A critical component of industry’s environmental management activities is how companies develop, analyze, prioritize, and choose environmental projects for implementation. The process and metrics that are used to determine and choose projects, such as P2 activities, are important issues for DoD installations. Commercial facilities and defense installations face the same difficulties when choosing and justifying environmental projects. In many companies, environmental projects must meet the same rate-of- return requirements as other business projects. Given the inherent difficulty and uncertainty of assessing the costs and the benefits of many environmental activities, understanding the methods that proactive companies use is especially important.
USING ENVIRONMENTAL ASSESSMENT, METRICS, AND ACCOUNTING
Proactive company sites facilitate and conduct environmental assessments and use accounting practices that integrate environ- mental concerns into core business processes. In such companies, management encourages and supports comprehensive and innova- tive environmental accounting practices. The support often includes accepting some nontraditional approaches, since there is as yet little tradition for environmental accounting and economic analyses.
Proactive companies also provide effective analytic environmental assessment tools, both formal and informal, and maintain a support- ive organizational environment for their use. These companies also effectively use environmental metrics to help measure progress
toward corporate goals, assist environmental assessments, and help motivate behavior.
Environmental Accounting
Historically, many environmental costs, such as costs associated with raw materials, manufacturing processes, and product design, were hidden in conventional accounting categories, such as labor, main- tenance, research and development, overhead, and marketing. Such traditional financial accounting practices meant that innovative environmental cost-saving activities, such as P2, were not being implemented within companies and that proactive managers were not credited when they achieved innovative environmental savings.
However, new environmental and full-cost accounting tools and techniques are changing such practices.
The definitions of environmental accounting and such related terms as full-cost accounting and environmental cost accounting depend on the user. In general, environmental accounting refers to the incorpo- ration of environmental costs and information into a variety of cor- porate decisionmaking and accounting processes.1 Environmental accounting techniques try to capture the full range of costs associ- ated with environmental activities, including conventional, hidden, contingent, and image costs. Conventional costs refers to costs from chemical purchases and storage, maintenance, labor, and utilities.
Hidden costs are costs associated with such items as ancillary chemi- cal and material inputs; waste management, treatment, and disposal;
regulatory compliance; fees and taxes; insurance; and production costs. Contingent costs are associated with unexpected future occur- rences, such as liabilities for spills, cleanup, and worker injuries.
Image costs are the costs associated with facility image and relation- ships outside the company, such as “good neighbor” activities, bad publicity, affects on clients or consumers, and the affects of a good or bad relationship with regulators.2
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1For discussions of different environmental accounting terms and the application of such techniques, see Ditz et al. (1995), Bailey and Soyka (1996), and Graff et al. (1998).
2For examples of where to find convention and hidden costs and more complete dis- cussion of all these costs, see Kennedy (1998).
Collecting these data and assessing the environmental costs, espe- cially the hidden, contingent, and image costs, can be very difficult.
In addition, companies that are proactively taking an integrated facility approach are focused on addressing the hidden, contingent, and image costs. Such approaches have expanded the traditional definition of costs, taking both a short- and a long-term view. For example, cost assessments focus not just on immediate regulatory compliance but also on such long-term issues as potential future liabilities, financial savings from implementing new environmental technologies, and the effects on corporate reputation.
Proactive firms recognize that environmental accounting offers a wide range of benefits. In an effort to educate businesses about envi- ronmental accounting, U.S. EPA (undated) has argued that environ- mental accounting can help companies
• gain competitive advantages
• increase profits
• guide new product and process development
• increase revenues through improved EMSs
• guide improvements in product and material use
• reduce costs through energy and resource efficiency
• identify opportunities to minimize compliance costs
• support the capital budgeting process
• improve investor return
• improve community satisfaction and confidence.
The decreasing costs of complying with current and potential future regulations and assessing costs of operational flexibility are two very important benefits, as the Intel P2 permit and the WDWR 20-year development permit illustrate. In both cases, an understanding of the costs of current and future regulations and increasing opera- tional flexibility helped convince upper management that the per- mitting efforts were worthwhile business investments.
Businesses have traditionally considered environmental costs when selecting a product mix, evaluating manufacturing inputs, costing processes, pricing products, and comparing costs across facilities.
