EPA/742/K-96/002
                       Environmental accounting
                       can help measure anil manage
                       environmental performance
    •For the  typical
 company, a, first step to
 preventing pollution is
  .  -. .     >
 setting up a coherent
 system for evaluating
 and addressing the environmental implications of
 its activities. There is an abundance of commen-
    = '          "        •                  '• [
 tary on the importance of managing enviroiimen-
• tal performance,, and on approaches that an orga-
 nization might take to create an environmental
 management system (EMS). Among the EMS frame-
 works'that are receiving a great deal of attention
• are the Chemical Manufacturers Association's Re-
 sponsible Care® program, the American Petroleum
 Institute's Strategies for Today's Environmental'
 Partnership (STEP), and the International Organi-
 sation for Standardization's Environmental Man-
 agement Standard, ISO 14001, which is targeted
 for completion in 1996.
    A key component in all of these approaches is
 the measurement of environmental performance.
 However, these approaches fail to emphasize the
 significance of financial measurement in the suc-
.cessful implementation of an EMS! The discussion
 in this article underscores the importance of such
 financial measurement, demonstrates-its applica-
                       bility in achieving the
                       • measurement require-
                     ' • ments;of  the EMS
                       frameworks, and intro-
                       duces approaches'to
measuring environmental financial performance.
    Environmental financial measurement is depen-
dent ori accurate and timely environmental cost
information. Unfortunately, however, most compa-
nies' accounting systems are not set up to provide
that information. Traditional accounting systems
tend to.hide environmental costs in Overhead ac-
counts. If these costs .are allocated among products
or processes, it is done through the use of realloca-
tion bases, such as labor hours or production vol-
umes, that obscure the size and sources of the costs.
Additionally) these systems generally fail to consider
all,of the potential environmental costs associated
with the firm's various activities. Such gaps in man-
agement accounting practices tend to hide the fi-
nancial benefits of pollution prevention activities
and other environmental initiatives.       '
                                                                  Susan McLaughlin
                                                                   and Holly Elwood
CCC1079-0276/96/060213-09 •
© 3 996 John Wiley & Sons, Inc.;
                                                                        Pollution Prevention Review /Spring 1996 / 13

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;  Exhibit 1. Some Costs of Implementing an Environmental
  Management System
  « Employee time spent on developing an environmental strategic plan.
  • Training and education for employees and others on the requirements of
    tha EMS, the use of new technologies, and the handling of new chemicals.
    The education program potentially would encompass managers, operations
    staff, engineering/design staff, maintenance staff, and suppliers.
  * Development or purchase of new technologies, including (if necessary) in-
    formation systems, monitoring devices, and more environmentally sound
    process technologies.
  • Consultants' hourly fees if the company seeks outside assistance in devel-
    oping tha EMS.                               '
  • Domestic and international sales revenue that stands to be'gained, lost, or
    maintained depending on whether the company opts for an EMS frame-
    work that may have trade implications, such as ISO 14000 or Responsible
    Care®.
  • Potential additional consulting and third-party certification fees for compa-
    nies implementing an EMS in the ISO 14000 framework.
                     These accounting issues are the focus of EPA's
                  Environmental Accounting Project, a program
                  founded in 1992 in collaboration with members
                  of industry, public accounting firms, trade asso-
                  ciations, and other stakeholder groups. The Project
                  now consists of a network of over 700 members.
                  In collaboration with these  stakeholders, the
                  Project is actively working to encourage and moti-
                  vate businesses to understand the full spectrum of
                  their  environmental costs and incorporate these
                  costs  into decision making.
                     This article explores how  environmental ac-
                  counting concepts and methodologies can be used
                  to justify the development of an EMS and to cre-
                  ate an environmental performance measurement
                  system. Throughout this  article, the term "envi-
                  ronmental accounting" is used to refer to the iden-
                  tification, quantification (or qualification), and
                  allocation of environmental costs and their inte-
                  gration into internal business decisions.

