Nowadays, people are confronted with various environmental problems, such as global warming, sea level rise, depopulation of biological species, degeneration of environmental, and so on. World Resources Institute (2008) makes a conclusion that "Global warming may dominate headlines today. Ecosystem degradation will do so tomorrow." It means that people is already suffering the effects of global warming. Recently, BBC news (2011) has reported that flood which is the worst natural disaster in history hit the Queensland of Australian. This disaster caused 72 missing and at least eight dead. The ecosystem degradation not only affects human beings' daily life, but also has an impact on business. The floods have caused billions of dollars worth of damage. Furthermore, it is obviously that ecosystem degradation is the next problem people should tackle with.
Compare to climate change, biodiversity loss is more complex, because it is harder to define and measure. According to CBD (1992), biodiversity is defined as the "the variability among living organisms from all sources including marine, terrestrial and other aquatic ecosystems and the ecological complexes of which they are part, this includes diversity within species, between species and of ecosystems". It means that biodiversity include numbers of species and ecosystems. Ecosystems, such as deserts, wetlands, cultivated farmlands, are consist of plant, animal and non-living factors and they interact each other. Rainforests is an example of ecosystems and Toulmin (2007) figured nobody could put a price tag on the culture value of the Amazon rainforest for the people who live within, and it is hard to measure the species loss which could lead to the collapse of ecosystems.
This paper illustrates the relationship between business and biodiversity loss. It would be a serious risk for companies when they facing the biodiversity loss, but at the same time, it could also be an opportunity to improve themselves. The aim of this paper is to offer an approach for business to understand the risk and take advantage of this change. Besides, this paper explains the role of accounting for sustainability in addressing biodiversity loss and ecosystem degradation.
Business risk and opportunity
Risks and how to deal with it
It is acknowledge that biodiversity loss is connected to many other risks ranging from flooding to disease. The coastal flooding has a connection with the damage of costal ecosystems (PWC, 2010). Due to the commercial shrimp farming, people reduce 28% mangrove cover between 1980 and 2000 in South East Asia. However, Tsunami hit the South Asian when coastal areas still covered by mangroves which could against natural disaster. People should regret that if they did not remove the mangrove, they will have less affected by the flood. In addition, food security is another risk related with biodiversity.
Ecosystem degradation linked with climate change has a series impact on business. According to the Stern report, dealing with the net greenhouse gas emission cost $1.7 trillion in 2008. While the cost of biodiversity and ecosystem degradation was taken of 3.3% of global GDP ($4.5 trillion) which is far more than the cost of carbon. This part will focus on the biodiversity loss and linked it with the business risk, then introduce an approach for manager how to protect the company from risk and create value for themselves.
Biodiversity risk is one of significant risk management for business should tackle. The author thinks it is better that company acting early to manage risk. Pwc (2010) made guidance for business on how to manage risk which also benefit from a leadership position in addressing biodiversity loss and exploit new business opportunities.
Firstly, companies should identify the impacts and dependencies of their business on biodiversity and ecosystem services (BES). TEEB (2010) suggested that not only direct, but also indirect linkages should be included throughout the value chain. However, there is not many companies have awareness the biodiversity risk; according to the PCW study (2010) only two of world's largest 100 companies see biodiversity as a strategic risk
Secondly, PwC (2010) suggested that company should assess their current processes and capacity, such as review the processes currently in place to manage biodiversity risk and identify the individuals responsible. Companies also need to observe their competitors how to respond to biodiversity risk. In that way, they should learn from the competitors. Last but not the least, communicate with stakeholders. TEEB (2010) indicated that business peers and stakeholders should be engaged in business activities. Policy consultation could help shape pending national and international ecosystem related regulation and ensure that company could deal with implications properly.
Opportunity: Organic farming
Biodiversity loss and ecosystem degradation not only have bad impact on business, it also bring opportunities, as long as company take advantage it. TEEB (2010) indicated that combined BES with business can create important added value for companies through penetrating new markets or ensuring a sustainability of supply chains. For instance, Walmart, large retailer, stock sustainable products in response to consumer demand. They announced a new environmental strategy in 2005, including commitment to sell "sustainable product" The Company uses a 'Sustainable Product Index' to assess the environmental impacts of the products it stocks and relays this information to customers using a labeling system. The Sustainable Product Index measures such facets of production as energy usage, material efficiency and human conditions
TEEB (2010) suggest that as long as investors and company conserve biodiversity and using it sustainability, they could develop and scale up "biodiversity business". According to the TEEB (2010), the value of sustainability resources (include energy, agriculture), connect with global business opportunities could be in the range of $2-6 trillion by 2050. One of the apparent case for biodiversity as a business opportunity is organic agriculture and sustainable forestry.
