Chapter 15: Social and environmental issues

Chapter learning objectives

Upon completion of this chapter you will be able to:

  • describe and assess the social and environmental effects that economic activity can have (in terms of social and environmental 'footprints')
  • explain and assess the concept of sustainability and evaluate the issues concerning accounting for sustainability (including the contribution of 'full cost' accounting)
  • describe the main features of internal management systems for underpinning environmental accounting such as the Eco-Management and Audit Scheme (EMAS) and ISO 14000
  • explain the nature of social and environmental audit and evaluate the contribution it can make to the development of environmental accounting.

1 Sustainability

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (WCED 1987).

Sustainability can be thought of as an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future.

  • It relates to the continuity of economic, social, institutional and environmental aspects of human society, as well as the non-human environment.

Definitions of sustainability

The concept of sustainability has become important with growing awareness of the impact of organisations on the environment. It is linked to the concept of globalisation and large companies seeking to show that they wish to limit environmental damage. The production of corporate and social responsibility (CSR) reports by approximately 50% of global companies identifies commitment to this belief.

First definition

The first definition above focuses on sustainable development, which is the main focus of CSR reports. In other words, business activities should be sustainable. Companies including BP, Nokia, Shell and Volvo refer to this concept in their reports. Development is sustainable as long as future generations can also meet their requirements.

Sustainable development therefore refers to the concept of intergenerational equity, i.e. equality between one generation and another in terms of needs being satisfied. However, this definition is limited to environmental concerns. Recent thinking has also linked sustainability to economic and social concerns.

Second definition

This definition also incorporates economic and social concerns. To be precise, the definition includes the concept of the Triple Bottom Line (TBL) of John Elkington. TBL attempts to show the full cost of development and that businesses should have a triple goal set incorporating not only economic, but also social and environmental objectives.

Economic perspective

This perspective recognises that there are limits to economic growth (as outlined by Meadows in 1974 in the Report to the club of Rome – The limits to growth). Meadows recognised that the earth is a finite system and therefore economic development, based on this finite system, must also be limited.

Sustainability relates to the organisation in terms of planning for long-term growth, ensuring that the organisation will continue to be in existence for the foreseeable future.

Examples of unsustainable activities include:

  • strategies for short-term gain (e.g. increase in share price)
  • paying bribes or forming cartels (which are potentially unethical as well as unsustainable in terms of activities that can be continued indefinitely without adversely affecting markets)
  • suspect accounting treatments and underpayment of taxes – being unsustainable in terms of the organisation not contributing to maintaining the countries' infrastructure (schools, roads, etc.).

Social perspective

This perspective recognises that organisations have an impact on communities and may in fact change their social make-up. The perspective is relatively new (1990s onwards) and results from recognition of the impact of businesses, with particular reference to the less-developed regions of the world.

Sustainability in this context relates to the concept of social justice. A UN report in 2001 (Report on the world social situation) noted large and increasing differences between income and wealth with reference to richer and poorer nations.

  • Examples of situations where social justice appears to be required include:
    • rich consuming countries and poorer manufacturing countries, and
    • urban 'rich' and rural 'poor'

Environmental perspective

This perspective recognises that organisations have an impact on the environment and that lack of concern means deterioration and eventual loss of some resources. The perspective was the first to be recognised, being linked initially to forestry management.

Sustainability in this context relates to the effective management of environmental resources so that they continue to be available for future generations. Human activities use environmental resources, so sustainability implies limiting use or replacing those resources in the medium- to long-term.

Examples of situations where the environmental perspective is seen as critical include:

  • the use of non-renewable resources including oil, gas and coal
  • long-term damage to the environment from carbon dioxide and chlorofluorocarbons (CFCs)
  • whether future generations can actually enjoy the same standard of living, given the finite nature of many resources.

Significance of sustainability

  • Sustainability affects every level of organisation, from the local neighbourhood to the entire planet.
  • It is the long-term maintenance of systems according to environmental, economic and social considerations.
  • Sustainability can be measured empirically (using quotients) or subjectively.

Illustration 1 – Rio Tinto

Rio Tinto is one of the world's largest mining corporations with operations spanning the globe. Its products include aluminium, copper and iron ore. One example of the size of their operations relates to iron ore extraction in Guinea which is forecast to exceed 600 million tonnes of iron ore per year in the near future.

To combat criticism relating to the depletion of non renewable resources and the inevitable environmental and social impact its operations incur, the company has fought hard to improve its position regarding sustainable development.

In 2007 Rio Tinto was listed on the FTSE4Good and Dow Jones Sustainability index , achieving platinum rating on the Business in the Community's Corporate Responsibility, Environment and Community indexes.

Its environmental goals include a 10% reduction in freshwater usage and a 4% reduction in green house gas emissions within a five year period and the need to ensure all sites achieve ISO14001 certification within 2 years of acquisition or commissioning.