                  Using Environmental Costs
                  To Promote Development of an EMS
                     Critical to the adoption and sustainability of
                  an environmental management system is its ac-
                  ceptance by top management. Their commitment
                  is necessary because the implementation of an EMS
                  is an  expensive and lengthy process that requires
                  the support and involvement of employees at ev-
ery level of the company.  (Exhibit 1 describes
many of the expenses that a firm will incur when
implementing an EMS.) To  ensure the long-term
effectiveness of the EMS, corporate leadership must
communicate  to employees that it is committed
to the system by allocating the necessary resources
and creating the appropriate incentive systems.
    Unfortunately, corporate leaders often do not
view strategic environmental management as "an
essential issue."1 Thus, staff  interested in develop-
ing an EMS will be in the best position to gain top
management's long-term support and cooperation
if they can justify EMS expenditures with a dem-
onstration of positive return on investment and
an increase in  shareholder value:

    The only sustainable corporate environ-
    mental initiatives are those that contrib-
    ute to shareholder value.... If we ignore
    the need  to contribute to shareholder
    value, "the best will become the enemy
    of the good"; striving for environmental
    purity, we will lose the internal corporate
    support that is necessary to sustain con-
    tinuous environmental improvement.2

    Corporate management is accustomed to be-
ing burdened with environmental compliance and
remediation expenditures, and with penalties for
environmental noncompliance. Nevertheless, most
companies have not  undertaken a systematic ex-
amination of their environmental costs. Thus,
many may not fully realize the magnitude of those
costs—or, conversely, the significant financial ben-
efits that stand to be gained through an EMS.
    Environmental  accounting methodologies
help companies identify and document the  wide
array of environmental costs they incur, and they
bring to light the full range of benefits that can be
gained from adopting an  EMS. These benefits
might include immediate reductions in compliance
expenditures,  lower  insurance premiums, and a
reduction in  future environmental liabilities.
14 i Spring 1936 / Pollution Prevention Review B
                    Susan Mclaughlin and Holly Elwood

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  (Exhibit 2 shows an array of environmental costs
  that might be reduced by the introduction of an
  EMS,) Assessment of a company's environmental
  cost inventory will provide input for EMS invest-
 • -ment analysis and will greatly increase the chances
  cif gaining top management's commitment.


  Environmental Accounting           •
  as a Tool for Creating Metrics       v
 :     Environmental management systems  build
  upon the principles of total quality management
  (TQM). Two TQM concepts that are important to
  this discussion are those of "customers" and  "con- •.-
, tinuous improvement."
  .    An EMS, like a TQM
  system, begins with the
  development of a vision
  statement and a  set of
 .objectives.and gpals in
  accordance  with  the '
  needs of the internal
  and external stakehold-
  ers,  or "customers," of '
  the organization. "Cus-
  tomers"  may include
•  managers and:other em-
  ployees, investors, the
  community at large, in-
  surers,  suppliers, and
  purchasers  of    the
  company's products.
  Also fundamental to
  TQM and EMS systems
  is the concept of "con-
  tinuous improvement,"
  which requires measure-
• 'ment of progress toward
  meeting system  objec-
  tives and goals.
     A measurement sys-
  tem—consisting of- a
  set  of  measurement
                       standards (called "metrics" or  "indicators")—is
                       crucial .to the implementation, review, and im-
                       provement  of any EMS. In fact, some type of
                       measurement system-is .required by such EMS  •
                       frameworks  as-Responsible Care® and ISO 14001
                       (Exhibit 3).

                           Many of a firm's stakeholders, such as rnanag-
                       ers, shareholders, bondholders, and lenders, have - /
                       an inherent  interest in the financial performance   •
                       of any initiative the firm undertakes. The environ-
                       mental management  system must be developed
                       with this in mind. For these stakeholders, the most
                       important issue with respect to the,EMS may be its
 Exhibit 2. Examples of Environmental Costs Incurred by Firms

 Potentially Hidden Costs          .             .
 Regulatory      .  ,
  .Notification .
   Reporting
   Monitoring/testing
  , Studies/mpdeling
   Remediation
   Recordkeepipg
   Plans     -•!
   Training •
   inspections     '
   Manifesting
   Labeling
   Preparedness
   Protective equipment
   Medical surveillance
  .Environmental insurance
   Financial assurance
  .Pollution control
   Spill response
   Stormwater management
   Vyaste management
   Taxes/fees

 Contingent Costs
 Upfront
 •  Site studies •
 •  Site preparation      •
 •  Permitting.
 •  R&p         •         '
 •  Engineering and procurement
 •; Installation

