Methods for Measuring Social and Environmental Costs - Research Paper Example

Abstract The purpose of this paper is to look at the validity of the methods that companies use when measuring social and environmental costs. Different companies use different methods, which vary greatly. To achieve this we shall compare the information available from the company disclosures of five different public companies. In doing so, we shall evaluate these methods in view of current literature on social and environmental costs. We shall look at how a company can address these issues while planning for future growth of the company. Environmental impact measurement allows companies to understand which products and or business processes are sustainable in the future. Thus, how well a company understands and deals with this issue gives the business an upper hand on growth trends. This is because a lump sum investment now on green or sustainable development will lead to immense cost reductions over the long run. Introduction For many years, companies have ignored the social and environmental impact of their business processes. What many organizations failed to realize is that these externalities impacts negatively on future business activities of the company or organization as regulatory, production, and raw material acquisition costs increase in future. Such instances have succeeded in driving certain companies out of business. The price of environmental damage is borne by all citizens including these organizations. Thus, the earlier the organizations take care of social and environmental costs the better for them. For the sake of this analysis, I will concentrate on issues of waste, packaging, and energy issues. Thus, we shall view these hidden costs associated with environment and the society in general. With respect to the global responsibility initiative many companies have made the decision to voluntarily disclose social and environmental impact assessment and costs in their annual reports either as separate from the financial report or as part of it. Many companies have adopted different ways of disclosing this information. For the sake of this assignment, we shall be considering: Rio Tinto Alstom PepsiCo British petroleum Wal-Mart The five companies are public companies and will be the basis for analysis Problem statement Lack of social and environmental cost disclosures in annual reports is undermining the concept of sustainable growth and development. Objectives of the research The objective of this research is to find out whether social and environmental cost disclosures in annual reports or as separate, disclosures enhance sustainability or not. Thus, we shall analyze the disclosures of the five mentioned companies and see whether they are in line with current literature on the measurement of social and environmental costs. We shall also see how the current available literature dictates on measurement of social and environmental costs. Chapter two Literature review Over the years, environmental reporting guidelines continue to emerge regarding the information that should be contained in environmental reports. Measurement of social and environmental costs and benefits arising from business operations need to be well documented to make it possible to evaluate how much corporate organizations are geared towards achieving sustainable growth (Hibbit 2004:65). The main concern of most of these guidelines is on social and environmental costs. Many scholars have questioned the actions of certain companies indicating environmental and social remediation costs as social and environmental costs. This is because the cost of remedying the problem is a direct cost to the company since it destroyed the environment in the first place. According to Kokubu and Nashioka, a company’s disclosed environmental costs should consist of: Cost of controlling environmental impacts caused by a company’s production processes in a given locality Cost of controlling downstream/upstream effects of a company’s business operations Cost of environmental management initiatives Research and development cost of finding better or cleaner modes of production or service delivery Social cost activities Environmental damage costs (2005:323). In line with environmental cost disclosures, companies should also disclose social and environmental benefits arising from their business operations in different regions of the world. Unfortunately, only few companies consider environmental reporting as an important component of internal management since a majority of them view this as important for external reporting purposes only. According to many scholars, the accounting profession had to find a way of equating the company profits to other benefits to the planet and the people themselves. The three “Ps” of accounting were introduced as a concept of taking care of people, planet, and profit. This is the “triple” mode of bottom line reporting. Beau and Fenn 1972, observed that introduction of a social perspective to financial reporting would lead to improvements not only of company profitability but also in environmental and social standards. Government regulation, public opinion, and attitudes have also forced many companies to adopt a more environmentally friendly mode of reporting since the 1990s. This is because environmental protection groups have been aggressively campaigning to people to reject products or services from companies or organizations that do not adhere to environmental preservation and conservation guidelines (Bakan, 2004). Packaging, energy, and waste management have been highlighted as