Christian (2004) indicted that Organic farming is an approach to produce food and fibers in a sustainability way which overcome the negative impact on soil, air, and humans worldwide. Organic management depends on developing biological diversity to disrupt habitat for pest organisms. Farmers make plants and animals naturally growth; it means they are not allowed to use synthetic pesticides or fertilizers.
Organic farming has a contribution to global food security and biodiversity. Firstly, compare to traditional faming system, organic farming supports a higher level of biodiversity, including wildlife such as birds and butterflies. Kay (1998) proved that the organic farms support a substantially greater number of a rare and declining plant species than the conventional farms. He tested diversity and 21 kinds of plant species on neighboring organic and conventional farms. There are 11 species found in the organic farms, while 8 species showed in the conventional farms. 4 targets which included in the UK Biodiversity action plan species were found only in the organic farms. What is more, Randerson (2004) indicated that organic farming boosts biodiversity, especially for bats. Foraging activity was up 84% on organic farms and two species, the greater and lesser horseshoe bats, were found only on organic farms. Secondly, Vasklikiotis(2011) indicated that organic agriculture have a high yields. Because farmers do not use any synthetic pesticides, it could afford a high yield of outputs. The agriculture systems are highly dependent on biodiversity, such as water regulation and climate stability. ABC rural (2010) reported that organic farming produced 30% more corn during droughts, due to better water retention. What is more, after accounting for all external costs of soil loss, water pollution, the profit of organic farming is higher than others. Besides, the methods of organic continually increase soil fertility and prevent loss of topsoil to erosion.
Because of its benefits to people and biodiversity, organic farming is supported by many companies and governments. Christian (2004) showed that during the last decade, many countries have a significant increase in certified organic farming. According to the International Trade Center, the annual sales grew from $17.5 billion to $21 billion between 2000 and 2001. In addition, Vasklikiotis (2011) reported that a number of European nations have supported the organic farming programs. Government will support the farmers to converse to organic farming, and afford them environment services, such as elimination of toxic runoffs which pollution underground water source.
Role of accounting
Reasons of using management accounting to address environment issue
There are massively increasing need for the business to use the management accounting tools to evaluate the risks and opportunities. Carbon Trust and McKinsey (CIMA, 2010) carried out a research suggested that company could create opportunities of increasing its value up by 80% if they tackling climate change. However, if the company is failed or laggard on climate change, 65% of value could be destroyed. Finding out a correlation between carbon efficiency and valuation multiples, the Goldman Sachs sustain report in 2009 illustrated that the "Green credentials" have an increase influence on a company's market capitalization. Besides, the external forces, such as investors and customers, are pushing climate change up the business agenda.
Firstly, investors expect a clearer and more reliable report of risk and costs around climate change and they think management accountants are the only way to report (CIMA, 2010). Investors need quality information to make investing decisions; particularly they focus on the value of non-financial reporting in a long term. According to the China Mobile report (2010), investors want to better understand a company's potential to manage risks and benefit from opportunities. Particularly, to be known that specific things what the company have done, investors could make a better choice when they make decisions. And now, they are increasingly pay attention to the climate change issue, a third of shareholders are signed up to view Carbon Disclosure Project material, said Chris Harrop, Marketing Director at Marshalls Plc(CIMA,2010).Besides, Derwall,J(2006) indicate that investors care about the corporate environmental performance because it is a potential source of information that help them generate superior excess returns. He suggests that there is a positive relationship between eco-efficiency and firm valuation. Share of most eco-efficient firms compare to least eco-efficient firms were undervalued, but later there is an upward price correction.
The second driver for address the environment issue is employee and customers. For employees, they need to know there is commitment and rigour behind climate change activity. CIMA survey (2010) shows that it is much easier when implement strategies if people have awarded of the reason why, and the benefit to be obtained from the environment strategies. Furth more, Sadgrove (1992) claimed that a great number of staff have a personal interest in environmental protection. Also, the author believes that a caring-climate change company will easy to attract new employees and increase their loyalty. For customers, they choose products based on the company's environmental impacts. Sadgrove (1992) shows that 39% per cent of adults in the UK buy green products as far as possible and further 20% buy them whenever they see them. As a company, they should meet the employee and customers demand to address the environment issue.
