Monitoring of enterprises' environmental expenditure

This report was produced as a result of a development project relating to the monitoring of enterprises' environmental protection expenses. The objective of the project was to prepare a recommendation on the definition and monitoring of environmental expenditure in order that enterprises can report the information concerning them more easily and better than before. The idea was to find contact points between statistics and financial environmental accounting developed in enterprises, rather than give instructions to enterprises for creation of a certain kind of accounting system. This report presents the central results of the project.

Statistics on environmental protection expenditure by industry have been compiled by Statistics Finland since 1992. It collects annually information about spending on environmental protection on the basis of a sample of about 2,500 industrial establishments (sites). The sample is focused on the most significant establishments and enterprises from the viewpoint of environmental protection. Information on the whole industry can be calculated relatively accurately on the basis of the sample.

Compilation of statistics follows international regulations and agreements, especially the EU's Single European Standard Statistical Classification. The aim is to obtain internationally comparable information on the direct expenditure and revenues raised by enterprises' environmental protection. The examination does not cover measures targeted at enterprises' indirect environmental impacts and the expenses and revenues raised by them. To this kind of statistical description, more general models relating to certain branches or the whole national economy can be applied.

In compilation of statistics on environmental protection expenses, enterprises' environmental protection is monitored on the basis of the actual spending on environmental protection. The statistics compilation is based on the macroeconomic approach, following that approach in its completeness, uniformity, continuity and comparability.

Statistics cover the following expense items of environmental protection:

• environmental protection capital expenditures;
• operating and maintenance expenses of environmental protection equipment;
• charges and other environmental operating expenses.

In addition, the following financial items are monitored to describe the net effect of the spending of environmental protection:

• revenues and cost savings from environmental protection;
• subsidies received for environmental protection.

Statistics of the financial data on environmental protection are based on the data that the enterprises produce for the statistical inquiry. The development project regarding the definition and monitoring of environmental expenditure aimed to produce such principled and practical instructions that help enterprises to monitor and report the information required by statistical needs. The instructions and additional information produced by the project intend to provide long-term solution models for a situation where an enterprise is developing the financial environmental accounting in its own information systems. Although the instructions do not cover all the financial impacts of enterprises' environmental activities, it contributes to the development of environmental accounting systems with a wider perspective.

Enterprises can utilise the financial environmental accounting in several different contexts. It can be connected to management needs that seek to increase the corporate management's knowledge of the financial and business significance of environment-related factors. Recently, the significance of financial environmental data has grown particularly in enterprises' public reporting. The information needs of stakeholders are more often than before directed to the economic impacts of environmental issues both in financial statements and annual reports and in separate environmental reporting.

In developing the monitoring of financial environmental data all of the above tasks can often be taken into consideration at the same time. This is the case especially when an enterprise develops monitoring within its financial accounting system. This monitoring is referred to as environmental accounting. It can be divided into two sectors based on how it is linked to the principles and objectives of the enterprises' environmental activities and how the key concepts of accounting are then defined. These two sectors are:

• environmental accounting focusing on the environmental protection approach: the intention is to monitor the financial impacts generated by environmental protection and the related activities; and
• environmental accounting centering on eco-efficiency; the purpose is to follow, in addition to environmental protection, the financial impacts caused by activities that promote materials and energy savings.

Financial environmental data can be controlled in financial accounting systems in different ways. The methods in practice used by enterprises include a technical solution based on accounting codes and a transaction-based recording solution. As the accounting systems cannot often produce all the financial environmental data, enterprises can also utilise their other systematic information systems. These can be activity-based cost accounting, quality cost accounting and separate cost monitoring based on spreadsheet software.

The second main section of the report presents the central results of the development project. The section gives revised instructions for Statistics Finland's annual inquiry on environmental protection expenditure by industry.

Detailed, supplementary information relating to the instructions for the inquiry is given in the endnotes to Section 2. The endnotes provide more exact information on how enterprises can produce the data needed for each question in the inquiry from their own accounting systems. The detailed instructions and examples given in the endnotes can serve as general guidelines for development of financial environmental accounting by enterprises.