the key benchmarks of ensuring sustainable growth. Thus, the cost and nature of the packaging materials a company uses have been subject to constant regulation to avoid environmental degradation. The use of green energy and waste recycling as well as reduction of landfill disposal have been also emphasized as key elements that social and environmental disclosures of companies should address and inform the public. Chapter three Methodology This research will focus on how the five companies report on different areas. The companies are randomly selected from various sectors concentrating more on Australian companies since we shall be looking at some of the changes that have taken place in Australia since the publication of the triple bottom line reporting guide in 2003. We shall concentrate on either the financial reports, sustainability disclosures, and other environment based disclosures available to ascertain how these companies deal with social and environmental costs or how they propose to deal with them in the future. We shall review available disclosures from 2005 to date. This will give us the current state of affairs since that is what we are interested in understanding. Validity of the measurement methods used by the five companies selected Rio Tinto Rio Tinto is a multinational British-Australian owned mining company. It has headquarters in both countries. It was ranked the fourth largest publicly owned mining company in the world with net assets of around $134 billion in 2009 (riotinto.com). According to Rio Tinto’s social, safety and environmental report business value is equivalent to a combination of environmental, financial, and social outcomes (riotinto.com). The total impact of as business process the report says is inclusive of the social impact, the financial cost and environmental impact. The company proposes different measurement methods but regardless of the method, the company believes the following factors are important in measuring any social and environmental cost or benefit. These factors are: Reduction of water usage Reduction of disruption or disturbance on water bodies and land Reduced loss of biodiversity Reduced greenhouse and other emissions Reduced accidents Improvement of employment opportunities for all Rio Tinto observed that in a sensitive industry like mining short-term profits would not be the maximum value the managers can offer to shareholders. They noted that in the business word, promises of CSR and sustainable development are large but the delivery of these promises is flawed and partial to say the least. In its accounting, practices riot into estimates its environmental and social costs as a percentage of its EBIT (earnings before interest and taxes). Alstom Alstom is a French multinational company operating in transport and power generation sectors (alstom.com). The company has been key in value creation to not only shareholders but the public as well. This has made the company to adopt innovation and technological advancement as key levers to induce sustainability. According to the company’s 2009 annual report there were various disclosures on what the company has been doing in measurement and management of social and environmental costs as well as what it intends to do in the future. In the 2009/10, financial disclosure the company pointed out that in an attempt to stay competitive and environmentally conscious the company has increased operational expenses in research and development that has almost doubled in five years to 614 million dollars for purposes of: Turbine upgrading Adoption of renewable energy (wind and ocean energy) In the process the company promises to recycle 80% of its waste by 2015, have all manufacturing sites ISO 14001 certified by 2012, and reduce water consumption by 20% by 2015. The Alstom foundation has also funded 24 environmental projects I the 2008-2009 financial years. On social costs, the company has been able to reduce injury frequency rate from 5.5 to 2.3 between March 2007 and March 2009. The company’s objective is to reduce this rate at a figure below 1 by 2015. The company also plans to reduce backlog by around 15%. This according to company executives will help to reduce environmental degradation by almost the same margin since once projects are completed on time there will be less likelihood of extensive environmental damage (alstom.com). PepsiCo PepsiCo is an American based multinational enterprise with its headquarters in New York. It specializes in manufacturing, distribution, and marketing of beverages, snacks, as well as a range of other products. In terms of revenue, the company is the second biggest food and beverage company in the world. The promise of PepsiCo is that performance with purpose means the delivery of sustainable growth through investments of healthy future for the people and the planet (pepsico.com). on environmental sustainability the 2009 annual report continues to say that “…it’s a promise to be a good citizen of the world, protecting the earth’s natural resources through innovation and more efficient use of land, energy, water and packaging in our operations” (PepsiCo 2009 annual report). On water the company promises to improve water use efficiency by 20% per unit of production by 2015, provide water to three million people in developing regions also by 2015. On land and packaging, the company declares that it will continue to use at least 10% recycled PET internationally in soft drink containers. It intends to promote recycling efforts to 50% by 2018, reduce packaging weight by 350 million pounds and thus reduce landfill waste by 1 