More-proactive companies and facilities also use environmental cost
information in evaluating waste-management options, prioritizing environmental initiatives, assessing opportunities for P2, making capital investment decisions, and doing strategic planning. For example, Witco Corporation’s Newark, New Jersey, plant conducted a facility P2 planning process that developed facilitywide and pro- cess-level material inventories with associated costs. The plant’s staff used this analysis to identify a potential cost savings of $30,000 that could be achieved by improving process efficiency and other P2 projects (Graff et al., 1998, pp. 92–93). As another example, the staff of the Amoco refinery in Yorktown, Virginia, analyzed environmental costs throughout the facility to understand how much was being spent and why, then used this information to aid capital budgeting and other decisions related to the environment.3
Financial accounting tends to focus on the past, while environmental accounting focuses on the future. But while the latter often focuses on identifying and supporting business planning and decisions about the future, it also uses historical data as appropriate.
P&G Mehoopany has effectively used environmental accounting data and approaches to identify environmental costs, link them to busi- ness units, and act to reduce them by, for example, converting some wastes into salable commodities. P&G Mehoopany currently spends
$23 million a year on environment-related expenditures but also generates revenues and implicit benefits equal to about half this through, for example, actual sales of waste and displacement of expensive fuel oil. By cutting environmental expenditures in half, some actions have an explicit beneficial effect on the bottom line.
Figure 5.1 shows how this contribution to the bottom line has grown, year by year, over the last decade or so for waste revenues.
Supportive Organizational Context for Environmental Accounting and Assessments
Proactive companies promote routine use of databases, assessments, and analytic tools that help decisionmakers see how environmental
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3One of the most interesting things about this plant’s effort is that it provides a detailed illustration of the complexity of calculating environmental costs. For example, Amoco found that assigning these costs to process units could be misleading and suboptimal compared with a full understanding of facility-level costs (Ditz et al., 1995, pp. 47–81).
decisions affect all parts of the organization. These companies rec- ognize that improved tools can enhance environmental manage- ment. The range of desirable tools includes environmental audits;
resource, energy, and/or material tracking systems; accounting sys- tems that link environmental effects to various decisions; and engi- neering models of core production and remediation activities that help firms compare the effects of alternative environmental actions.
For example, some companies, such as AT&T and Chrysler Corpora- tion, have promoted the use of activity-based costing for environ- mental accounting. This costing methodology traces environmental costs back to the activities that are directly responsible for them and then uses the information to improve environmental and business decisionmaking, such as decisions related to current processes and future designs (McLaughlin and Elwood, 1996, p. 18).
Corporate and facility management also gives flexibility in the choice and implementation of such tools, given their limitations. Such
Proportion of funding
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Figure 5.1—P&G Mehoopany Waste Disposal Costs Versus Waste Revenue
accounting systems as life-cycle assessment, total cost assessment tools, and activity-based costing remain primitive. Firms typically rely on existing cost accounts and draw the information needed to support specific decisions from these accounts as needed. Such analyses typically require considerable discretion and judgment.
Using such tools is complicated because they cannot always account for all environmental costs, such as image costs, and because the appropriate data are often lacking and too expensive to acquire.
Thus, innovative environmental and management professionals often use approaches that are more informal. Management accepts such judgments in setting priorities for such environmental activities as P2.
For instance, P&G Mehoopany made a strategic decision to favor incineration over land disposal, even though incineration appears to cost more. The staff decided to pursue the use of a waste-to-energy facility because land disposal is too uncertain, especially given the potential liabilities. This decision, which eliminated high-end risk, was made without formal cost analysis because the uncertainties associated with land disposal could not be formally laid out.
Ultimately, organizational concerns tend to dominate tool develop- ment; until a firm organizes itself in a way that allows it to use a tool effectively, the political support for tool development will be limited.
That said, objective tools can provide a strong basis for shifting cor- porate attention toward environmental concerns in a company.
