To identify true social and environment costs and then allocating those costs in the right context at the right places within the company so that these costs are factored in the final product cost, we need tools like:
ABC (Activity based costing): Using this method, environmental costs become self evident, as ABC tries to allocate costs to individual products and processes on the basis of activities that caused those costs in the first place. It reveals where value is added and where value is destroyed.
Sustainability Assessment Model (SAM) which is actually a form of FCA (full cost accounting) is another tool for TBL accounting as used by BP. SAM seeks to monetize the economic, resource, environmental and social impacts over a project’s full life cycle.
Monetizing environmental externalities by cost control and damage costing: Cost control means to reduce/avoid the environmental damage before it occurs by installing a machinery to control the impact. Damage costing refers to the end-of-pipe solutions when damage is already done.
Considering future environmental risk liabilities: By using proportional cost allocation to encourage environmentally benign decision making, some of the costs can be traced to the activities, products and respective departments.
Accounting for ‘grey areas’: Unique to companies. For example an energy efficient turbine will be an environmental cost to a firm looking to reduce its energy usage but for a firm looking at pollution prevention, this might be a capital cost.
The problem is when environmental costs are not separately recognized, but are aggregated in a common overhead pool, products that are more environmentally benign are discriminated against through the cost allocation procedures. (Kreueze and Newell)
So, each industry and each company within it has to tailor make its own tools for effective implementation. Needless to say, there needs to be internal consistency within an organization starting from the CEO to be more effective in using TBL tools, with both successes and failures to be reported.
To get hold of more tools and strategies for TBL accounting: http://www.iisd.org/business/tools/strategies.aspx
- Corporate Governance for Sustainability
- 7 Overarching Objectives of Sustainability
- Why some don’t like Sustainable development?
- Internalizing the Externalities