20.
What is sustainable management accounting?

20.1 Introduction

Sustainable management accounting (SMA) is an approach that integrates sustainability principles into traditional accounting practices to enhance decision-making processes and organisational performance. Organisations may seek to incorporate sustainability measures into their management accounting practices, either to align them to their strategic goals or to reflect regulatory pressures. The extent to which these factors drive behaviour will depend on the organisational context.

SMA integrates tracking, reporting and managing a company’s environmental and social impacts into and alongside financial performance. It aims to improve internal management decisions by considering the impact on society and the environment, thereby contributing to sustainable business practices. To be able to deploy such approaches, management accountants need to have a thorough understanding of production and/or service processes within an organisation. They are then able to determine which aspects of performance could and – most importantly – should be measured.

Management accounting is not constrained by reporting requirements in the way that financial reporting is, and can tailor its measures to support the organisation’s objectives. We have already considered the balanced scorecard approach in Unit 18, which is sufficiently flexible to include non-financial sustainability-related metrics alongside financial metrics. In this unit, we introduce four additional techniques: life cycle costing, material flow accounting, internal carbon pricing and social value.

20.2 Life cycle assessment

Read this MIT Sloan article that considers strategic sustainability uses of life cycle analysis.

Life cycle assessment (LCA) evaluates the economic, social and environmental impacts of a product or service from cradle to grave. By assessing stages such as raw material extraction, production, usage and disposal, LCA provides a comprehensive view of financial and non-financial impacts. LCA is often conducted once the activity – for example, production – has taken place but it can also be adopted for planning purposes. This can inform how key performance indicators (KPIs) are set for the organisation and then broken down for operating units.

Life cycle costing attempts to include all the costs associated with a product or service. It is important to reflect on the phasing of costs which can be incurred at different times throughout the life cycle. Furthermore, many costs are linked; for example, a focus on waste disposal during a manufacturing can lead to a reduction in end-of-life costs.

Some limitations of life cycle costing include:

• complexity and data requirements
• uncertainty and assumptions involved in evaluating future costs and performance
• focus on cost ahead of other factors that may be equally important
• lack of standardisation.

The process can also be resource-intensive and difficult for smaller organisations to implement.

20.3 Material flow cost accounting

Material flow cost accounting (MFCA) seeks to support an organisation’s understanding of the financial and environmental impacts of its material and energy usage. The method is standardised through one of the International Organization for Standardization’s standards (ISO 14051), to establish a common approach to assessing material efficiency. It is concerned with the usage of materials in an organisation, therefore it does not consider many of the externalities considered by life cycle costing. Unlike traditional cost accounting, which often treats waste as an overhead cost, MFCA highlights waste-related expenses and encourages sustainable production practices.

20.4 Internal carbon pricing

Internal carbon pricing assigns a cost for emissions and seeks to guide internal decision-making to reduce carbon emissions. This can be achieved either through:

• shadow pricing, whereby a charge is allocated to carbon emissions to guide decision-making
• internal carbon fees, whereby a business unit is charged a fee for their emissions which is then used to fund sustainability initiatives, such as offsetting carbon emissions or financing carbon reduction projects.

It can support investment decisions, aid with managing regulatory risks posed by existing and potential carbon pricing regimes, and it can also help management identify risks and opportunities. See for example, Mitsubishi’s use of internal carbon pricing.

The strategy adopted for internal carbon pricing will vary between organisations, although common approaches include a uniform price or a differentiated price (for example, by location or business unit). The organisation’s management will decide which it feels is most appropriate.

20.5 Social value

Social value, also known as social return on investment (SROI), measures the social and environmental value generated by an organisation relative to the investments made. It provides a framework for evaluating the broader impact of organisational activities on society, thereby helping companies understand and enhance their contributions to social well-being.

Watch this short video from Social Value International, which outlines the principles included in their framework.

Together, these tools and techniques support a holistic approach to sustainability, enabling businesses to align their operations with environmental and social objectives while maintaining economic viability.

20.6 Case studies: Examples of sustainable management accounting in action

Access to live case studies of management accounting practices is typically generalised as organisations are competing with each other and do not want to share commercially sensitive information. This can make it difficult to visualise some of the costing and pricing approaches that have been highlighted. The following case studies provide insights into different sustainable management accounting techniques.

How does price transparency impact other industries?

The pharmaceutical industry has been challenged about the pricing of new drugs and the estimated costs of trials. High drug prices have been justified as a means of recouping the cost of research and development of both successful and unsuccessful drugs, and the associated costs of bringing them to market. A recent study indicates that the actual cost of drug development may be lower than has been claimed by the industry. Information of this nature is particularly relevant in the medical industry as difficult decisions often need to be made about who can access various drugs by both policymakers and doctors treating patients.

The food industry faces challenges over a lack of transparency concerning its product pricing strategies. Supermarket chains take a portfolio approach to pricing, but their relative power in comparison to their suppliers has led to concerns that they may be pushing prices down to unsustainable levels.

The sector has also been subject to allegations of ‘price gouging’ – raising prices to an unsustainably high level to take advantage of the operating environment, for example, high prices for medical masks and hand sanitiser during the Covid-19 pandemic. While some consider price gouging a legitimate response to scarce resources, many consider it unethical.

Read the article, Amid allegations of price gouging, it’s time for big supermarkets to come clean on how they price their products for a discussion of supermarket pricing.

20.7 Summary

• Sustainable management accounting combines traditional costing techniques and investment appraisal methods with sustainability measures to recognise the associated environmental and social costs (for example, including waste and carbon emissions).
• SMA seeks to drive organisational decision-making by aligning financial and sustainability goals.
• Accurate data collection for environmental and social impacts is complex but essential for effective SMA implementation.