Statistics Finland employs this inquiry every year to collect information concerning environmental protection expenditure by industry. It covers about one third of Finland's industrial establishments (sites). The inquiry is used as a basis for production of branch-specific data on the whole industry. The purpose of the inquiry is to collect enterprises' environmental protection capital expenditure, expenses, revenues, cost savings and subsidies during the review period. The data content of the inquiry is still more or less similar as previously.

Compared to before, the instructions for the inquiry have been revised with the aim that enterprises would be able to utilise the information produced by their own accounting systems more easily when responding to the inquiry. In addition, the instructions and the connections to the more detailed information on Statistics Finland's Internet pages can help enterprises to develop, at least in the long run, their monitoring of financial data on environmental protection.

The inquiry is establishment-specific. It relates only to the particular establishment (site) indicated on the first page of the inquiry. An establishment refers to a local production unit defined by its branch of industry. Therefore, the same enterprise's several establishments representing different branches may be located in the same address. To identify the establishment concerned a label is attached to the first page of the inquiry indicating the street address of each establishment, supplemented by its principal activity and the number of employees in that establishment. The official numerical identifier of the establishment is also given there.

The inquiry covers the branches of mining and quarrying, manufacturing, and energy and water supply. The branches of industry are classed in accordance with the Standard Industrial Classification based on the EU standard (NACE Rev.1).

Definition of environmental protection

In this inquiry, environment is defined as the external operating conditions of the establishment, comprising air, water, soil, natural resources, flora and fauna, people and all interaction between them.

Environmental protection refers to those measures that reduce environmental damage. Such measures are:

a. prevention, reduction and elimination of direct harmful environmental impacts, or prevention of their spreading, such as

• reduction of emissions and prevention of their formation by improving the process technology, for example;
• waste management and prevention of waste formation;
• repairing of environmental damages;
• restoring of environmental damages (incl. landscaping);
• establishment of protected forest areas.

b. measures related to prevention, reduction and elimination of direct harmful environmental impacts, or to prevention of their spreading, such as

• improvement of energy and materials efficiency, the primary purpose of which is to reduce the direct harmful environmental impacts caused by the establishment (e.g. recycling in place of waste treatment);
• management, education, induction and information related to environmental protection;
• environmental protection research and development directed to the production process;
• reimbursement and compensation for environmental damages,
• environmental insurances and reduction of environmental risks.

Direct and indirect environmental impacts

An environmental impact is a change in the environment caused by the establishment's activity, products or services. In this inquiry direct environmental impacts refer to the establishment's own actual environmental impacts. Energy saving and intensifying of materials use is here included in environmental protection if through them it is possible to, and the primary intention is to influence the establishment's direct environmental impacts. Indirect environmental impacts can be generated, for example, by the products manufactured by the establishment and by their transportation, use and final disposal. This inquiry does not concern with environmental protection measures regarding the management of indirect environmental impacts and the related economic data.

End-of-pipe and process-integrated environmental protection measures

The inquiry covers both end-of-pipe and process-integrated environmental protection measures of production processes. It is therefore important in responding to the inquiry to make sure that the answers given include the expenses and capital expenditure of both types of environmental protection measures.

An end-of-pipe environmental protection measure refers to such treatment and reduction of emissions which does not significantly alter the production (process) but may call for minor modifications in production technology. For example, different types of "end of pipe" clean-up equipment (such as electrostatic precipitators) are an end-of-pipe environmental protection measure.

A process-integrated environmental protection measure is a process modification and other such measure that will prevent emission production so that emissions per product or production unit will decrease. Such measures include e.g. burner solutions that reduce nitrogen oxide emissions and closed water circulations.

Definition of environmental protection expense and environmental protection capital expenditure

In this inquiry environmental protection expense and environmental protection capital expenditure refer to the part of environmental protection expenditure belonging (accrued) to one year or accounting period in accordance with the principles applied in bookkeeping. Expenses and capital expenditure are given in gross value based on purchasing price exclusive of the deductible value added tax (VAT). The environmental protection expenses do not include:

• imputed costs (depreciation and interest on environmental protection investments);
• expenses and capital expenditure indirectly related to environmental protection (e.g. expenses and capital expenditure on external recycling and final disposal of products produced by the establishment); nor
• expenses not related to environmental protection (e.g. fines).

