*Graduate School of Business Administration, Kobe University
‡IGES Kansai Research Centre, Japan
kokubu@kobe-u.ac.jp, nashioka@iges.or.jp
Abstract. Environmental accounting practices in Japan have been led by two governmental initiatives.
One is the MOE initiative which emphasized external disclosure. The other is the METI initiative which Management Accounting (EMA). To characterize corporate environmental accounting practices in Japan, a questionnaire survey was administered to all companies listed in the first section of the Tokyo Stock Market. After a brief review of these governmental initiatives, this paper will examine the survey results.
From the results it is found that environmental accounting is still oriented mainly toward external information disclosure, but that the application to internal management (EMA) has increased steadily. The survey results are also used to assess a set of hypotheses regarding factors and conditions important to promoting adoption and maximizing the benefits of EMA. Findings suggest that key factors include: a well-established environment department actively engaged in decision-making across the firm, understanding of environmental accounting concepts by top and middle management, and the use of specialized EMA tools.
emphasized the applications of environmental accounting to internal management, namely Environmental
©2005Springer. Printed in the Netherlands.
321
P.M. Rikhardsson et al. (eds.), Implementing Environmental Management Accounting, 321-342
1 INTRODUCTION
In Japan two governmental environmental accounting initiatives have been the pri- mary agents for promoting, disseminating and producing those practices for private sectors. One is the Ministry of the Environment (MOE) initiative and the other is the Ministry of Economy, Trade and Industry (METI) initiative. The MOE initiative emphasizes the application of environmental accounting to communication with ex- ternal stakeholders, and the METI initiative emphasizes internal applications of environmental accounting, which is environmental management accounting (EMA).
The MOE initiative precedes the METI initiative; MOE published an interim report in 1999 and environmental accounting guidelines in 2000, whereas METI published its environmental management accounting workbook in 2002. Therefore, external environmental accounting has been more diffused than EMA in this country (see, Kokubu et al., 2003)1.
The MOE initiative undeniably influenced environmental accounting information disclosure in the form of corporate environmental reports. As Kokubu et al. (2003) showed, environmental accounting information disclosures in corporate environ- mental reports were heavily influenced in content and format by the MOE environ- mental accounting guidelines.
On the other hand, Kokubu et al. (2003) revealed that the use of environmental accounting for corporate management purposes in Japan is not so widespread. They argued that the development of EMA was critically important for corporate manage- ment. However, the survey of Kokubu et al. (2003) was conducted before the publi- cation of the METI workbook. Before the publication, the environmental accounting knowledge of Japanese companies was restricted to the tools and methods discussed in the MOE guidelines; companies had little knowledge of the specialized EMA tools and methods2.
The purpose of the paper is to re-examine the Japanese corporate practices of environmental accounting one year after releasing the METI workbook by a ques- tionnaire survey and to analyse some factors to promote environmental management accounting practices. Before discussing the results of the survey we will briefly explain the two governmental initiatives on environmental accounting.
2 GOVERNMENTAL INITIATIVES ON ENVIRONMENTAL ACCOUNTING3 2.1 MOE Initiative
MOE started its first environmental accounting project in 1997. It formed an environ- mental accounting committee and in 1999 published an interim report (MOE, 1999).
MOE revised the report and released the environmental accounting guidelines in 2000 (MOE, 2000). These guidelines are not mandatory. Their main purpose is to encourage Japanese companies to disclose environmental accounting information to
the public via voluntary corporate environmental reports. While the guidelines refer to the managerial function of environmental accounting, they place much more em- phasis on external reporting/disclosure. The MOE issued revised guidelines in March 2002. The revisions were not major, and were mainly concerned with improving classification and measurement of environmental benefits. In addition to the environ- mental accounting guidelines, MOE published voluntary environmental reporting guidelines in 2001 (MOE, 2001). The environmental reporting guidelines set out the information that should be disclosed in an environmental report; environmental accounting information is one disclosure category.
The core contents of the environmental accounting guidelines concern environ- mental costs and benefits. The environmental costs addressed by the guidelines are limited to environmental conservation costs and do not include either material costs or social costs. Specifically, the guidelines set out and address seven categories of environmental conservation costs:
1 Business area costs: environmental conservation cost for controlling the environ- mental impacts that are caused within a business area by production and service activities.
2 Upstream/downstream costs: environmental cost for controlling environmental impacts that are caused in the upstream or downstream as a result of production and service activities
3 Management activity costs: environmental cost in management activities 4 Research and development costs: environmental cost in research and development
activities
5 Social activity costs: environmental cost in social activities
6 Environmental damage costs: environmental costs corresponding to environ- mental damages
7 Others
Regarding environmental conservation benefits, the guidelines classify these into four categories: (1) environmental conservation benefits concerning input resources, (2) environmental conservation benefits concerning environmental impacts and wastes from main business activities, (3) environmental conservation benefits con- cerning products and services of the company, and (4) other benefits. These environ- mental conservation benefits are, in principle, to be disclosed as a contrast to environ- mental costs.