 Conventional Costs
>•  Capital equipment
 •  Materials
 • .Labor        :
 • .Supplies.
 •  Utilities
 •  Structures           .
 •  Salvage Value

 Back-End
 •  Closure/decommissioning
 •  Disposal of inventory
 •-  Post-closure care
 •  Site survey
Voluntary
(Beyond Compliance)
  Community relations/outreach
  Monitoring/testing
  Training
  Audits
  Qualifying suppliers
  Reports (e.g., annual environ-
  mental reports)
  Insurance
  Planning
  Feasibility studies
  Remediation
  Recycjing              '
  Environmental studies
  R&D.
  Habitat and wetland protection  j
  Landscaping
  Other environmental projects
  Financial support to environ-,
  mental groups and/or
  researchers
• Future compliance costs  ' ,
• Penalties/fines
••. Response to future releases

Image and Relationship Costs
•' Remediation. •
•  Property, damage
•  Personal injury damage
•  Legal expenses
p  Natural resource damages
1  Economic loss damages
  Corporate image
  Relationship with customers
  Relationship with investors
  Relationship with insurers
 • Relationship with
  professional staff
 • Relationship with workers
 >'. Relationship with suppliers
  Relationship with lenders
  Relationship with host
  communities
  Relationship with regulators
Source: -EPA, An'Introduction to Environmental Accounting as a-Business Management Tool:. Key Concents and Terms EPA
742-R-95-001,June-1995,p.9.             ..-        ,             .
 Environmental Accounting and EMSs
                                                                                Pollution Prevention Review / Sqrm
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  Exhibit 3. Environmental Cost Metrics in the IS014000 Standards
I    The ISO 14000 standards are one of the frameworks an organization can
I  use whan creating or improving its environmental management system. ISO
!  14001, the environmental management systems specification standard, is the
  standard under which companies will be certified. In addition, general guid-
  ance documents, which will not be used for certification purposes, are being
  written to assist organizations with implementing key components of an envi-"
  ronmental management system.
    For certification under ISO 1400t, organizations will have to demonstrate
  the existence of mechanisms for continuous monitoring and measuring of
  environmental impacts. Each organization will determine its own environmen-
  tal performance metrics. ISO 14031, one of the ISO guidance documents,
  covers environmental performance evaluation. This document will provide
  guidance on how an organization can evaluate its environmental performance
  and create environmental performance metrics, and will offer examples of
  such metrics. The current draft of this document includes information on utiliz-
  ing environmental costs as metrics of environmental performance. It will be up
  to each organization (whether or not it seeks certification)  to determine the
  extent to which it will use this guidance.
    For further information on ISO 14000, readers can contact EPA's Mary
  McKiel, who is serving as Vice-Chair of the U.S. Technical Advisory Group of
  ISO 14000, aJ 202-260-3584 or mckiel.mary@epamail.epa.gov.
                  current and future financial implications—that is,
                  the significant spending and savings that will re-
                  sult from its implementation. Additionally, lend-
                  ers and insurers may be interested in EMS-driven
                  reductions in the organization's potential environ-
                  mental liabilities—an area of major (and growing)
                  financial concern.
                      Thus, when developing an EMS, an organiza-
                  tion should consider including a set of financial
                  objectives and corresponding metrics in order to
                  satisfy the interests of these stakeholders. The or-
                  ganization  may choose to incorporate the results
                  of these measurements into internal reports, and/
                  or into external documents, such as annual finan-
                  cial and environmental reports.