Expenses and capital expenditure of measures related to improvement of materials and energy efficiency are included only to the degree where the primary objective of these measures is environmental protection. Recycling, for example, is taken into consideration only as far as it is used instead of other waste treatment. This definition is based on the environmental protection approach applied to statistics on environmental protection expenditure that is narrower than that of eco-efficiency.

The following items, which differ slightly from the environmental protection expense concept and thus from the actual environmental protection expenses, are given separately: the value of the purer production input use, environmental revenues and cost savings and subsidies received for environmental protection. Each of these is given a definition and instructions separately following the order used in the inquiry.

Cleaner production inputs refer to such inputs whose use compared to the use of conventional "dirtier" production inputs improves the establishment's level of environmental protection. These include low-sulphurous fuel oil, the use of which compared to ordinary fuel oil reduces sulphur emissions caused by burning oil, in principle similarly as clean-up equipment. Others could be the use of biodegradable, recyclable or burnable materials.

As other environmental operating costs are reported environmental protection related payments made to outsiders, administrative and management expenses, research and development expenses and compensations, that is, expenses not reported in section B. Other environmental operating costs are either purely environmental protection related payments made to external parties to the establishment (subsections C1-C3, C7) or costs caused by these kinds of payments and often by own work (C4-C6). Waste taxes, other tax-like charges and water protection charges are given as separate items in subsection C8. The whole volume and value of own work directed to environmental protection is reported in subsection C9.

Here are reported expenses of such research projects that are innovative in nature and advance the level of the establishment's environmental protection at least in the long run. Expenses of R&D projects produced by improvements in the environmental quality of products are not given in this inquiry. The expenses may be brought about both from external charges and self-performed R&D work.

Give here an estimate of the person-years the establishment uses on environmental protection and the costs caused by the corresponding total labour input, that is, the personnel costs included in sections A, B and C in total. Person-years should also comprise part-time and fixed-term work converted into full-time working time.

Calculated or estimated environmental cost savings are given here. They refer to the following types of items:

1. All revenues and expenses are separated in bookkeeping at their registration stage into those related to environmental protection and those not. Then both external and internal environmental protection transactions are recorded "earmarked" by utilising the accounting codes of the accounting system (parts of the code are e.g. the bookkeeping account, type of cost, cost account, cost centre/object, activity, work order and partner code). The solution can in principle be applied in all enterprises in the same way. It contains the environmental protection revenues and expenses produced solely by environmental protection. Therefore it covers only partly the total environmental protection expenses of the enterprise. The solution also necessitates creation of detailed recording principles and practices as well as clearly defined responsibilities.

2. All environmental protection revenues and expenses are not separated at the registration stage into those related to environmental protection and those not. In that case monitoring is based on that in addition to the registration stage solutions, all the possibilities provided by the structures (e.g. accounting code, product groups, information fields, etc.) of the accounting system and related subsystems (e.g. sales ledger, maintenance management system) are exploited. This solution generally leads to sufficient coverage in the monitoring of environmental protection revenues and expenses. Concrete solutions are then largely dependent on the enterprise's accounting system. Here is as an example of a general solution:

Environmental protection revenues can be monitored in bookkeeping on their own revenue account/s. Environmental protection expenses caused by payments to external parties can be registered in bookkeeping on their own expense accounts or subaccounts of expense accounts. Accounts of cost accounting can be used to monitor expenses caused by payments made to external parties or by the establishment's own environmental protection work. The account of cost accounting can then form entirely the environmental protection cost centre. In other cases environmental protection expenses can be monitored with the help of cost centres (e.g. the maintenance costs of a desulphurisation plant on the basis of the equipment database information), activities (e.g. by establishing the activity of environmental supervision and monitoring) and work orders (e.g. by establishing the work numbers for the control and monitoring activity: sea water surveillance, bioindicator surveys and dust surveys). The maintenance costs of environmental protection equipment can be followed by cost centre with the help of the equipment database by tracing the environmental protection equipment and the costs directed to them. By monitoring environmental activities and work numbers it is possible to follow both expenses directed to environmental protection equipment and those not directed to them, i.e. the expenses of self-performed environmental protection activities.