Brundtland Commission

Another view on sustainability was provided by the 1983 World Commission on Environmental and Development (WCED) also known as the Brundtland Commission after its chairman Harlem Brundtland. The Brundtland Commission report 'Our Common Future' was published in 1987. The main emphasis of the report was the phrase:

'Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their needs.'

The report provides detailed guidelines on four areas.

(1)Provide environmental strategies for achieving sustainable development to the year 2000 and beyond.

(2)Recommend ways in which concern for the environment can be translated into co-operation on environmental issues.

(3)Consider ways in which the environmental community can deal more effectively with environmental concerns.

(4)Provide methods of protecting and enhancing the environment in the long-term.

The full report is available on the Internet although this summary is sufficient for examination purposes.

2 Effects of economic activity

There are a number of different environmental and social effects which should be considered when examining economic activity.

  • Economic activity is only sustainable where its impact on society and the environment is also sustainable.

Environmental footprint

In the same way that humans and animals leave physical footprints that show where they have been, so organisations leave evidence of their operations in the environment. They operate at a net cost to the environment.

  • The environmental footprint is an attempt to evaluate the size of a company's impact on the environment in three respects:
    • The company's resource consumption.
    • Any harm to the environment brought about by pollution emissions.
    • A measurement of the resource consumption and pollution emissions in terms of harm to the environment in either qualitative, quantitative or replacement terms.
  • Where resource use exceeds provision, then the activity can be termed unsustainable.

Measuring impact of economic activity

Economic activity has social and environmental effects. In general terms, that activity is only sustainable where the long-term impact on the environment and effect on society is sustainable. If the impacts are not sustainable, then the economic activity itself is unsustainable.

In terms of organisations, the effect of their social and environmental activities, i.e. their social and environmental footprints, must be sustainable. Lack of sustainability implies that the organisation is also not sustainable.

There are two methods of measuring sustainability; the quotients approach and the subjective approach.

Illustration 2 – Environmental footprint

The environmental footprint

An economic activity may require 15 million gallons of water. If the organisation's share of available fresh water is less than this, then the activity can be termed unsustainable. Using the quotients approach, this can be shown as follows:

However, the environmental footprint extends to more than just water use, e.g. the production of laundry detergent has various environmental impacts:

Test your understanding 1

Suggest ways in which an airline could seek to limit its environmental footprint.

Social footprint

The social footprint evaluates sustainability in three areas of capital:

  • social capital
  • human capital
  • constructed capital.

Organisations need to ensure that their economic activities are sustainable in each of these three areas.

Social footprint

The social footprint evaluates sustainability in three areas termed 'Anthro capital'.

Organisations need to ensure that their economic activities are sustainable in each of these three areas. For example, regarding social capital, the government will set taxation rates, with those taxes being used to provide various services. Where the amount raised is less than the amount required for the provision of social capital, then the activities of society as a whole are unsustainable. The government will need to raise taxes meaning that companies will pay more tax.

Sustainability is achieved where the social capital needs of society are being met. It can be argued that economic activity itself is unsustainable if education is insufficient to meet the needs of society.

Sustainability can be shown using the quotients approach as follows:

The importance of the social footprint is that more capital can be generated if required. E.g. people can decide to improve their knowledge. The aim of economic activity may therefore be to generate sufficient social capital, or have a large enough social footprint, to ensure sustainability.

Note: This is a relatively new area of research so watch out for relevant articles in the press, etc. as part of your studies.

3 Accounting for sustainability

Two methods which attempt to account for sustainability are 'full cost' and 'triple bottom line' accounting.

Full cost accounting

  • Full cost accounting means calculating the total cost of company activities, including environmental, economic and social costs.
  • It attempts to include all the costs of an action, decision or manufacture of a product into a costing system, and as such will include many non-financial costs of certain actions.
  • The aim of full cost accounting is to internalise all costs even those which are incurred outside of the company.

Full cost accounting

Full cost accounting (FCA) attempts to include all the costs of an action, decision or manufacture of a product into a costing system. Most budgets and financial accounts are based on actual costs incurred. FCA includes the additional (and in many situations non-financial costs) of those actions. The aim is to internalise all costs, including those which are incurred outside of the company.

Taking car manufacture as an example:

  • An initial outlay on a factory will be included within one year's budget. However, that factory will incur costs in every year it is used and therefore those costs must be shown as being incurred over the life of the factory.
  • The location of the factory may incur costs even though no cash outlay is involved. For example, the time lost from traffic queues as workers attempt to reach the factory, or the additional cost of pollution from cars in those queues are costs, even though the company has no financial outlay for them.
  • The cars being manufactured will have a finite life, however the company has no obligation to dispose of the used product at the end of that life. FCA would include the disposal cost and associated environmental damage. Some car manufacturers have recognised this cost and now advertise their cars as being recyclable, even if the company does not actually carry out that recycling (yet).