Thirdly, the major diver of using accounting tool to climate change is global economics itself. Because of economic recession and increasingly global competition, there is a great deal of demands for operating efficiencies (CIMA, 2010). Companies have considered investment in new technologies, plant and equipment which require professional management accountants provide a financial and strategic appraisal. CIMA (2010) shows that during the recession, if having reduced their environmental programmes, company could miss the opportunities for long-term cost savings. Make an example of Compass Group, who gets benefits from investing new technology of steam in a downturn economic. Compass Group is one of the largest food and company in the world, and they also do service business. They employ a great number of employees providing food services including restaurants and coffee shops, and supporting service like cleaning, security. This example explains the Compass management accountants proved the value of new Steamaplicity technology for patient meals (Compass case study, 2008).
The Compass Group realized that there is an important environmental impact associated with its operations, products and services. Then they define environmental targets in areas such as waste management, water management, and pollution prevention. What is more, they work hard to improve the environmental performance of their operations, such as they provide steam value technology to their clients. Steamaplicity is based on complete meals with a nutritional mix of fresh and cooked ingredients, served in containers with patented steam release valve lid. Use microwave to pressure steam the food, it could remain the maximum nutrients. Patients pick 20 hot dishes every day, with additional special dietary requirements. Each kitchen has five standard 1000W commercial microwave ovens and refrigerators to comply with the average hospital budget for patient's food. The total ward equipment cost is about $2000. Because hostesses take over the patient meal service from the cleaning staff, the staff hours on the wards should increase slightly overall. However labor savings from reduced service hours in the kitchens, there is no extra cost. Because of the implement of Steamaplicity, the meal service role was removed from the cleaning service. These two roles allows one to focus on keep a high quality of cleanliness, and the other one pay attention on the patient meal service. In that way, patient care has improved. When the considering if they should use the Steamaplicity system, management accountants demonstrate the costs and benefits compare to their existing situation. Accountant identified the cost and benefits were: a change in the roles of staff on the ward, an increasing cost of meal itself, labour savings, energy savings because of no cooking food, energy saving connected with microwave ovens instead of trolleys, and lower costs of repair and maintenance the kitchen equipment and facilities. Due to the Steamaplicity system, they save $50,000 in energy cost, with associated reduced carbon emissions per year.
Management accounting tools
Management accounting has played a vital role in proving sustainable strategy addressing the climate change issue in a long term. By implementing some initiative way to save energy; the company could survive in a sustainability way to adapt to climate change and ecosystem degradation. Besides, it could drive the manager make a proper decision if the finance team provides a strategy to save energy. According to the CIMA survey results(2010), there are 80% of respondents think that the finance function should be engaged in climate change initiatives, and majority of respondents hold the value that management accounting tools, such as cost benefit analysis and investment appraisal, could be usefully adapted to help manage environmental impacts.
Firstly, using the cost- benefit analysis, manager could formulate payback in a very simple and understandable way. Cost- benefit analysis aim to inform the decision-making process with specific types of information. Its purpose is not to price everything, but rather to order social choices for decision makers. It is a common way to assess the social value project which cost minimum but obtain maximum benefits.
Management accountants can show the potential cost saving and revenue generation opportunities when they need to reduce the impact of climate change. Make an example of Asda, stores stocking plenty of products, which is inevitable that waste is generated. But Asda has several approaches to make sure the material is disposed of in a sustainable way. The supermarket is running a charity called FareShare to distribute the unsold food to those in need. However, it is not a sustainable solution with the rapid escalation of landfill tax. Therefore Asda has a firm commitment to send "zero waste to landfill" by the end of 2010. As part of the strategy it has introduced a process that food which cannot be sold is sent to recycling centers and reprocess into bio fuels or pet food. Asda's finance staffs run this project to provide actual and forecast cost benefit analysis on a month by month basis which help refine the non profitable elements and directs the successful roll out. The finance team also set a model to monitor the project, within it, stuff estimate input variables and the committed store roll out numbers to acquire a forecast cost benefit analysis. Although this approach is successful, ASDA also have tried other alternative ways. Under the cost-benefit analysis, they found this approach ensured that good ideas are not wasted, and progress can be made to long-term goals.
EMA:
When facing the increasing cost of environmental protection or in connection with environmental damage, a company can implement environmental management accounting (EMA) to improve profits. Martin (2004) proposed using environment accounting techniques to identify actions that not only support environmental objectives, but also help companies to manage business effectively.
