Last month, I got 2Kw of solar photovoltaic panels installed on our home. The install was seamless, so thanks to the provider https://www.greenelectric.ie/.
A 2Kw installation equates to six panels. Our roof already has solar water heating panels, so I guess a standard install might be 3Kw or more. So how is it going you might ask? As I am an accountant, of course I want to do the numbers. Before I do, lest you need reminding, Ireland is not the sunniest of places, but we do have good daylight – which is key to solar PV. Since the install, the lowest we have generated is 3Kw in one day, the most 13Kw. In terms of daily usage, this equates to a range of about 20% of our needs to more than 100% – depends on the day, as some days we use more energy than others.
So, to the numbers. I am making the following assumptions 1) no revenue from sale of extra power to the grid, 2) a cost of 0.17c per Kw – this is my current costs, 3) 5% annual increase in energy cost and 4) an average of 5Kw generated by the panels each day. I think these are all quite conservative. The cost of the install was about €6,500 net of a government grant, so the question from an accounting view is when do I get my money back? Using a simple Excel sheet and the above assumptions, it takes about 16 years. This is reasonable, given the average life of PV panels is 20-25 years.
There is more to it of course. I will probably save the planet 1.5 tons of CO2 per annum, which is not at all considered in the above numbers. And of course, I will have power for a while in case of a power cut, and can always expand the system to have more batteries. So overall, I am happy as an accountant, but also happy that I am doing my bit for the planet.
In recent years, I have become interested in the broader role and use of accounting in society. In particular, accounting for water has caught my eye and in Ireland it’s been great fun in the past two years or so.
As you may know, one of the things we need in accounting is measurement. In business accounting, it’s relatively easy, as the unit of measurement is rather simple – it’s the unit of currency normally. Currencies are broken into various units – euro and cent for example – and we can use the decimal system easily communicate and measure larger numbers.
In accounting for water, the measurement unit is normally cubic metres, or 1000 litres. To measure (or account) for our water usage, we need a measurement device – a meter. Once a meter is in place, we can see how much water we use and take measures to reduce it if necessary – as water is a precious resource.
In Ireland, there has been much debate about billing for water. A recent (December 2016) expert commission report on domestic water billing has within its remit to explore if metering should occur. This, in my view, was/is a completely daft request. The report itself is full of statistics on water usage – none of which are possible with a meter. For example, it suggests usage on average of 111 litres per person per day or 20.8 cubic metres per person per year. In my own house, we have used on average 11 cubic metres per month for 4 people. Annually this is 33 cubic meters, so we are quite above average. And like any management accounting scenario, now that I have some information (on water usage) I can now take corrective action, or pay extra for my somewhat excessive usage. The latter is the subject of much debate in Ireland of course.
You have probably heard about the amount of fruit and vegetables wasted in the food supply chain. This waste “occurs” for three main reasons. First, in less developed countries, poor transport and storage can result in waste. This also happens in larger developed countries, where distances mean fruit/veg cannot survive the trip. Second, the exacting standards imposed by retailers as to the size and shape of fresh fruit and vegetables causes growers to simply dump large quantities each year. Third, end consumers throw away perfectly good food.
Personally, I grow some fruit in a small suburban garden. We never but jam, as I make enough for the household for the whole year. We have 2-3 months worth of pears and apples, and some years the “leftover” fruit become wine – blackcurrant wine is quite nice. So, from a small say 10m2 plot, I can do all this and have zero waste. On a commercial scale, things are different. The waste is immorally high, primarily due to the exacting standards of retailers. I can tell you that the apples and pears I grow may be all shapes and sizes, but they taste so much better than anything I can buy in the supermarket – and my neighbours all agree.
To give a snapshot of how much perfectly good fruit and vegetables we waste each year as a race, National Geographic (March 2016) provides some stark numbers. In total, 53% of fruit and vegetables never makes it to the market – 20% is lost at the farm due mainly to exacting standards, 19% is uneaten and discarded at home, 3% lost in transit/storage, 2% lost in processing (canning/baking) and 9% discarded by wholesales and retailers. Add to this the resources used to harvest and prepare what is wasted – 70 times the oil lost in Deep Water Horizon and enough water to fill the Volga, and that’s just one year in the US alone. To add another number, the annual total food waste (all foods) could feed 2 billion people.