Quantitative and Qualitative Metrics Used to Stimulate Inno- vation
Successful firms manage what can be measured. This cliché can be overstated, but proactive firms rely on metrics as the foundation for managing improvement. Accounting is often called the language of business. Metrics extend this notion more broadly to reflect the importance of nonmonetary, as well as monetary, measures of per- formance. Proactive environmental facilities effectively use envi- ronmental metrics to help measure progress toward their goals, aid their environmental assessment processes, and help motivate behav- ior.
Motivational metrics measure a team’s or a manager’s success and provide a basis for allocating the net value added that the firm gener- ates among its units. Proactive facilities use environmental metrics to measure progress and help motivate behavior. For example, BRT (1993, p. 10) found that all six facilities it studied used P2 metrics to measure progress, communicated the progress, and used the metrics to assign responsibility and accountability for the P2 results.
Such metrics apply throughout the company, from top to bottom.
Metrics designed to motivate behavior must be carefully crafted to each decisionmaking setting throughout the firm to ensure that the metrics
• induce the decisionmaker to pursue firmwide goals
• are compatible with the constraints that the decisionmaker faces in each setting
• are easy to collect and verify
• are mutually understood and accepted by the decisionmaker and oversight authority (Kaplan, 1990; Kaplan and Norton, 1996).
In practice, successful firms find that metrics that meet these criteria more nearly approximate firmwide goals because the decisionmaker has more discretion. Hence, metrics vary at different levels and locations in the firm.
Dow Corning’s Carrollton, Kentucky, facility is a good example of using a metric both to measure progress toward an environmental goal and to motivate the environmental behavior of all employees.
The facility uses an innovative metric and compensation system based on corporate and unique facility goals to reduce emissions cited in the Superfund Amendments and Reauthorization Act of 1986 (SARA). This facility developed and implemented a P2 plan that reduced SARA emissions by 92 percent over about ten years, begin- ning in 1988. The plan used a tracking system that included annual reduction goals and that targeted specific waste streams. The facility created a variable compensation package based on level of achieve- ment of corporate and facility goals to reduce the SARA emissions. In 1998, every facility employee received a 3-percent bonus based on his or her annual salary for meeting or exceeding this goal (Kentucky Pollution Prevention Center, 1998).
It is, however, important to note that quantitative metrics alone can rarely capture everything important about a decisionmaking posi- tion. Proactive firms typically supplement these data qualitative metrics on the overall operation of important processes. The man- agers may also have the discretion to adjust the quantitative metrics associated with particular options under consideration to reflect subjective judgments about how cost-effective these options would be for the organization as a whole.
These considerations present a special challenge for environmental management. As noted earlier, integrating environmental manage- ment with other management concerns is about innovation. Metrics provide the basis not just for inducing everyone to execute the exist- ing production process as well as possible but also to improve that process continually to reduce the associated environmental damage.
Innovative circumstances typically call for metrics that reflect an unconstrained work environment and hence, as broadly as possible, the firm’s goals. But environmental management must ultimately be implemented in constrained circumstances, with metrics that reflect this. The tension between unconstrained metrics aimed at innova- tion and constrained metrics that implement an innovation is not easy to resolve, especially when change is continuing.
In individual firms, engineering groups affiliated with production often drive innovation but are able to take a broader perspective. In these circumstances, the engineers can work with metrics closer to the corporate environmental goals than would be appropriate for the workers on the production line. For example, the engineers might use metrics that reflect the companywide costs associated with using a chemical, while the workers on the line would use metrics that track their implementation of the tighter housekeeping and phar- macy practices the engineers had developed. Making this distinction is more problematic in firms that rely more heavily on the produc- tion teams than on others for innovation.
P&G’s Use of Metrics. P&G uses different environmental metrics at many different levels within its organization, including the corporate and facility levels and within the business units. P&G effectively uses environmental metrics to help measure progress toward environ- mental goals, help assess environmental processes, and motivate behavior.
An important metric is the plantwide environmental Key Element Assessment (KEA) number, which P&G calculates each year for each facility. This number, which takes three days to calculate,4 is derived from an environmental auditing and assessment process that P&G uses to evaluate systems and how well they are addressing environ- mental issues. The company has a facility standard of 8 for the envi- ronmental KEA (10 being the highest rating). Some plants are at a disadvantage in this calculation because of the complexity of the environmental issues they face. The Mehoopany plant is a high- complexity site.