The economic benefits specified by the guidelines are classified into “economic benefits calculated on a credible basis” and “economic benefits based on hypotheti- cal calculation”. The former includes some savings and revenues from environmental protection activities. The latter includes uncertain benefits such as risk avoidance benefits. The guidelines require the company to disclose only economic benefits cal-
culated on a credible basis, but leave it open for companies, if they wish, to disclose the economic benefits based on hypothetical calculation without any additional guid- ance.
The guidelines provide three formats for an environmental accounting statement within a corporate environmental report as follows:
Format A: environmental cost only
Format B: environmental cost and environmental conservation benefits
Format C: environmental cost, environmental conservation benefits and econo- mic benefits
Format C is the most comprehensive option, and is recommended if the company has the capacity to report at this level.
The MOE guidelines have strongly influenced the voluntary environmental re- porting practices of Japanese companies. Kokubu and Nashioka (2001)4examined the disclosure of environmental accounting information by Japanese companies.
They asked all 1,430 companies listed in the first section of the Tokyo Stock Ex- change to provide a copy of any corporate environmental report. The study collected 257 reports (18%) published in 2000.5. The percentage of the companies publishing environmental reports was not so high. However, among these 257 companies, 184 companies (71%) disclosed environmental accounting information. Furthermore, the authors found that a majority of those companies disclosing environmental account- ing information followed the MOE environmental accounting guidelines.
2.2 METI Initiative
METI formed an environmental accounting committee in 1999, the secretariat of which is the Japan Environmental Management Association for Industry (JEMAI).
The committee conducted a three-year research project to develop EMAitools suited to Japanese companies. The project was completed in March 2002 and METI pub- lished the “Environmental management accounting workbook” in June as the final product of the committee. Whereas the MOE initiative places more importance on the external use of environmental accounting, the METI project focused exclusively on the internal management functions of environmental accounting within compa- nies. After releasing the workbook, METI has continued its EMA work. A new com- mittee on this issue is examining case studies and developing more simplified methods for small and medium enterprises.
The METI workbook is the first book on EMA in Japan. It consists of the following seven sections.
Section 1: A framework for environmental management accounting Section 2: Environmental capital investment appraisal
Section 3: Environmental cost management Section 4: Material flow cost accounting Section 5: Lifecycle costing
Section 6: Environmental corporate performance evaluation Section 7: For further development
The contents of the main sections of the workbook (Section 2 to 6) will be briefly explained.
Section 2 discusses environmental capital investment appraisal. This section introduces some conventional appraisal tools such as discounted cash flow methods and a payback method in this area, and then integrates economic information and environmental performance information that the investment is expected to achieve.
The workbook proposes a new format for environmental investment appraisal inclu- ding not only cash flow information but quantitative environmental information.
Section 3is divided into two parts: environmental quality costing and environ- mental target costing. Regarding environmental quality costing, METI developed the
“environmental cost matrix”, a new format for capturing environmental quality cost- ing information. The matrix is intended to organize the costs and benefits set out by the MOE environmental accounting guidelines in a clear way, as is expected to be particularly useful in budgeting. Environmental target costing is a method for adding some environmental elements to traditional target costing. This method supports cor- porate activities of design and development of environmental-conscious products in terms of product costs. The workbook proposed a framework for constructing the methods and provides a number of case studies including Sony, IBM and Canon.
Material flow cost accounting is the main theme of Section 4. Material flow cost accounting was originally developed in Germany (Strobel and Redmann, 2001), and the authors of the workbook introduced this tool into some Japanese companies (Kokubu and Nakajima, forthcoming). These pilot efforts were successful, and mate- rial flow cost accounting seems to have significant potential in the Japanese context.
This section explains the theory of material flow cost accounting as well as the pilot assessments.
Section 5discusses lifecycle costing. The main purpose of this section is to inte- grate cost accounting and LCA impact assessment. This section surveys practices for valuing external environmental costs and conducts a case study of lifecycle costing of refrigerators.
Section 6 discusses corporate practices introducing an environmental perform- ance index such as CO2emission, quantity of wastes, green product rate and so on into their corporate or divisional performance evaluation system. Those indices are based on corporate environmental policy. This section consists of case studies,
including Sony, Ricoh, Canon and Osaka Gas. Those companies have already intro- duced some environmental performance index into their corporate performance evaluation schemes.
After releasing the workbook, METI held EMA seminars in Tokyo and Osaka.