From these stark numbers, what can (management) accountants do? Recently, some documentaries on British TV featured vegetable growers saying the loose perhaps £100,000 per month worth of vegetables – assuming it could be sold at market price. Nowhere is this accounted for, not in their accounts, in supermarket accounts, in our national accounts (GDP). What if these accounts included the cost of waste? I’m sure if they did, we would all stand up and take notice.
I have written before on sustainability, and it is a tricky topic to define and pin down. However, one thing that helps bring any issue to the fore is to measure and/or report on it. Many companies do report on sustainability and environmental issues. Whether such reporting is genuine or “green-washing” is another debate.
CGMA recently conducted a global survey of management accountants, and the report can be found here. A nice infographic of the key points can be seen here in the December CGMA magazine. One of things that jumped out at me was that the highest perceived benefits of reporting on sustainable issue came from management accountants in Africa. The report/survey suggests that management accountants are very aware of the need to report on sustainability and note it is beneficial. It also surprisingly suggests that the greatest barrier to reporting is no demand from decision makers.
It’s 13 years since Ireland introduced a plastic bag levy of 15c, then 22c. Since then, around €200m has been collected from consumers. England recently introduced a similar scheme and this prompted me to reflect on what the less use of plastic bags has meant for Ireland – with a cost/accounting angle of course.
The first thing that strikes me is the lack of plastic bags stuck in hedges. Not only does this mean a cleaner countryside, but much lower clean up costs for local councils.Second, I would say the packaging industry did not lose out, as paper bags are generally available in stores – cost neutral in terms of employment. This is good too as paper is renewable, but also lost people have a car boot full of reusable bags. I still have some dating back to 2002 believe it or not. Third, as a tax it worked in that it changed our behaviour as a nation – for the good of the exchequer and the environment.
The April 2015 edition of National Geographic includes a very nice short article which draws on the work of two MIT aeronautical engineers. The article to me is a very nice mix of explaining why airlines charge more for more weight (of bags usually, but some airlines are considering weight of passengers too), and how we as passengers can reduce CO2 emissions as we fly.
For many years now, low-cost carriers in particular have charged more for checked in bags. They also step-up the charges as bags get heavier. The key reason for this is to reduce ground-handling time – less checked bags, less baggage handling, faster turnaround, all of which reduce cost or increase revenue. But, as the National Geographic article also points out, more weight equals more fuel consumption and higher fuel cost. The MIT engineers used a Boeing 737-800 (as used by Ryanair) at 75% capacity as a model to calculate how much extra fuel cost various passenger items incur over a year. A 25kg suitcase increases costs by $3,267 per annum, a 1okg carry on $980, a laptop $291 and a full-bladder $29 – among other examples. Ryanair currently have 303 aircraft (per their website), so taking just the costs I quote, this is $4,567 per passenger per year x 190 seats x 303 aircraft, this equate to $262,922,190 – and that’s a big potential cost saving. I can already see Ryanair’s next advert 🙂
There are two points to take from the above. It is obvious that airlines may charge more for weighty items as these drive fuel costs up. The second point is look how much cost we could save the environment by taking even small steps like taking a pee before boarding – $29 x 190 seats x 303 = $1,669,530 worth of fuel. This is just one airline, and I have no idea how much CO2 emissions are reduced by, but as Tesco say “every little counts”.
A recent quote from Pope Francis to the World Congress of Accountants captures the broader role of accounting quite well:
” everyone, especially those who practise a profession which deals with the proper functioning of a country’s economic life, is asked to play a positive, constructive role in performing their daily work, knowing that behind every file, there is a story, there are faces.”
This quote reminds us that behind the numbers are real jobs, real people and real effects. It may be easy to forget this as you trawl over a ledger audit trail or provide information to managers, but reminding ourselves of the broad reach of our accounting numbers can only be a good thing.
The full text the address by Pope Francis can be found here.