In separate monitoring (e.g. spreadsheet software) accrual based costs of environmental protection can be followed on the basis of invoicing so that the person recording/inspecting/approving the invoice registers the cost to the accounting system when approving the water bill. This kind of monitoring can be realised in such establishments where the number of economic transactions related to environmental protection is not very large. In more complex cases separate monitoring can be solved more systematically and easier than in the electronic database that covers the enterprise's all establishments. In each case the principles, monitoring practices and chain of information production has to be documented in detail from the enterprise's other information systems (e.g. invoicing) to this separate system. In these instructions separate monitoring is not discussed in more detail with respect to monitoring of different types of financial environmental data, but the principles and practices of separate monitoring are almost similar for all items.

In the example the total investment project concerns renewal of a productive process. The implementation of the project aims to improve the production efficiency, customer satisfaction and environmental protection level at the same time and the objectives concerning these have been set concrete enough. To fulfil the objectives of environmental protection the following specifiable subinvestments are realised in the total investment project: an electrostatic precipitator for dust removal (FIM 100,000), a Lox-Now burner (FIM 100,000) and process-integrated dust collection and recovery equipment (FIM one million). When the acquisition cost of the total investment project is FIM 12 million, environmental protection investment expenditure amounts to FIM 1.2 million and the environmental proportion of the total investment project is 10 per cent.

• responsibility areas' own capital expenditure monitoring;
• follow-up reports of fixed assets accounting;
• fixed assets accounting or a separate system.

In case subinvestments included in the total project, implemented due to environmental protection objectives, can be defined by investment type, spending can be followed in fixed assets accounting separately for each type. In addition, the investment project's environmental proportion can be followed as a whole. In separate investment monitoring (e.g. spreadsheet program) the environmental proportion can be followed on the level of the whole project if this proportion is defined either in the planning of the investments or afterwards.

For example, the operating costs of own waste water treatment plants or process water treatment plants are given here (in treatment of waste waters) as well as other possible own treatment of waste water (e.g. cleaning of process waters of oil mechanically without a treatment plant). If in addition to own waste water cleaning or process water cleaning, part of waste or process water is conducted to the municipal waste water network, expenses raised in accordance with the municipal waste water charges should be given in C2.

• responsibility areas' own operating and maintenance cost monitoring;
• environmental protection reports, equipment database cost reports and cost centre reports;
• financial accounting systems.

Environmental operating and maintenance costs can be monitored in the accounting system in the following two ways:

1. The maintenance costs of environmental protection equipment are followed in the equipment database. Allocation of maintenance costs to each equipment is based on work orders. Each work or its part, subwork, can in most cases be allocated by equipment. In that case the maintenance costs of environmental protection equipment reported here are discovered on the basis of labour costs registered in the equipment database for each equipment. Monitoring of other operating costs regarding equipment (e.g. energy, labour costs) can be based either on measurement (e.g. equipment-specific energy measurement) or work order monitoring (e.g. a work order can be created for internal control and monitoring measures, in which case their costs can be allocated to equipment and environmental protection activities). If the establishment does not follow all equipment-specific environmental operating and maintenance costs in the systematic information systems, such costs of the monitoring period can be calculated (e.g. the average energy consumption of environmental protection equipment). Other costs not directed to environmental protection equipment, of self-performed environmental protection work can be followed by means of work orders. The work order allocates the costs e.g. to environmental protection activities, to the environmental protection cost centre (e.g. environmental protection work directed to outdoor areas can form a running account of its own) or to other cost centres. In that case the costs of the review period will be found out by means of combinations of work orders, activities and cost centres.

2. Costs of both environmental protection equipment and those not directed to the equipment mentioned, i.e. of self-performed environmental protection work are followed by means of work orders. In that case specific work orders can be created for each type of environmental protection work. The work orders can be then allocated to environmental protection activities, cost centres/objects or some other cost centre. In that case the costs of the review period will be found out by means of combinations of work orders, activities and cost centres.