FCA is therefore the normal 'costs' in terms of running a company with the additional costs to recognise the additional external costs.

Triple Bottom Line (TBL) accounting

  • TBL accounting means expanding the traditional company reporting framework to take into account environmental and social performance in addition to financial (economic) performance.
  • The concept is also explained using the triple 'P' headings of 'People, Planet and Profit'.


TBL attempts to show the full cost of development, and that businesses should have a triple goal set incorporating not only economic, but also social and environmental objectives. This is commonly shortened to the triple 'P' headings.


People expands the concept of stakeholder interests from simply shareholders (as in financial reporting) to other groups including employees and the community where the company carries out its business. Actions of the company are therefore considered in light of the different groups, not simply from the point of view of shareholders.

For example, a TBL business would attempt to pay its workers fair wages, maintain a safe working environment and not use child labour, although these practices will decrease the amount of profit available for shareholders.

Similarly, the company would promote its surrounding community, e.g. by providing educational opportunities or a safe community to live in (as in the Bourneville estate established by Cadbury the chocolate maker in England).


Planet refers to the environmental practices of the company to determine whether they are sustainable or not. The TBL company attempts to reduce the 'ecological footprint' by managing resource consumption and energy usage. The company therefore attempts to limit environmental damage. For example, production processes will be efficient in terms of resource use and environmentally damaging outputs such as toxic waste eliminated. The company believes it is inappropriate to produce toxic waste as the environmental cost of disposal is normally borne by the government and society as a whole.

The drive for environmental stability also means that TBL companies will not be involved in resource depletion. For example, fish stocks are maintained at sustainable levels and timber use is balanced by replanting to retain the resource into the future.


Is the 'normal' bottom line measured in most businesses. As noted above, a non-TBL company will seek to maximise this measure to improve shareholder return. A TBL company on the other hand will balance the profit objective with the other two elements of the TBL.

TBL and business ethics

TBL implies that businesses must consider the full cost of their impact on the environment. However, that cost may also be seen in terms of the potential to contribute to sustainability.

Ethical practice may therefore simply relate to businesses limiting environmental, economic and social damage according to their actual ability in those areas. Accounting techniques are important for measuring success, but sustainability also implies desire for action which provides the ethical approach to the issues.

Test your understanding 2

Explain whether the growth in air travel is sustainable in terms of the TBL in areas of:

AEconomic sustainability.

BEnvironmental sustainability.

CSocial sustainability.

4 Management systems

Environmental accounting relates to the need to establish and maintain systems for assessing the organisation's impact on the environment.

EMAS and ISO 14000 are both systems that support the establishment and maintenance of environmental accounting systems.

Many companies refer to the standards in their CSR reports.

Eco-Management and Audit Scheme (EMAS)

  • EMAS is the Eco-Management and Audit Scheme. It is a voluntary initiative designed to improve companies' environmental performance.
  • EMAS requires participating organisations to regularly produce a public environmental statement that reports on their environmental performance.
  • Accuracy and reliability is independently checked by an environmental verifier to give credibility and recognition to that information.
  • EMAS requires participating organisations to implement an environmental management system (EMS).
  • There are four key elements of the scheme:
    • Legal requirement
    • Dialogue/reporting
    • Improved environmental performance
    • Employee involvement.


  • ISO14000 is a series of standards dealing with environmental management and a supporting audit programme.
  • The ISO formulates the specifications for an EMS.
  • EMAS compliance is based on ISO 14000 recognition – although many organisations comply with both standards.
  • ISO 14000 focuses on internal systems although it also provides assurance to stakeholders of good environmental management.
  • To gain accreditation an organisation must meet a number of requirements regarding its environmental management.

EMAS and ISO14000

Benefits of compliance with either standard

  • Reduced cost of waste management.
  • Savings in consumption of energy and materials.
  • Lower distribution costs.
  • Improved corporate image among regulators, customers and the public.
  • Framework for continuous improvement of the companies' environmental performance.

5 Social and environmental audit

Social auditing

  • A process that enables an organisation to assess and demonstrate its social, economic, and environmental benefits and limitations.
  • Also measures the extent to which an organisation achieves the shared values and objectives set out in its mission statement.
  • Provides the process for environmental auditing.

Elements of a social audit

Social audit

The social audit – overview

  • Statement of purpose.
  • Review results of last year's purpose and plans.
  • Establish this year's purpose and plans.

External view

Obtain the view of external stakeholders to form a view of the organisation's position within the wider context.

Internal view

Obtain views of the board of directors, staff and volunteers to assess satisfactory ways of working and reward. This helps to ensure that organisational management and systems can achieve the stated purpose and plans.