I have recently been involved in a research project on the newly formed Irish Water – a state-owned utility responsible for water supply in Ireland. The main objective of the new utility is to provide a unified approach to water supply – as opposed to the 30 odd previous authorities. While the utility has caused much media attention, this post draws your attention to the use of accounting principles in the provision of water supply.
Let’s think about water as a resource, which it is. Now think about the utility. It needs to account for the water it processes, distributes to customers and looses through leaks etc. To do this it needs various measuring devices such as meters. So, in a similar way to a ledger account, we could think as water coming into a system as a debit, water out a credit, the measurement is in litres (not money) and we should be able to account for the difference i.e. the balance on the account.
Now think about the end consumer of water. Similarly water comes in and out – the latter being usage. With meter installed, we can account for our usage, possibly trying to reduce usage. Or we can seek an alternative (partial) source of water by harvesting water from the roof of our house. By accounting for our usage, ultimately we can make decisions to reduce usage if we have to pay for the water resource. Without the ability to account for our usage (through a meter), we cannot make such decisions. This is of course more like management accounting – using our information on water usage to make decisions – but it is still accounting.
A while ago, I was asked to write some entries for an Encyclopaedia of Corporate Social Responsibility. I enjoyed this and the research behind the writing. One of the terms I wrote about was Local Food. Without repeating the definition verbatim, local food is basically food grown within a local area. But what exactly is local? Town, region, state, country or what? That’s the hard part.
The image to your right shows some nice juicy strawberries. When I was a kid, we had these as treats from about May to July. And they are a treat, once in season and local. But now I can get strawberries at Christmas – but they taste c**p usually and come from many miles away. This is definitely not local food.
Bringing consumers year round fruit (and other food types) is an expensive and difficult business. An article in the November edition of National Geographic gives some idea. Yes the example is US based, but it has some hard facts. The article follows the 3,200 mile journey of strawberries from California to Washington DC. The berries are grown on large-scale farms and over 500 trucks a day can be involved on just one farm. The retail value of each truckload is $90,000, and fuel for each truck costs $2,700. Total journey time is 80 hours, for which a driver must be paid etc, and think about the wear and tear of the truck. This is hardly a local food example I would argue, and it easy to see the money involved. And I’m not even starting on the true cost, which includes costs of large-scale farming (pesticide run-off for example) and CO2 emissions.
True cost accounting (also called Environmental Full Cost Accounting) is a process which tries to identify all costs associated with a product or service. This includes not only the normal costs we would associate with a product or service, bit also social and environmental costs. It attempts include what economists call externalities – something which affects society or the environment but is not included in the market price of the product. Rather than me continue, here is a short YouTube video which explains the concept in a very clear way.
A re-blog this week. This is a great post from the Freakonomics blog on the climate change debate – or fact perhaps more correctly. It makes interesting reading.
A brief (but incomplete) overview of current attempts to account for sustainability : guest post 2 by Dr Stephen Jollands
Guest post #2 by Dr Stephen Jollands
In the previous post I defined sustainability as humanity not over-consuming the resources available to them and thereby irreversibly depleting the levels of natural capital while at the same time ensuring an equitable and fair distribution, both within the current generation as well as across all future generations, of the resources available. The aim of this post is to review some of the tools that claim to account for sustainability and question how well they stack up against this definition.
The obvious place to start is with the very tool we utilised to help explain sustainability, the ecological footprint. This calculates the biologically productive surface area required to sustain the thing of interest; whether that is the Earth, a specific country, an organisation, or even a specific project. Thus this tool is a very effective indicator of resource throughput. Despite being a very effective tool and adhering to a strong conception of sustainability it also has inherent weaknesses. Primarily amongst these is that it gives no indication over the health of the specific part of the ecosphere that the resources are being drawn from or the waste assimilated to. Therefore, it would appear that its effectiveness would be improved if set within a system of supporting sustainability focused management controls. We shall now turn to examining a few of these potential candidates.