                  Financial versus Impact Metrics
                      Current discussion of environmental perfor-
                  mance indicators generally focuses on nonfinancial
                  indicators,  and corporate environmental reports
                  typically include few metrics' expressed in dollar
                  terms. Arguably, reductions in emissions or in the"
                  use of toxic chemicals are more likely to directly
                  demonstrate improvements in environmental im-
                  pact than are financial metrics. In fact, some ar-
                  gue that financial indicators should not be con-
sidered as indicators of environmental perfor-
mance. But it is important to  note that even
nonfinancial indicators may not always measure
overall environmental improvement, per se. For
example, a metric that indicates reductions in air
emissions .may hide the  fact that the emissions
have been transferred to another medium—beconv
ing, for example,* hazardous waste—with no net
improvement  to the environment. While dollar
metrics may serve only as proxies for reductions
in environmental  impact, they often are  no
worse—and sometimes may even be better—as
indicators of environmental improvement..
    Although there are differing opinions about the
adequacy of financial indicators for measuring over-
all environmental performance, such indicators
clearly are necessary for measuring the performance
of the environmental management system itself.
Financial metrics are meaningful to managers. They
measure the cost effectiveness of the environmen-
tal alternative's  chosen by the firm and whether the
EMS is efficiently using the firm's resources. They
also provide necessary measurements for ensuring
the sustainability of the system, and otherwise dem-
onstrate the financial value of the environmental
choices made by the  firm. It is thus necessary for an
organization to ensure that it has access to accurate
and current environmental cost information in or-
der to create and use financial metrics.
    It must be kept in mind,  however, that the
historical  costs provided by accounting systems
often do not help a firm track progress toward
eliminating future environmental costs. Metrics
that are based  on historical costs will not give the
company dollar figures for many future expenses,
such as the costs that may result from having to
comply with new or expanded regulations, or the
cost of future remediation actions, fines and pen-
alties fornoncompliance, compensation claims, or
punitive and natural resource damages. A company
should devise  other means for measuring those
potential liabilities.3
16 ,  Spring 1996 / Pollution Prevention Review  Q
                    Susan Mclaughlin and Holly Elwood

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  Developing and Using
  Environmental Cost Metrics
      Because metrics should be specifically designed
  to  measure  progress  toward  meeting  an
  organization's unique set of objectives and goals,
  no two organizations will.have identical sets -of
  metrics. However, any organization's metrics
  should be designed to be easy to track, understand-
  able, objective, verifiable,  reproducible, and use:
  ful for identifying and communicating both posi-
  tive progress and areas for improvement to internal
.  and external customers." They should also be rel-
  evant to the organization's activities,  consistent
  with its environmental policy, practical, cost-ef-
  fective, and technologically feasible.5,     •-•.'.•
     The scope, scale, purpose, and form  of ah
  organization's environmental financial metrics will
,  vary according to'its specific environmental ob-
  jectives. Metrics may range from total expenditures
  on environmentally related equipment at an ag-
,  gregated level to the cost of raw materials at a'pro-
'  cess level. Individual metrics might demonstrate,
  for instance, total waste handling costs at a facil-
  ity, investments in environmental equipment per
  ton of reductions in air emissions  at a -national
  level, or reductions in a product's material costs
  resulting from thfe use of recycled materials^6
     In order to ensure the integrity of environmen-
 tal financial metrics, each identified metric should
 be linked to a "normalizing factor." For example,
 monitoring a facility's monthly disposal costs with-
 out comparing this metric to the month's produc-
 tion volume might result in an  inaccurate assess-
 ment of the facility's environmental performance.
•It could even create a'n incentive for managers,to
 outsource some processes or products in order to
 reduce disposal costs—which would merely trans-
 fer'the waste-creating activities rather than reduce ••
 them. By using normalizing factors, companies
 maintain clarity in the metrics' results and create
 positive incentives to improve environmental
 performance.
     In designing and'applying metrics, firm's
 should carefully consider the kinds of behavior that
 the metrics could produce. In their book Green Led-
 gers, Daryl Ditz, Janet Ranganathan, and R. Darryl
 Banks point out that "inappropriate measures can
 encourage self-defeating or myopic behavior For
 example, a heavy emphasis on re-
 ducing aggregate environmental
 costs could reward managers who
 cut back on environmentally related
 maintenance or R&D—activities es-
'sential to long-term environmental
 management."7   ,     •
    Similarly, in an article on creat-       .
 ing an integrated environmental business manage-
 ment  strategy, David Cohan and; David Gess
 observe:    •       ,    '

        It is imperative that a firm defines and
    publicizes both formal and cultural incen-
•  -.  tives that are consistent with both busi-   -
    ness and environmental performance. If
    the costs of reducing waste generation or
    of taking measures to minimize environ-
 ,   mental risks are incurred by an operating
    unit; but the costs of waste disposal or en-
    vironmental liabilities are not, the unit's
    'manager is  faced with'conflicting incen-
    tives.  If he  or she is only judged,  for ex-
    ample, on meeting cost-reduction targets,
    then environmental performance will be
    given little attention. Ensuring that incen-
    tives and performance evaluation criteria
    are fully consistent with the articulated
    goals of a firm may seem obvious, but in
    practice it is an area in which many firms
    fall short.8 .

