Written by Glenn Stephens, Pennsylvania Department of Environmental Protection

During the 1999 SBO/SBAP Conference at Tampa, Florida, Glenn Stephens presented Pennsylvania’s new, more comprehensive concept of "Environmental Financial Management." This concept goes beyond Environmental Accounting and finance, per se, to recognize that the focus of environmental management should be on good environmental performance. This new concept attempts to synthesize the evolutionary financial path of supporting investments in pollution prevention with the environmental management system process. Its main precept is that to obtain effective environmental progress, business and the environment must truly recognize each other’s needs, biases, and interests. We can neither bankrupt businesses or communities nor pollute at will.

A sole focus upon "environmental accounting" or "environmental cost accounting" may be too limiting. It is more than "accounting" and more than simply cost analysis. Though the bulk of its components involve environmental accounting, we need to provide techniques and opportunities for looking beyond the firm itself. Environmental accounting techniques evoke a process that inevitably leads to broader topics in financial management. Initially, environmental accounting encourages organizations to broaden their analysis to "discover" what really drives hidden or arbitrarily assigned costs (such as those typically found in overhead). The usual reaction is surprise at the number of environmentally related costs.

The organization then attempts to minimize or eliminate those costs via the involvement of internal resources (employees, managers, etc.). Then, further attempts are made to minimize or eliminate costs via external resources such as industry or trade groups, professional organizations (such as the Institute of Management Accounting and Certified Public Accountants), etc. Then, the organization coordinates with government—which is increasingly taking on a pro-active role—to insure movement to and beyond compliance. Government entities often serve as a broker of technical (and other) information and a "matchmaker" for professional resources.

Government offers vital assistance in providing incentives or helping to fund pollution prevention investments. And when there is no apparent solution, government, industry, and third parties coordinate research and development into appropriate green technologies.

Financial analysis is the thread that binds the components of Environmental Financial Management. Initially, we seek to improve financial analysis practices and capabilities in evaluating investment alternatives. Then, we move on to investigate operations (O&M). Here, we are just as concerned with identifying revenue-generating opportunities as we are with cost savings. The majority of these two initial components (investment and operations analysis) involve environmental accounting. However, we go beyond environmental accounting to also incorporate the growing influence of Activity Based Costing and the proven usefulness of Life Cycle Assessment.

Investment Recovery, another growing business discipline treats every cost as an asset that must be managed. Then, we give specific attention to Business Risk Management. Intel Corporation found that compliance audits focused too much on compliance and management audits focused too much on process, so it instituted a third audit process, called the business risk audit to focus on those items that posed the most danger to disrupt business operations. Along those lines, we specifically focus on financial analysis that describes the magnitude and effect of environmental risks. We can only deal effectively with potential liability in this manner. Finally, we consider financing needs and available support. Initially, this comes in the form of loans and grants to support investments in existing P2/E2 technology. And this area is the primary financial focus of most SBO/SBAP programs. But beyond that, what happens when there is no solution to pollution? Government, businesses, and other entities must work together to broker solutions and to promote the development of green technology. It is not as necessary for government to fund this stage of development as to be involved in encouraging movement towards a solution. Financial analysis here attempts to define the prospects for feasibility of the technology, the effectiveness of possible government support, the economic benefit of marketing the technology, etc.

The concept of Environmental Financial Management attempts to recognize the comprehensive interrelationships of financial and environmental considerations. Just as environmental flows (discharges, emissions, waste streams, etc.) must be scrutinized, so must we scrutinize associated financial flows to obtain optimal performance. For additional information and/or comment, contact Glenn Stephens at stephens.glenn@dep.state.pa.us, phone 717-772-8926, fax 717-783-2703, or write c/o PA DEP/OPPCA, P.O. Box 8772, 400 Market Street, Harrisburg, PA 17105-8772.

Thanks to Glenn Stephens for his article. If you have the chance to attend one of Glenn’s presentations in person, avail yourself of the opportunity, it will be worth your while.