The most obvious to examine next is the various types of external reporting that organisations do under the label of sustainability. There have been many differing frameworks developed in this respect including The Prince’s Accounting for Sustainability Project, the GRI and Integrated Reporting. These provide useful tools for businesses to organise their communications with their shareholders in regards to their social and environmental impacts. But this is also the source of critique for them as well. That is we have to question how far beyond public relations these reports go. The proponents of the various framework argue that the use of their frameworks provide stakeholders with an in depth analysis of the social and environmental impacts of an organisation. However, we need to question whether any rationale executive would allow the more controversial elements of their operations to be released in a public environment. When we reflect on the various accounting standards inability to provide clarity over economic affairs, as is evidenced by continual scandals, it is hardly surprising that these frameworks will probably fare no better. Further, none of these frameworks requires the organisation to report on the scale or scope of resources drawn from the ecosphere or waste assimilated back into it (i.e. an ecological footprint), which, as was explained last week, is at the heart of the issue of sustainability. This is not surprising as the accounting entity convention sets precise limits as to what is accounted for. For this very reason many commentators have expressed the view that the focus of the going concern concept should be elements of the ecosphere; such as rivers and forests; rather than the economic entity. If this was the case then economic organisations would be required to account for how they have helped maintained these ecosphere going concerns and in doing so been allowed to generate a profit.
The final example, although there is so many others we could review, which I will cover will be attempts to provide a cost to the social and environmental impacts of an organisation. The reason for selecting this as the final example is that Puma generated a large amount of publicity recently through publishing their first Environmental Profit and Loss account. Puma reports that their environmental impact for the key areas of greenhouse gas emissions, water use, land use, air pollution and waste, generated through their operations and supply chain is valued at €145 million in 2010. In the same year Puma reported that their Net Earnings were €202.2 million. This raises the question as to whether, given their Net Earnings were greater than their environmental impacts, they are therefore a truly sustainable organisation? The possibility of one of the world’s most notable examples of a consumerism driven, profit increasing through growth in sales organisations being sustainable seems to fly in the face of the evidence provided by the ecological footprint of our current over consumption of natural capital. This contradiction could be better explored had Puma provided more in depth details surrounding their calculations. However, given the involvement of consultants in this calculation, these details are unlikely to be ever released. The final question to ask is what concrete actions will this calculation result in?
In closing this quick overview, I would also question why Puma chose to put itself in a position for stakeholders to believe that it was the first organisation to provide an environmental profit and loss account when so many other notable and more transparent examples and experiments have occurred before? Or indeed we could question why Puma did not utilise one of these other tools given they are existing technologies and these tools have a close relationship with strong conceptions of sustainability? One notable example is full cost accounting (FCA). FCA as a concept integrates all potential costs and benefits, including those that relate to social and environmental, that organisations would normally consider as externalities, into the economic calculations they perform. The aim, therefore, is to ensure that a full set of broad considerations are taken into account during the decision making process. Of course here the emphasis is on decision making rather than releasing information publically and hence when this tool is used it generally does not make levels of publicity anywhere near those generated by Puma. Related to this is the sustainability assessment model (SAM), which is a tool developed in order to assist with the implementation of FCA. It is interesting that a colleague of mine focused his PhD research on assisting two local government bodies in implementing the use of SAM. While one of these were genuinely amazed at the extent of their impact and proceeded to take action accordingly, the other asked my colleague to leave when the SAM failed to deliver the “right” answer. That is when it provided visibility over the high levels of un-sustainability this plainly was unsettling to the managers involved. It is often understood by researchers in the area of accounting for sustainability that if the results do not make you feel incredibly uncomfortable you’re plainly not doing it right. Thus it is with interest that I introduce the last tool, the sustainable cost calculation (SCC). SCC is a way to measures how much it would cost an organisation to ensure that its operations left Earth at least no worse off at the end of the accounting period. The idea here is precisely to utilise the language of accounting to provide visibility over the true impacts of an organisation on natural capital and thereby the gapping chasm between our current operations and those that would be sustainable. It is interesting that the experiments with this tool have, beyond showing the un-sustainability of the organisations involved, highlighted how difficult it is to perform these calculations given the complexities and our relative dearth of knowledge as to how our ecosphere works.