Ditz, Ranganathan, and Banks suggest that:

    [a]n alternative, is to connect incentives
    to the underlying activities that give rise
   It could even create an
incentive for managers to
'   ','     outsource some
    processes or products
       in order to reduce
          disposal costs.
 Environmental Accounting and EMSs
                        0 Pollution Prevention Review / Spring',1996 / 17

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Activity-based costing
can be used to identify
and prioritize
environmental costs.
    to environmental costs. Such programs
    have been used for decades to drive
    progress on targets for productivity, safety,
    and quality. Amoco's gain-sharing plan,"
    for instance, rewards employees for vari-
    ous measures of facility performance. The
    [Amoco]  Yorktown refinery's waste-gen-
    eration metric for the gain-sharing pro-
    gram excludes remediation costs associ-
    ated with past contamination so that the
    current workforce is not penalized for de-
    cisions over which they have no control.9

Identifying Environmental Costs
    As discussed above, environmentai account-
ing methodologies can aid a company in identify-
ing and documenting its full array of environmen-
tal costs prior to implementing an EMS. This
financial assessment can serve to pinpoint areas
that merit the most attention and that have the
most potential for cost reduction. It can also pro-
vide useful information for making an investment
analysis of the EMS, as well as establishing base-
line measurements for use in setting realistic EMS
             goals and helping create metrics for
             tracking progress toward reaching
             cost-oriented objectives.
                  Activity-based  costing and
              "cost of quality" are two method-
             ologies that can be used to iden-
             tify and prioritize environmental
             costs.
                 Activity-Based Costing
                     Activity-based costing (ABC) is an accounting
                 methodology that is increasingly being applied in
                 environmental accounting. The objectives of ABC
                 are fully consistent with those of environmental
                 cost accounting. Its methodologies can be used to
                 identify environmental costs and trace them back
                 to the activities that are  directly responsible for
                 their occurrence.
    ABC can, in turn, be used in the context of an
EMS. In arguing for the necessity of fully integrat-
ing pollution prevention programs into a-firm's
"core business practices," Cohan and Gess note
that ABC "is directly extensible to include envi-
ronmental performance metrics as well as cost in-
formation."10
    The Chrysler Corporation is expanding its use
of the ABC approach "to manage environmental,
health and safety issues—cost being the common
measure to compare alternative designs and to in-
tegrate these factors into a dynamic decision pro-
cess."11 Similarly, AT&T is using ABC and "activ-
ity-based management" to help  identify the
environmental costs associated with a wide
variety  of.  activities.  AT&T is using these
methodologies  "to understand and target areas
of opportunity in current processes and in design
considerations," to identify environmentally pref-
erable activities, to measure those activities against
environmental  objectives and strategies, and to
measure the cost savings from those activities.12

Cost of Quality
    The "cost of quality" (COQ)  framework can
be used to analyze the expenses associated with a
firm's environmental impacts and with the imple*
mentation of the EMS itself. In this framework, the
three general categories of costs are "failure costs,"
"appraisal costs," and "costs of prevention."
    Environmental failure costs are those the firm
incurs when it allows its processes and products to
negatively affect the environment. Environmen- •
tal appraisal costs are incurred in the process of
inspecting, testing, collecting, and processing data
associated with  environmental "quality." Preven-
tion costs are those associated with the steps the
firm takes to reduce its impact on the  environ-
ment.13
    AT&T has employed this model to  organize
its environmentally related activities. (Exhibit 4
shows how AT&T has assigned these activities to
18 •' Spring 1936 / Pollution Prevention Review 0
                                                                   Susan Mclaughlin and Holly Elwood

-------
  the three COQ categories.) By
  thinking .of the activities in this
  framework, the firm can compare
  the costs of alternative environ-
  mental strategies or tactical
  choices. It can also use this catego-
  rization to set goals for reducing
  costs. In this case, AT&T's "concep-
  tual model is a total COQ of 30%-
  of sales revenues (i.e., 5% for pre-
  vention, 10% for appraisal, and
  15% for failure costs-including
  non-compliance),  and AT&T be-
'  lieves that by making greater in-
  vestments in preventive measures,
  AT&T, can reduce the overall COQ [by] half (i.e.,
  to 15% of sales revenue)."14