The calculations start with environmental audits of each facility, measuring against corporate performance standards in five areas:
1. government and public relations: compliance, inspections, and community relationships
2. people capacity: leadership, training, accountability, program support and expectations, etc.
3. direct environmental impact: includes monitoring emissions (air, water, solids), assessment of waste management, and manage- ment of process change.
4. incident prevention: includes a prevention plan, special risk pro- grams for specific chemicals on site, emergency response plans and training, spill protection, etc.
5. continuous improvement: audit frequency and follow-up, waste and cost reduction, goals and measurement of progress, com- plexity reduction relevant to such environmental effects as dis- posal and recycling, etc.
The individual calculations for each of these five areas are blended together to arrive at the site-level KEA number.
The Mehoopany facility uses a range of monthly and periodic metrics for managing its environmental program, calculating progress for these standards, and calculating the yearly environmental KEA. The plant regularly tracks environmental measures in management, air
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4P&G also does plant KEAs in the areas of safety and quality. It also takes three days to calculate the safety KEA.
quality, water quality, solid waste, and toxic and/or hazardous waste.
Seventeen such measures are tracked on a monthly basis (see Table 5.1). The plant has good measures of pollution generation by medium, and the staff uses these measures effectively. However, the integrated facilitywide measures are not very good as yet; such mea- sures are very hard to develop. KEA is as close as the staff gets. MEG also does not have any specific metrics for P2 but tracks P2 measures by looking at trends. MEG staff is working to develop better metrics, especially for P2 activities and at the site level.
WDWR’s Use of Metrics. WDWR uses metrics less formally. WDWR uses energy usage metrics to continue improving environmental performance and to save money. Given WDWR’s size and location,
Table 5.1
Environmental Performance Measures—
P&G Mehoopany
Measures Units
Management Assessment rating 1–10
Complexity rating 1–10
Compliance
—Actions Number
—Chronic Number
Incidents (P&G) Number Total waste to environment MTPY
Public perception 1–10
Costs
—Neta $ M
—Recovered $ M
Air quality Emissions (DER inv.) Mtons
Incident releases Lbs
Water quality Discharges (NPDES) Tons
Solid waste Disposal Mtons
Beneficial use %
Toxic/Hazardous waste Hazardous waste generation Tons
SARA releases Tons
Chlorine used (as Cl2) Tons SOURCE: P&G.
NOTE: Annual data on each category are tracked from 1983 to the pre- sent.
aTotal recovery.
this is no small matter: One day in August costs millions of extra dol- lars because energy usage is at its peak. Therefore, the resort has developed an effective energy conservation program.
WDWR tracks energy usage and energy conservation savings at each property and functional area. Using these data, EI and RCES show properties how energy conservation saves money. For example, summary statistics about the current practices and potential revenue opportunities of different environmental practices, related to energy savings, by property area are used to help motivate properties to participate in the Green Lights program.
WDWR has also used such metrics to develop an effective energy conservation tracking and awards program for the different resorts.
The award is based on percentage of improvement in energy savings for each of the 13 resorts. Each month, the improvement percent- ages for all the resorts are made public so that their staffs can com- pare the new data to their own performance the previous month and to how well the other resorts did. Keeping these data in a spread- sheet allows each resort to track how well it has been doing graphi- cally. This tool is particularly useful for monitoring performance and motivating the staff to do better. These metrics are used to create a friendly energy conservation competition between the different hotels. WDWR uses metrics for tracking recycling rates at different business units in similar ways.
ENVIRONMENTAL ASSESSMENT AND PRIORITIZATION TOOLS, TECHNIQUES, AND APPROACHES
Proactive facilities use a range of customized formal and informal analytical techniques in assessing and prioritizing environmental decisions. Whenever possible, information systems and analytical tools that identify the full, facilitywide effects of environmentally related activities are used to help integrate environmental concerns into the core interests of the facility. One example is the use of life- cycle assessment to identify the effects of a system’s initial design during its operation and support. Another is activity-based costing, which fully attributes environmental compliance costs to decisions about the design and operation of a company’s core production pro- cesses.