topics are available from:

The original version of this article, © European Commission, appeared on the European Commission's Environmental Technologies in Action Plan website and is reprinted with permission.

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