  How Companies Use
  Environmental Financial Metrics
     Exhibit 5 provides examples of how financial
 metrics have been used in corporate environmental
 reports. The excerpted financial measurements dem-
 onstrate a wide range in scope, scale, and purpose.
     The reader should keep in mind that the pas-
 sages set out in this exhibit are only examples. A
 company must develop its own metrics, in accor-
 dance with its own environmental policy, objec-
.tives, and. goals. The authors, do  not necessarily
 endorse any of the metrics-outlined in Exhibit 5,
 but present them here as  examples of possibilities
 for uses of environmental costs in an EMS's mea-
 surement system..

 Moving  Forward
    The Environmental Accounting Project is tak-
 ing steps to encourage companies to apply envi-
 ronmental accounting.concepts and method-
 ologies to  the development of  environmental
 management systems. It continues to examine en-
 vironmental accounting's role in helping compa-
 Exhibit 4. AT&T's Categorization of Environmental Costs Under a COQ Model
 Prevention                     Appraisal               Failure
 Design for Environment (DFE)

 Advanced Manufacturing

. Supply Line Management
 Prevention training

 Better tools and systems
 Waste minimization
Environmental testing,
audits,' analysis

Tracking performance

Risk analyses
Residues and wastes
Remediation and
litigation costs

Devalued assets
Lost sales and higher
cost of capital due to
impaired corporate image
 Member ^995 En^onmer*al Accountin9 Case Studies: Green Accounting at AT&T, EPA742-R-95-003, Sep-
            nies achieve the measurement requirements of
            widely used EMS frameworks.,The Project is par-
            ticularly interested in the role that EMS guidance
            documents (such as those of ISO 14000) can play
            in clarifying the importance of financial indica-
            tors to environmental management systems. The
            Project also continues to compile examples of the
            use of financial measurement in companies' envi-
            ronmental management systems.      -
               Because the,Project's activities are based on
            the interests of its. stakeholders,  the authors are
            very interested in readers'  responses to this ar-
            ticle.  Readers are  encouraged to contact Susan
            Mclaughlin at 202-260-3844 or Holly Elwood at
            202-260-4362. In addition, readers can send
            comments to the authors at USEPA, MC7409, 401
            M St. S.W., Washington, DC, 20460,  or via fax
            at 202-260-0178. Messages  can also be e-mailed
            to  mclaughlin.susan@epamail.epa.gov or
            elwood.holly@epamail.epa.gov.
               To,obtain a complete listing of the Environ-
           mental Accounting Project's materials, or to ob-
           tain any of the EPA publications mentioned in this
           article, readers should contact EPA's Pollution Pre-
           vention Information Clearinghouse at 202-260-
           1023. or via fax at 202-260-0178.
Environmental Accounting and EMSs
                                                                           Pollution Prevention Review.-'/. Spring 1996

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      Exhibit 5. Examples of the Use of Financial Metrics in Corporate Environmental Reports
      DuPont (Safety, Health and the Environment:
      1994 Progress Report):

      Community Awareness: "As part of the Land Legacy program,
      DuPonfs Chambers Works in Deepwater, New Jersey, donated
      1,100 acres of wildlife habitat to The Nature Conservancy for its
      'Last Great Places' campaign.... In the last 10 years, the company
      has donated 45,000 acres in total, valued at $47 million."

      Energy Conservation: To accelerate energy conservation, DuPonfs
      Corporate Energy Leadership Team initiated 'Jump Start' in late
      1993.... The initiative targeted a 5% reduction in the procurement
      of electricity and energy fuels and saved $12.5 million over four
      months, double the initial goal."

      Environmental Fines and Penalties: DuPont includes a bar chart
      showing the magnitude (in millions of dollars) of its environmental
      fines and penalties over a four-year period. The chart compares the
      amount of DuPonfs fines and penalties to those of "all industry."

      Procter & Gamble (1995 Environmental Progress Report):

    i  Wasts Reductions: "In 1990, P&G instituted a Total Quality Pollu-
      tion Prevention  process, which enables each plant  to measure
      waste and costs, and set reduction goals...."

