3EFA
How do Financial
Practices and
.Professions Affect
the Environment?
United State*
Environmental Protection
Agency •
Office of Pollution Prevention
and Toxics '
Washington. dC::2046O
EPA744F-93-002
xfre
Design for the
Fact Sheet
Accounting and Insurance Projects
Applications for Pollution Prevention ;
in Financial Professions
It is now well recognized that every business decision, whether
it involves the choice of raw materials, production processes, or
products, has an impact on the environment. Two even more
certain maxims are that financial or economic criteria affect every business-
decision and that every business decision affects die firm's "bottom line."
While it is true that some business planners and product developers have
begun to look beyond the boundary of their firm to the environmental impacts
of their activities, these same people have not moved away from the
fundamental premise that if an activity is profitable or cost-effective, the
business should try to do it; and if it is not profitable or cost-effective, it
should not. The challenge ahead for securing long-term environmental
protection is to develop the link between businesses' economic self-interest*
and protection of the environment. The most straight forward way to
accomplish this is to integrate environmental considerationsanto traditional
business functions, among them are financial functions Sucn as accounting,
capital budgeting, insurance, risk management, and lending and finan'ce.
To mobilize the power and potential of the f
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What is "Design for the Environment", or DFE?
As it is generally used, the term "Design for the Environment" (DFE) means making environmental
considerations an integral part hi the design of a product, process or technology. The concept of
DFE originated from industry's efforts to target specific environmental objectives for design engineers
to incorporate when creating a new product. Examples of DFE initiatives include designing for CFC
elimination, disassembly and readability.
What is the EPA's Design for the Environment Program?
The Office of Pollution Prevention and Toxics (OPPT) created EPA's Design for the Environment
Program (DfE) as a voluntary program that works closely with private sector partners. The DfE
Program promotes the incorporation of environmental considerations, especially risk reduction and
pollution prevention, at the front end of the design process. The DfE Program is OPPT's
contribution to industry environmental design initiatives.
The DfE Program has initiated a number of wide-ranging projects which operate through three levels
of involvement: infrastructure projects are aimed at changing general business practices hi order to
remove barriers to change and to provide incentives for environmental design and redesign of existing
systems (e.g., modify management accounting systems to fully account for environmental costs and to
improve capital budgeting practices to examine an array of investment options including pollution
prevention alternatives); cooperative industry projects are joint efforts to evaluate substitutes, share
risk, regulatory, and prevention information, and invoke behavioral change; and facility based
activities are projects to help individual businesses begin environmental design initiatives and adopt
new business practices as a result of their own assessment of alternatives.
How is Capital Budgeting and Cost Accounting Related to DfE?
Every business collects information for its own internal decisionmaking, e.g., costing and pricing
decisions, (managerial accounting) and to provide to external audiences such as bank stockholders,
creditors, bankers, and government (financial accounting). Every business also must decide how to
Divest its available capital in new equipment and-products. The process by which a firm makes these
investment decisions is known as the capital budgeting process and is part of the managerial
accounting process. At present, many cost accounting systems and capital budgeting processes do not
provide enough information to business managers to make optimal decisions in increasingly
competitive global markets. In the environmental arena, for example, part or all environmental costs
for treatment, disposal, and administration are often allocated to overhead cost pools which hi turn
mask the true environmental costs of a particular product or process. Potential future liabilities may
not be accounted for at all. As long as this and other cost information is hidden from managers,
costing and pricing decisions will underestimate the costs of some products and overestimate the costs
of others. Managers face, a-similar lack of information when they evaluate investment alternatives in
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new equipment and products. Without adequate information to include is the financial analysis of
capital investments, and given problems in the methods of analysis, mangers will not see the
advantages of investments that prevent pollution and minimize environments! impacts.
EPA's DfE project seeks to promote the design and development of better accounting and capital
budgeting practices within firms' managerial accounting systems.
What is the Capital Budgeting and Environmental Accounting Project?