Review and planning

The social audit team manages the social audit and measures performance ready for input into next year's social audit.

Detail on social audit

The concept of social audit is to provide additional information on a company's activities over and above the financial accounts. In this sense it has links with TBL and FCA. The main difference in a social audit is the active involvement of external stakeholders, and in many situations the publication of a social audit by those external stakeholders. For example, one company, Social Audit Ltd, provides social audits on companies, sometimes without the active participation of the companies.

Typical sections of a social audit report include:

  • an overview of the company including salient features of the financial accounts
  • the company's stance regarding employees such as how pay and benefits are negotiated, provision of job security and policies on discrimination in the areas of sex, race and disabilities
  • overview of products with negative environmental impacts
  • the environmental impact of the company itself in terms of pollution, emissions, recycling, etc. and health and safety policies
  • the social impact of the company in terms of community support
  • response, if any, from the company.

In effect, the social audit is evaluating the organisation's footprint (social, environmental, etc.) within a given accounting period from the external perspective.

Environmental auditing

  • Aims to assess the impact of the organisation on the environment.
  • Normally involves the implementation of appropriate environmental standards such as ISO 14001 and EMAS.
  • Provides the raw data for environmental accounting.
  • An environmental audit typically contains three elements:
    • agreed metrics (what should be measured and how)
    • performance measured against those metrics
    • reporting on the levels of compliance or variance.

Refer to the Examiner's article published in Student Accountant in March 2009 "Risk and Environmental Auditing”

Environmental audit

The environmental audit – overview

An environmental audit leads into an environmental action plan.

The audit is based on the implementation of the appropriate environmental standards, e.g. ISO 14001 or EMAS, which were explained in the previous section.

The main areas to cover within the environment audit normally include:

  • waste management and waste minimisation
  • emissions to air
  • ground and groundwater protection
  • surface water management
  • energy and utility consumption
  • environmental emergencies
  • protection of environmentally sensitive areas
  • product/service stewardship
  • management of contractors control of visitors
  • local issues.

Environmental accounting

  • This is the development of an environmental accounting system to support the integration of environmental performance measures.
  • It builds on social and environmental auditing by providing empirical evidence of the achievement of social and environmental objectives.
  • Without social and environmental auditing, environmental accounting would not be possible.

The aims of environmental accounting are:

  • to use the metrics produced from an environmental audit and incorporate these into an environmental report, and
  • to integrate environmental performance measures into core financial processes to generate cost savings and reduce environmental impact through improved management of resources.

Environmental accounting

Environmental accounting – overview

Definition: 'to develop an environmental accounting system to support the integration of environmental performance measures into our core financial processes, and to track internal environmentally significant expenditure' (Environmental Policy Statement 12 July 2000) issued by the UK Environment Agency.

Benefits of environmental accounting

Cost savings

To utilise resources efficiently and effectively, and in doing so generate cost savings.

Environmental improvements

To support the delivery of the environmental audit which will benefit the company and the environment – see above for a list of those areas involved with environmental audit.

Corporate governance

To assist in the management of environmental risks and operational costs including the publication of environmental accounting disclosures in corporate documents such as the annual and CSR reports.

Examples of measuring impact on environment

Examples of the areas discussed above include:

Mass balance

Environmental accounting can also be explained in terms of the 'mass balance'. This system shows what inputs (that is materials) have been converted into finished goods as well as emissions and recyclable waste products. In effect, the mass balance shows the inputs to a production process in weight terms compared to the outputs produced. The aim is to minimise inputs and non-recyclable outputs.

6 Chapter summary

Test your understanding answers

Test your understanding 1

  • Discuss more efficient engine design with manufacturers.
  • Provide information to customers on the environmental impact of air travel.
  • Limit the amount of baggage customers are allowed to carry – and impose surcharges for amounts over this limit.

Test your understanding 2

A Economic sustainability

  • There are limits to growth as air travel currently depends on the use of non-renewable resources (primarily oil).
  • In the short-term airline companies are stable due to demand for air travel.
  • In the long-term airline companies may not be sustainable as air travel in its current form cannot be provided indefinitely.

B Environmental sustainability

  • Air travel does not appear to be sustainable due to damage to the environment (carbon dioxide emissions).
  • As noted above, air travel also uses non-renewable resources.
  • Damage to the environment may continue, as long-term effects take longer to be noticed.

C Social sustainability

  • Air travel can change communities because it provides cheap and quick methods of moving people around the world. Individual communities find it more difficult to be 'isolated' or unchanged by other social systems.
  • While appearing 'cheap', air travel is still expensive for poorer communities. In social terms it accentuates the difference between richer countries (where 'cheap' air travel is affordable) and poorer countries (where air travel is still 'expensive').

Created at 5/24/2012 12:38 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 8/14/2012 12:20 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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