      "P&G's manufacturing sites have achieved:
      ...A drop in disposal costs of 10%;
      Savings from waste-related activities of $140 million."

      WMX Technologies, Inc. (1994 Annual Environmental Report):

      Purchase of Recycled Materials: "\n 1994, WMX's Purchasing De-
      partment spent S114 million on goods containing  recycled mate-
      rial.... The total spent on goods containing  recycled material was
      less than in"l993. However, the percent of the capital budget for
    J  containers and vehicles ... spent on products containing recycled
    I  material increased...."
    I
    |  Remediation: "WMX net expenditures for  remediation of closed
    i;  sites (after recovery of costs from other parties) are  shown in [a
    j  bar chart showing expenditures over a five-year period]."

      "In 1991, the Company recorded a charge of S296 million before
      tax and minority interest, to  reflect its then-current estimate of
      Superfund environmental remediation liabilities. The Company...
      provides for costs expected to be incurred after a facility ceases to
      accept waste. At the end of 1994, WMX had accrued $813 million
      to provide for environmental responsibilities, .including remediation
      and closure and post-closure monitoring costs."
    I
Bristol-Myers Squibb Company
(Report on Environmental Progress, May 1995):

Pollution Prevention: "fj Jt is difficult to identify implementation costs
and benefits associated with pollution prevention initiatives.... [W]e
are working to develop full cost accounting practices that will fully
capture the costs and savings associated with pollution prevention
projects.... In developing our EHS strategic plan for 1995-1999,
we estimated that the benefits (cost savings and cost avoidance)
of bur prevention-based activities were nearly four times greater
than out-of-pocket and opportunity costs. We discovered that the
financial pay back period for most of our  planned initiatives was
lass than two years—a solid financial return on investment."

Research and Development: "Expediting governme'nt approval is
perhaps the biggest financial benefit for integrating EHS into the
pharmaceutical business. Bristol-Myers Squibb filed three Supple-
mental New Drug Applications for Cefzil. The U.S. FDA acceler-
ated its review time in part due to proposed,EHS improvements.
Bristol-Myers Squibb estimates that early approval saved the Com- ,
pany $7 million."                               .

Energy Conservation: "To minimize energy usage ... the Espluges
facility in Barcelona, Spain,  reviewed its manufacturing process
and made several improvements. As a result, trie site has increased
batch sizes, eliminated the use of nitrogen in the process, and re-
duced electricity and steam usage by 50%. Productivity increased
163%, resulting in a 9.3% production cost savings."

Packaging: The size of the  Naldecon trade package is now ap-
proximately 10% smaller, resulting in smaller cartons and shipping
cases and saving more than  $300,000 annually. The Pharmaceu-
tical Group has eliminated individual unit cartons of Cytoxan, thereby
saving approximately $50,000 each year."

Amoco Corporation (Environment, Health
& Safety Report for calendar year 1993): -

Green Lights Program: "In December 1990, Amoco signed a Memo-
randum of Understanding with the U.S. EPA to become one of its
charter partners in the voluntary Green Lights Program. Through
1993, Amoco spent $2.8 million to upgrade many of its major office
facilities with energy efficient lighting, which has resulted in an en-
ergy savings of 12  million KWH/year or $756,000 per year....
Through  savings in  energy  costs, each Green Lights Program
project is expected to return  the finances invested within three to
four years." (This text is accompanied by a bar chart showing cu-
mulative dollars spent on the Green Lights Program, as well as
cumulative dollars saved per year in energy costs for a three-year
period.)

Human Health and Ecological Risk Assessment: "A health-based
risk assessment approach was used in the investigation and clo-
sure of surface impoundments at an oil and gas production site
located in west Texas. The risk assessment was performed as part
of an overall strategy to eliminate potential future environmental
concerns.... Estimated savings as a direct result of the risk assess-
ment, when compared-to the  cost of the initial closure plans for the
site,  exceeded $1 million."

3M (Environmental Progress Report:
Recognizing Employee Contributions 1994):

Research and Development: 3M devotes "about 15 percent of [its]
research and development spending, or $150 million annually, to
reduce the environmental impact of new and existing products and
improve manufacturing processes."