The long-term objective for the accounting/capital budgeting project is to promote "full cost pricing"
of products and processes with emphasis on environmental cost/benefits. Initial emphasis will be on
those costs and benefits which impact the firm's bottom line. There are four specific; goals for this
project:
(1) Stimulate the development and adoption of improved managerial cost accounting systems that
; allocate environmental costs to products and processes.
(2) Stimulate the development and adoption of financial analysis/capital budgeting tools and
practices to evaluate the quantitative and qualitative aspects of investments, thereby putting
pollution prevention investments on a level playing field.
(3) Stimulate development of programs to educate relevant disciplines (e.g., MB As, CPAs,
CFAs, engineers, and environmental policy and natural resource professionals).
(4) Facilitate dialogue and interest among the many stakeholders traditionally involved in
managerial accounting, including capital budgeting. Traditional stakeholders include plant and
corporate personnel for operations, finance and accounting, and the outside accounting
community. Additional stakeholders include federal, state, and local governments,
universities, labor and environmental interest groups, and the public.
Dialogue and Building Partnerships with the Experts '
To facilitate dialogue on the design of better accounting and financial analysis tools, EPA continues to
develop a network of experts and to solicit their input on the best ways to develop and promote
innovative accounting and capital budgeting practices. The culmination of these efforts will be a
multi-sponsored workshop held in Washington, DC in September, 1993.
Develop and Pilot Analytical Tools and Methods
The most important goal of EPA's voluntary partnership is to develop and implement analytical tools
and methods for environmentally aware managerial accounting and investment analysis. For some
years now, EPA has been funding the development and piloting of tools. The Total Cost Assessment
Methodology (which is contained in the EPA report "Total Cost Assessment - Accelerating Industrial
Pollution Prevention through Innovative Financial Analysis," EPA/741/R-92/002, May 1992) and the
Pollution Prevention Benefits Manual are two methods for innovative capital budgeting analysis. The
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Agency is presently funding the development and pilot testing of an innovative managerial accounting
methodology with the World Resources Institute and New York University.
To disseminate innovative financial tools, EPA is working with the American Society for Testing and
Materials to incorporate a "total cost assessment" methodology into their upcoming "Guide to Setting
up a Corporate Pollution Prevention Program." .
i
Curriculum Development
Because EPA recognizes the opportunity and importance of preparing future generations of
decisionmakers to grapple with tough problems concerning environmental protection and wise
business practices, we established the National Pollution Prevention Center at the University of
Michigan. The Center is a collaborative effort of EPA, business, industry and academia and offers:
curriculum modules; short courses; internships; and conferences and workshops.
In addition to other disciplines, the Center has begun developing pollution prevention modules for
undergraduate and graduate courses in business and accounting.
What is the DfE Insurance Project?
EPA is working to incorporate pollution prevention principles into the day-to-day practices of
insurance underwriters and brokers, and corporate risk managers. Through cooperative ventures
with these groups, EPA believes there are significant opportunities to stimulate voluntary changes in
these important business activities.
In the short run, the Agency has entered into a cooperative effort with the American Institute of
Chartered Property and Casualty Underwriters (AICPCU). AICPCU is a non-profit, independent
organization offering educational programs and professional certification to people in the property and
liability insurance business. The Institute offers a broad array of certification programs for insurance
underwriters and brokers, and corporate risk managers.
EPA is working with AICPCU to modify the curriculum for the Associates hi Risk Management
(ARM) program to incorporate pollution prevention into their certification program.
b There Additional Information Available on EPA Initiatives for the Financial Professions?
For more information about the EPA's initiatives for the financial professions: Marty Spitzer, capital
budgeting or accounting; or Julie Shannon, insurance; Pollution Prevention Division (7409), Office of
Pollution Prevention and Toxics, US EPA, 401 M Street, SW, Washington, DC 20460; telephone,
(202) 260-3557; and FAX, (202) 260-0178. For copies of DfE fact sheets or the reports mentioned
in this fact sheet, contact the Pollution Prevention Information Clearinghouse at (202) 260-1023.
Printed on Recycled Paper
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