billion pounds by 2012, as well as eliminate solid waste to landfills in all production sites (PepsiCo 2009 annual report). On energy and climate change, the company hopes that by 2015 it will increase electricity efficiency by 20%, fuel use to reduce by 25% by the same time, with partnership with EPA reduce GhGs (green house gases) by 25%. British petroleum British petroleum (BP) is a UK based oil and gas multinational company. It is the world’s third biggest company operating in the energy sector. It is also the world’s fourth largest company in terms of revenue. Over its course of operations the company’s CSR has had mixed records. It has received widespread criticism over environmental and safety incidents especially the recent Gulf of Mexico oil spill. Due to such incidents, BP invests around $1 billion in renewable energy development. The company has also promised a further $8 billion up to 2015 on renewable energy sources (bp.com). Bp is one of the few companies that incorporate environmental and social costs as separate entities within the financial report. In the companies’ 2010 annual report the environmental and other provisions was worth 54 million dollars, in exploration and production, $98 million on refining and marketing, and $103 million on corporate and other businesses (bp.com). This does not include environmental remediation costs, which are catered for in a different fund. This does not include the $20 billion set aside for dealing with the Gulf of Mexico oil spill. However, capital and operating expenses on control, elimination, prevention, and abatement of water, air, and solid waste is not reflected as a separate entity. Instead, they make approximations from the maintenance expenditure, $716 million in 2010. The company has also gone further to provide for provisions for catering for future remediation. This is not a very acceptable accounting method according to many scholars since the company should expense the cost of destroying the environment today rather than making provisions for remedying its actions on a later date. This is because when the time comes there will be no expenses for the destruction that will be arising then. Wal-Mart Wal-Mart is an American multinational enterprise. It has a workforce of more than two million employees making it the world’s largest private employer. As of 2010, Forbes magazine values Wal-Mart as the world’s largest retail chain. The company’s social and environmental impacts have been analyzed by many scholars. The social impact of the company has been described as one of the worst since there is empirical evidence showing that a town can lose 50% of its retail stores within a few years of the opening of a Wal-Mart store. To contain social and environmental impact Wal-Mart is committed to reduce GHGs by 20 million metric tons by 2015. In addition, the 2010 financial year saw the company reduce plastic bag consumption by 16% on a global perspective. The sustainability progress report gives information on the progress that Wal-Mart has achieved in reducing costs associated with its operations including, decreased waste, resource use, energy, access to markets, competitive advantage, and insurance premiums (walmartstores.com/sustainability). Discussion From the discussion above it is clear that there are many costs and benefits arising from social and environmental cost disclosures. From different studies, it has been showed that in the initial years of these disclosures. This is because of initial investment costs and inability of organizations to realize the benefits this early. However these disclosures help organizations later on to make informed decisions on cost reduction measures as we have seen above (Merrick and Crookshanks, 2001). As a result companies that have been making environmental disclosures for over seven years are able to reap many economic benefits since they have enough time to invest in new technology, seen the benefits of research and development, and improved their internal processes in order to reap the benefits of social and environmental cost measurements. Regardless of these benefits, some of these companies are criticized for “green washing.” Green washing refers to the practice of using a very small percentage of company revenues or profits to averse environmental damage or the act of lying about their activities. For instance, there are companies that promise elimination of landfill waste on all production facilities. After promising this these, companies go ahead and dump the waste in other sites or countries without following disposal guidelines set in the home countries. This is also considered an act of green washing since there is no environmental protection or conservation that takes place. Recommendations and conclusion From the analysis, we have seen there are many benefits arising because of social and environmental disclosures. Thus, it is important for governments across the globe to ensure that all corporations follow environmental protection guidelines. This is the only way that the "people, planet, profit" impact of corporations will be felt. In addition, to oversee the implementation of these guidelines corruption or the rent seeking behavior should be minimized if not eliminated from all private organizations and public offices. List of references “Letter to Shareholders.” Retrieved 02 April 2, 2011. Available at: http://www.pepsico.com/annual09/letterShare_intro.html Alstom. 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(2009) Recurring failures in corporate governance: a global disease? Business Horizons, 52, pp 545-552. Read More