While METI continues to develop new EMA tools, the ministry’s focus is promoting diffusion of EMA concepts and practices. While the METI workbook is targeted at larger companies in the manufacturing sector rather than smaller companies, the dif- fusion of EMA for small and medium-sized companies is perceived as an next important issue of their projects.
3 SUMMARY OF PREVIOUS RESEARCH RESULTS
In 2001 Kokubu et al. (2003) conducted a survey of environmental accounting prac- tices. They sent out questionnaires on environmental accounting to the 216 com- panies5 that had disclosed environmental accounting information in their environ- mental reports and 159 valid responses were received. From this previous study, the following findings are relevant to this paper6:
1. Concerning the purpose of environmental accounting, 42.8 per cent of the re- sponding companies considered external reporting the primary purpose of environmental accounting. Only 18.9 per cent saw internal management applica- tions as more important. However, 35.8 per cent of companies emphasized both.
2. Concerning the benefits of environmental accounting, only 35.8 per cent of the companies answered that environmental accounting was useful for internal environmental management. This result suggested that, at the time, the perceived usefulness of environmental accounting for internal management was limited.
3. Concerning environmental accounting for internal use, 42.1 per cent of the com- panies used the same environmental accounting methods and metrics as they used for external disclosure purposes. 28.8 per cent used somewhat modified versions of these methods and metrics. Only 5.7 per cent of the companies employed some different environmental accounting methods and metrics for internal use than those they used for external environmental accounting.
Based on these results, Kokubu et al. (2003) concluded that Japanese corporate environmental accounting was oriented to external reporting, and that in substantial part this was due to the emphasis the MOE guidelines place on the external dis- closure function of environmental accounting. In addition, they pointed out that Japa- nese companies did not receive significant benefits from the internal use of environ- mental accounting.
4 THE CURRENT STUDY AND RESULTS 4.1 Research purposes
However, this previous research was conducted before the publication of the METI workbook with its focus on the internal management applications of environmental accounting (EMA). Therefore, a new survey-based study was conducted after the release of the METI workbook to re-examine management practices of Japanese companies.
Specifically, the new study had two purposes:
1. To characterize the current environmental accounting practices of Japanese com- panies and the motivations and perceptions underlying current practices
2. To identify factors and conditions important to promote the adoption and maxi- mize the benefits of EMA
Concerning the first purpose, the survey was structured to permit comparisons to the results of the previous research while at the same time eliciting more nuanced re- sponses. A significant new focus of the survey questions was the extent to which EMA methods have diffused into Japanese companies. Regarding the second pur- pose, three hypotheses were proposed and evaluated in light of survey results.
The survey was conducted in April 2003, approximately one year after the publi- cation of the METI workbook. A questionnaire was sent to the environmental depart- ments of all listed companies (1,523 in total, manufacturing: 952; non-manufac- turing: 571) in the first section of the Tokyo Stock Exchange. Valid responses were received from 324 companies (manufacturing: 258; non-manufacturing: 66), corres- ponding to a response rate of 21.3 per cent in total (manufacturing 39.6 per cent; non- manufacturing: 11.6 per cent). Among respondents, 187 companies (57.7%) were in- troducing environmental accounting either for external disclosure or internal management.
4.2 The purposes of environmental accounting
The purpose of environment accounting is of particular interest in the Japanese con- text because each of the two key governmental environmental accounting initiatives has emphasized a different application – external disclosure in the case of the MOE initiative and internal management in the case of the METI initiative.
The questionnaire provided the choice of four possible responses on this issue: (1) considerably more emphasis is placed on internal management than on external information disclosure; (2) slightly more emphasis is placed on internal manage- ment; (3) slightly more emphasis is placed on external information disclosure; (4)
considerably more emphasis is placed on external information disclosure than on internal management. The results are shown in Table 1.
Table 1.What is the purpose of environmental accounting (singular answer)
Table 1 shows that 38.7 per cent of companies emphasized internal management (1 + 2) and 61.3 per cent emphasized external information disclosure (3 + 4). Since the previous survey by Kokubu et al. (2003) provided the option “emphasize both,” a simple comparison to the results of the previous study is not possible (see, Table 6.10 in Kokubu et al., 2003). However, the majority of responding companies continue to emphasize external information disclosure purposes over internal management ones, and we therefore conclude that environmental accounting is still utilized primarily for external information disclosure rather than internal management in the Japanese context.
The next question solicited the perceived benefits that can result from the intro- duction of environmental accounting. The previous research revealed that environ- mental accounting was perceived to provide insufficient benefits for internal manage- ment. The results of this question were shown in Table 2.
