Business ventures have a wide range of duties and responsibilities to their employees, partners, investors, and the community within which they operate. Traditionally, the stakeholders interested in the company or affected by its actions and practices are informed on its operations and financial activities via annual reports. However, the impact of any business on society goes beyond the economy. In particular, many industries use natural resources for production and substantially impact the environment through supply chains, resource consumption, and waste production. Considering the growing interest in protecting the environment and addressing ecological problems, traditional accounting and company reports fail to meet the stakeholders’ information needs. Furthermore, many consumers make decisions concerning engagement with a company based on their environmental responsibility. It is currently associated with several issues, including the lack of clear disclosure standards and principles, insufficient adoption, and increased costs. Nevertheless, disclosure of environmental accounting can positively impact the financial performance of the organization as well as increase stakeholder satisfaction.
Environmental or green accounting is a relatively new trend in the field of business. Ayu et al. (2020) define this type of accounting as the process of “identifying and revealing explicit environmental costs” (p. 77). It recognizes and communicates the costs of a company’s resource use and environmental protection expenditures, damage, and waste transfer costs (Ayu et al., 2020). The primary definition of environmental accounting refers to the costs that impact the company’s bottom line (United States Environmental Protection Agency, 2022). The United States Environmental Protection Agency (2022) argues that it can be extended to account for the costs to individuals, communities, and the environments the company does not directly impact. Accounting for the damage to the environment presents a clear departure from traditional accounting as it focuses on the interaction between individual businesses and the economy with the natural world (Rubenstein, 1992). It should be noted that environmental reporting can be utilized internally and externally. Internally, it may be employed to regulate pricing and expenses, while externally, it serves as a disclosure of a venture’s development toward sustainability (Shoeb et al., 2022). Thus, this type of accounting reveals the cost of the economy on the environment.
Disclosure of environmental accounting is associated with several issues that may prevent adherence. Shoeb et al. (2022) note that despite certain industries mandating compulsory reports of impact on the environment, the majority of it is disclosed on a voluntary basis. As with any form of accounting, environmental reporting requires substantial cost and time investment. According to Hossain (2019), the cost factor may deter ventures from recording, analyzing, and interpreting information relating to the use of natural resources, waste transfer, or environmental protection costs. In addition, as environmental accounting differs from traditional forms, it requires the employment of qualified personnel experienced in the field (Hossain, 2019). Therefore, the documentation and analysis of the environmental impact and its subsequent disclosure to stakeholders involve additional costs. Although established businesses may be in a position to bear added expenditures, smaller ventures may not be able to afford it.
Furthermore, limitations in the disclosure can be attributed to the lack of coherent standards as well as rules and regulations on environmental accounting. Hossain (2019) notes that there is currently no accepted standard for recording the impact a business has on nature, resulting in different companies, in particular, manufacturers providing reports that focus on various aspects. In addition, the lack of industry-specific guidelines and regulations can prevent disclosure (Hossain, 2019). Moreover, the inability of businesses to afford environmental accounting and the absence of consistent rules and standards results in low adoption of the practice and underreporting. Therefore, the overall impact of enterprises in a specific community or country on the environment remains difficult to calculate.
Despite the challenges, environmental accounting has several positive implications for business ventures divulging their impact on the environment and society as a whole. According to Ayu et al. (2020), although it is associated with increased expenditures to the organization, it can translate into increased revenue and decreased operating costs. For example, it can reveal the areas where expenses can be reduced. In addition, disclosure highlights the empirical link between the activities of the company and environmental costs and impact (Ayu et al., 2020). It can be argued that for consumers, environmental accounting indicates the reliability and responsibility of a venture and can lead to increased revenue. Therefore, disclosure can be utilized as a tool to develop a company’s reputation and “convey to the public its legitimacy and relevance in the industry” (Ogunode, 2022, p. 18). Besides the positive impact on the business, the evaluation of environmental reports submitted by numerous companies in different industries can expose existing trends in resource consumption and waste transfer. This knowledge can be used for various purposes, including establishing industry-wide guidelines and regulations.
In summary, the environmental responsibility of businesses continues to garner public interest and attention. Disclosure of environmental accounting allows companies to show the public its impact on the environment by revealing the use of natural resources, waste transference, and expenditures on environmental protection. Thus, ventures can improve their reputation by demonstrating their interaction with the environment and resolving to decrease the adverse impact. In addition, this information can be used to determine industry-wide trends and the overall effect on the planet. However, environmental accounting requires additional costs and remains in its infancy with the lack of comprehensive international standards, rules, and regulations.
Ayu, M., Lindrianasari, L., Gamayuni, R. R., & Urbański, M. (2020). The impact of environmental and social costs disclosure on financial performance mediating by earning management. Polish Journal of Management Studies, 21(2), 74–86.
Hossain, M. M. (2019). Environmental accounting challenges of selected manufacturing enterprises in Bangladesh. Open Journal of Business and Management, 7(2), 709–727.
Ogunode, O. A. (2022). Legitimacy theory and environmental accounting reporting and practice: A review. South Asian Journal of Social Studies and Economics, 13(1), 17–28.
Rubenstein, D. B. (1992). Bridging the gap between green accounting and Black ink. Accounting, Organizations and Society, 17(5), 501–508.
Shoeb, M., Aslam, A., & Aslam, A. (2022). Environmental accounting disclosure practices: A bibliometric and systematic review. International Journal of Energy Economics and Policy, 12(4), 226–239.
United States Environmental Protection Agency. (2022). An introduction to environmental accounting as a business management tool: Key concepts and terms. US EPA. Web.