Chevron  (Measuring Progress: A Report on Chevron's
Environmental Performance, October 1994):

Fire  Loss: "Chevron's 1993 Jire loss was $37 million." (This pas-
sage is from the caption to a  bar chart showing Chevron's fire loss
in millions of dollars for a five-year period.) .

Operating andCapitalExpenditures: "\n 1993, Chevron spent more
than $1.3 billion on environmental protection in the United States....
  Operating expenditures (the cost of running and maintaining the
company's environmental activities) were $738 million in 1993.
  Capital expenditures (investments in new-equipment) for  envi-
ronmental -improvements have increased almost three-fold since
1989—to $620 million in 1993."
20 / Spring 1996 / Pollution Prevention Review
                                                                                             Susan McLaughlin and Holly Elwood.

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  Notes                                         ,

  1. "Confidence GiowzinSEMMaitet," Environmental Business *
  Journal, Vol. VIII, No. 7 (July 1995), p. 3.

  2. R.E Wells, "Why We Need Value-Added Environmental-Man-''
 ; agement," Total Quality Environmental Management, Vol. 4, No.
  4 (Summer 1995), p. 2.   .  '      •                 ',..' _^
  3. As of this writing in early  1996, EPA's Environmental Ac-
 'counting Project is conducting a study of available tools and
  approaches for monetizing potential environmental liabilities
  for use in internal business  management decisions. The final
  paper is expected to be available in Spring 1996.   '
 . 4;  Adapted frbm.Susan Walters (of'Arthur Andersen &  Co.), '
  "Environmental Cost Accounting and Performance Measure-'
  ments," presented at The Strategic Environmental Management
  Conference, Washington, DC, December 6,1995.
  5.. "Environmental Management Systems-General Guidelines
  on Principles, .Systems and Supporting Techniques,"
  ISO1400X:199X, Draft International Standard, June 1995, p
 •37.   ..  \    •            '  '..      '  ,   '     •      •

 6. Total .Quality,Environmental Management, the primer (Global
 Environmental Management Initiative, 1993), pp. 18-19;-ISO/ '
 TC207/US SUBTAG 4, third working draft of an ISO standard
 on Environmental Performance Evaluation, ISO/WD 14031:3,
"p. 14.            .'       '

 7. Green Ledgers: Case Studies in Corporate Environmental Account-
 ing (D. Ditz, J. Ranganathan, and R.D. Banks,, eds., World' Re-
 sources Institute, 1995), p. 41.. EPA's Environmental Account-
 ing Project co-funded the development of this publication.!
 8. D. Cohan and D. Gess, "Beyond Pollution Prevention: A
 • Vision for an Integrated Environmental Business Management
 Strategy," Total Quality Environmental Management, Vol. 4, No.r
 2 (Winter 1994/95), pp. 18-19.                        '
 9. Green Ledgers (cited in' note 7) at p. 41.
 10. D. Cohan and D. Gess (cited in note 8) at p. 16.

 11.M.H.L Prokopyshen and C.E. DeLadufantey (of Chrysler
 Corporation), "Extending the .Enterprise: The Supplier Role in
 Product Stewardship," paper presented December 12,1995, at
 the Society of Automotive  Engineers International's Global
 Vehicle Development Conference, Dearborn, Michigan, Decem-
 ber 11-13,1995, Paper #952785, p. 4.  '             .     ;

 12.EPA, Environmental Accounting Case Studies:"Green Account-
 ing at AT&T, EPA742-R-95-003, September 1995, p. 22.
 13. Adapted from D.D. Wyckoff, "New Tools for Achieving Ser-
 vice.Quality," Cornell Hotel and Restaurant Administration Qitar-
 terly, November 1984.            *   '

 14. Green Accounting at AT&T (cited in note 12) at p. 31".' ;
Susan McLaughlin and Holly Elwood corhanage EPA's
Environmental Accounting Project, a voluntary program
housed in the Pollution Prevention Division of EPA's Office
of Pollution, Prevention and Toxics in Washington, DC. The
views and comments contained in this article are those of
the authors and do not necessarily reflect the views of the
EPA. The authors, gratefully acknowledge the reviews of •
drafts of this article provided by David Kling, John Cross,
Mary McKiel, Edward Weiler, Jordan Spooner, and John
Harman.-            '    •
Environmental Accounting and EMSs
                                                                                        S Pollution Prevention Review / Spring 1996 I 2.1

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