The point I am trying to highlight in this post is that it is hard to be anything but cynical of many of the current attempts to account for sustainability as they do not link to the underlying issues and appear to be nothing more than attempts to generate publicity for the organisations involved.
These issues, covered in these two posts, around accounting and sustainability is the focus of my research and teaching efforts:
I would therefore encourage anyone interested in furthering their knowledge in the area of sustainability and business to consider undertaking the innovative One Planet MBA, which I teach the accounting module in:
Guest post #1 by Dr Stephen Jollands
It is very interesting that Martin’s story of the wasted portions of condiments on an airline flight is a very simple setting to think through the complexities of the issues we face around sustainability. But before we examine Martin’s example further we first need to think about what exactly sustainability is and more importantly what it is not. The first question to ask is what is it that we are trying to sustain? While this may appear as quite a straight forward question the answer is not as most expect. Sustainability is about sustaining humanity. Put simply we need the ecosphere in which we live but it does not need us. This leads to an interesting understanding of a nested system view of the world. That is the economy resides in our societies and our societies in turn reside within the ecosphere. Thus no ecosphere then no society and in turn no society then no economy.
With having worked out what it is that we are trying to sustain we still need to investigate a few more things before we can put forward a concrete definition. In order to do so I need to introduce the ecological footprint, which is an accounting tool that measures the biologically productive area required to sustain a given population. This has been calculated for the entire world with the formula being the total biologically productive surface area divided by the population of the world. The result of this calculation gives us what is referred to as each individual persons Earth share. That is it provides us an indication of the average amount of biologically productive surface that we each have available to us to provide all that we need and want as well as absorb all the waste we generate. Based on 1996 data we know that the Earth share per person was roughly the size of one football field and this is not even taking into account the space required for other species we share our planet with.
To draw an appropriate conclusion from the above calculation of the average Earth share we need to draw an analogy between the ecosphere and a business. With a business we invest capital from which we expect to earn some form of interest. It is this interest that we expect to use to pay for the things we need and want to live from. However, in some situations we understand that the interest we earn may not be enough to support what we want and therefore we may decide to withdraw some of the capital. This is fine as long as we understand that we are doing this (and hence the need for good accounting) and that we understand that if we keep removing capital then the business will eventually go bankrupt. So it is with the ecosphere. Interestingly environmentalism first started to gain traction with space exploration back in the 1960s when it became very clear from the photos taken from space that we live on a finite planet. Hence we can view the ecosphere as having a finite amount of natural capital from which we derive natural interest (usually through interactions with the energy produced by the sun). So in terms of our Earth share this requires deriving everything we need from the football field without depleting the existing resources on that football field. However, the ecological footprint calculation based on 1996 data showed that our resource throughput (measuring resources being taken from the ecosphere as well as waste that the ecosphere is required to re-assimilate) was 20% over the levels of natural interest. This has increased to 50% over the levels of natural interest based on 2008 data. Put simply it would take one and a half years to generate the resources we consume within a year and thus we are currently, and potentially irreversibly, depleting the levels of natural capital, the very thing we require to keep sustaining us.
We can therefore define sustainability as humanity not over-consuming the resources available to them and thereby irreversibly depleting the levels of natural capital while at the same time ensuring an equitable and fair distribution, both within the current generation as well as across all future generations, of the resources available. Hence returning to Martin’s analogy it is not only the amount of things we waste that we must be aware of but also the levels of resources we utilise. Hence, what would the ecological footprint of Martin’s flight look like or in other words what was the amount of biologically productive surface area required to sustain this flight?
In the next post (as Martin has been kind enough to allow me to post two) I will briefly overview experiments around accounting for sustainability. As part of this we will investigate how well the measure up against accounting for a world of finite resources. We will even see that successful examples like the ecological footprint have inherent weaknesses that require us to question whether business that are serious about engaging with these issues may actually require a series of sustainability focused controls to guide their efforts.
Finally in closing, the large part of what I have written above is based on one easy to read book that I would suggest is the perfect place to start for anyone wishing to learn more about these issues:
Wackernagel, M., Rees, W.E., 1996. Our ecological footprint : reducing human impact on the Earth. New Society Publishers, Gabriola Island, B.C.