The first reason to use EMS is the need for evaluation of environmental costs which have been a significant element of total cost, but some of them could be reduced or even eliminated. The paper will present an approach to achieve this. Another reason is that it could have a positive influence on the market position of the company. For example, when a company takes account of the environmental impact of its activities, products and services, the implementation of EMS increases the opportunity to have business partners, 94% of managers take the implementation of an EMS into consideration when selecting their business partners (Martin, 2006). Over 90% of managers expect that implement of EMS would improve work in the area of environmental protection and increase the environmental awareness of all employees.
Management of waste is one of the most immediate and obvious approaches to acquiring financial benefits. Gray and Bebbington (2001) indicate that most companies who addressed the waste issue carefully have found significant financial savings. From the environment perspective, maximizing resource efficiency and reducing waste leads to improved environmental performance and reduced operation costs, which are a benefit for business.
There is a comprehensive approach by which companies are account for waste. Gray and Bebbington (2001) give one example of a company, who use comprehensive waste accounting system which charged all waste management costs back to line management. Line management was able to devise cost-effective ways of simply reducing costs. Waste water leaving a site was a cocktail of many chemicals. The presence of traces of certain controlled substance in the water meant that all the water had to be specially treated. The waste accounting system helped manager to identify the point at which the traces joined the water stream and separate them out before they jointed.
One of functions of accountant is measure performance and manages it. Allen (CIMA, 2010) suggested people cannot manage unless they measure performance. Through setting benchmark or making a clear report, management accountants could show how their companies are doing in terms of reduce the impact to environment, such as carbon footprints or energy savings. Sometimes, they use key performance indicators and scorecard to measure performance. Firstly, quantitative KPIs are needed and this means that a company can set a target to reduce an emission when it is expressed in a quantitative term (Defra, 2006). Take an example of China Mobile, which pays great attention to energy consumption to respond to the climate change (China Mobile, 2010). They set a target to save electricity use of 1.8 billion kWh in 2008. Because of the quantitative target; they made the necessary efforts on improving their energy efficiency to meet their commitment. Besides, McKinsey study (2007) found that only 24% of managers have set emission target for operations. Actually, management accountants should pay highly attention on the targets, make example of Asda. After producing environmental targets, their accountants also use the target as a part of performance reviews connected to the individual's targets and bonuses on climate change.
The accounting profession should provide standards and metrics for disclosure the BES (Biodiversity and Ecosystem Services) impact and cooperate with other to accelerate efforts (TEEB, 2010). Right now, the government and business are working together to develop plenty of principles, guidelines to help company address BES challenges which could bring risks and opportunities. These initiatives need a better metrics, including valuation and market-based incentives. However most initiatives are weak, people need a quantification of biodiversity and ecosystem services and reporting requirements. Credible audit and assurance mechanisms are also needed to validate business performance and quality of disclosure.
CONCLUTION
After the nature disaster from tsunami to flooding, people have awareness the importance of the environmental problem, particularly the biodiversity loss. This paper has introduced the risks of biodiversity; include the economic and people's daily life, such as food security. For the business, it has a severity impact. Because of the ecosystem degradation (PWC,2010), all of world's commercial wild marine fisheries are collapse, warm-water coral cover has fallen by more than 30%, and the cost of biodiversity loss and ecosystem degradation takes up 3.3% of global GDP. How to deal with the biodiversity loss becomes a problem for business. The author suggests companies should realize the important of biodiversity first, and then identify the risk, compare their performance with competitors, and last cooperate with stakeholders.
This paper also provides an approach to make companies grab the opportunity of biodiversity. Company should build an organic farming system which is good for global food security, but also protect the environment. One of the advantages of organic farming is it supports a higher level of biodiversity, because of using less fertilizers, rare species could be found in the organic farming rather than conventional farming. What is more, due to its water retention, organic farming offers a higher yield of output. In additional, take account into external cost, such as soil loss, organic farming have higher profits.
Next, this paper explains the role of accounting in addressing climate change and biodiversity. The reason for using management accounting tool is because the push of stakeholders, such as investors, employee and customers. Investors need to acquire more information to make invest decision and environmental performance connected with value of a company. The most important driver is using management accounting tool could provide financial appraisal to value a new technology, such as Steamaplicity, which cause the operate efficiency. After comparing the cost and benefits with their previous situation, accountants provide a decision that implication of the Steamaplicity, which lower the costs of maintenance equipment, but also save energy cost. At the end of the paper, it introduces environmental management accounting to improve their profits, but also support environmental objectives.