No. of Companies % 1. Considerably more emphasis is placed
on internal management than on external
information disclosure. 19 10.2%
2. Slightly more emphasis is placed on internal management than on external
information disclosure. 53 28.5%
3. Slightly more emphasis is placed on external information disclosure than
on internal management. 83 44.6%
4. Considerably more emphasis is placed on external information disclosure than
on internal management. 31 16.7%
n=186
Table 2.How much benefits do you receive from environmental accounting (singular answer)
From the results of Table 2, aggregating the responses of “very beneficial” and
“somewhat beneficial”, 63.4 per cent of companies indicated that the introduction of environmental accounting was beneficial for internal company management. In the previous study, only 35.8 per cent of respondents perceived EMA to be useful for internal environmental management (see Table 6.11 in Kokubu et al., 2003).7
However, the perceived benefits of environmental accounting to internal manage- ment are less widely held than the perceived benefits in other areas. The following percentages are combined “very beneficial” and “somewhat beneficial” responses in Table 2.
Very Somewhat Not very Little Beneficial Beneficial Beneficial Beneficial
No. of No. of No. of No. of
companies % companies % companies % companies % Useful for internal
management 12g 6.7% 102 56.7% 59 32.8% 7 3.9%
Improved understanding of the amount of the
environmental costs 70 38.5% 105 57.7% 6 3.3% 1 0.5%
Improved understanding of the relationship between environmental costs
and performancep 31 17.1% 111 61.3% 30 16.6% 9 5.0%
Enhanced awareness of environmental issues
within the companyp y 18 9.9% 108 59.7% 47 26.0% 8 4.4%
Improved Awareness of environmental cost reduction
within the companyp y 15 8.3% 85 47.0% 73 40.3% 8 4.4%
Improvement of corporate
image by information disclosure 32g y 18.3% 86 49.1% 45 25.7% 12 6.9%
Increasing of salesg 0 0.0% 12 6.9% 78 45.1% 83 48.0%
Other 1 0.5% 4 2.1% 2 1.1% 1 0.5%
n=182
“Improved understanding of the amount of the environmental costs?” 96.2%
“Improved understanding of the relationship between
environmental costs and performance?” 78.4%
“Enhanced awareness of environmental issues within the company” 69.6%
“Improvement of corporate image by information disclosure” 67.4%
Furthermore, if only the most stringent measure of perceived benefit is used (the
“very beneficial” response), only 6.7 per cent of respondents perceived environmen- tal accounting to be “very beneficial” for management. This is the lowest such response, save only for contribution to increasing sales for which the “very bene- ficial” response was nil. From these results, it appears that internal management is not the most widely perceived benefit of environmental accounting8.
4.3 The Diffusion of EMA practice
A particular focus of our survey was to characterize the nature and extent of EMA adoption in Japanese companies. Towards this end, the survey first inquired about the type of the environmental accounting methods, if any, being used for internal management purposes. The results are shown in Table 3.
Table 3.What type of environmental accounting do you employ for internal management?
(singular answer)
Companies using environmental accounting oriented to external disclosure for inter- nal management purpose and not using specially designed EMA were 42.7 per cent.
On the other hand, 40 per cent of companies used either a combination of environ- No. of
companies %
Environmental accounting intended for
external disclosure and do not use any othery 79 42.7%
Environmental accounting intended for external disclosure and those specially
designed for internal managementg g 56 30.3%
Environmental accounting specially designed for internal management
and do not use any othery 18 9.7%
Do not use environmental accounting
for internal managementg 28 15.1%
Other 4 2.2%
n=185
mental accounting for external disclosure and those for internal management (30.3%) or environmental accounting specially designed for internal management only (9.7%). The previous study (see Table 6.12 in Kokubu et al., 2003) revealed that only 5.7 per cent of the companies employed different environmental accounting methods and metrics for internal management use than those they used for external environ- mental accounting. These results indicate that the use of specialized EMA tools and methods is becoming more widespread9. However, it is noteworthy that many com- panies still employ external environmental accounting tools and methods for internal management purposes.
This finding is of interest because, as Kokubu et al. (2003) argued, external en- vironmental accounting practice in Japan has been strongly influenced by the MOE guidelines. Because the MOE guidelines restrict the definition of environmental cost to environmental conservation costs, applications of externally-oriented environmen- tal accounting to internal management purposes will tend to have a similarly restrict- ed definition of costs. Specialised EMA methods employ a much wider definition of environmental cost that better capture bottom-line impacts of environmental per- formance. EMA methods are thus likely to have more benefits for business decision- making. This issue is addressed at greater length below.
The awareness and utilization of specific EMA methods were then investigated.
The following six methods were explained in the METI workbook and hence all of them were addressed by the survey.
1. Environmental capital investment appraisal 2. Environmental cost matrix
3. Environmental target costing 4. Material flow cost accounting
5. Environmental corporate performance evaluation 6. Lifecycle costing
The results are shown in Table 4.