• on the basis of the actual nature of the cost centres/objects (e.g. the operating and maintenance costs of a waste water treatment plant to waste water treatment) or of the equipment (e.g. the operating and maintenance costs of dust removal equipment are allocated to protection of ambient air and climate);
• on the basis of environmental protection activities and corresponding work orders (the work orders of the main works then comply with the main division of the environmental domains, and the subworks to be summed to the main works can be created for both environmental protection equipment and environmental protection work not directed to the equipment).

• invoices;
• financial accounting system.

On the basis of invoices it is possible to establish the total control and monitoring charges and the breakdown of the charges according to the payee. An expense account of bookkeeping (or a subaccount whose main account is some existing expense account) can be created for registering control and monitoring charges. Control and monitoring charges can be separated on the basis of the payee by employing a so-called partner code of the accounting code at the expense registration stage.

For monitoring waste water charges implemented in the accounting system it is possible to create an expense account of business bookkeeping, or a subaccount whose main account is some existing expense account. Waste water charges can be separated on the basis of the payee by employing a so-called partner code of the accounting code at the expense registration stage.

• waste management invoices and waste-related production reports;
• financial accounting system.

On the basis of invoices and production reports it is possible to ascertain: the total waste management charges, their breakdown into different types of waste and utilisation; and information on the quantity of waste charged in the review period. The information on the quantity of waste can be used for calculating the waste tax and for separating it from the actual waste management charges. The amount of waste tax can be calculated as follows: the quantity of waste charged in the review period x waste tax (FIM/one tonne of waste). The basis of the waste tax is defined in the Waste Tax Act (495/1996).

An expense account of bookkeeping can be created for registering waste management charges. To separate waste taxes, the party invoicing waste management charges can be asked to indicate the waste tax separately from the charge itself. Then waste taxes can be registered on a separately created subaccount of bookkeeping, waste taxes, whose main account is the expense account of waste charges (an individual main account can naturally be created for taxes as well). A separate expense account can be formed for each type of waste (and depending on the type of waste, a subaccount for the expense account for monitoring the waste tax), in case the charges are to be followed by type of waste. Waste management charges can be separated on the basis of the payee by employing a so-called partner code of the accounting code at the expense registration stage.

• cost monitoring reports of environmental management and invoices;
• financial accounting system.

On the basis of the invoices it is possible to ascertain: the total expenses of environmental management; their breakdown into external payments and the costs raised by own work; and the allocation of external payments by the payee.

Environmental management expenses can be followed in bookkeeping, on expense accounts of cost accounting and by means of work order monitoring. In order that payments made to external parties can be kept separate from the expenses of self-performed environmental management, a specific environmental management expense account (or a subaccount when the main account is some existing expense account) can be created for monitoring payments. In that case the expenses can be separated on the basis of the payee by employing a so-called partner code at the expense registration stage. The expenses raised by self-performed environmental management measures can be followed on their own specific expense account/cost centre in case environmental management is centred on one responsibility unit/cost centre. If environmental management is decentralised, the environmental management expenses of self-performed work can be followed with the help of work order monitoring.

The environmental proportion of R&D projects can be defined systematically at the planning stage of the project. When the definition is made in the project planning documentation, the information about this proportion can be utilised in project cost monitoring.

• cost monitoring reports of R&D projects;
• financial accounting system.

Cost monitoring reports may be available from financial management or from those in charge of the project, for instance. On the basis of them it is possible to clarify: the total costs of the projects; their breakdown into expenses for payments made to external parties and those raised by own work; and the breakdown of payments made to external parties on the basis of the payee.

In the accounting system the environmental protection expenses of R&D projects can be followed by means of work orders and cost accounts, for example. In the former case specific work orders can be created for different types of R&D projects (e.g. risk analyses, fishing industry studies, etc.). In the latter case a specific cost account can be created for each R&D project (or a control account of some existing cost account). In order that the environmental protection expenses raised by self-performed R&D activities can be kept separate from the project-related expenses, incurred by payments made to external parties, a separate expense account of business bookkeeping (or a subaccount when the main account is some existing expense account) can be created for monitoring payments. In that case the expenses can be separated on the basis of the payee by employing a so-called partner code at the expense registration stage.

• cost reports and receipts relating to compensations;
• financial accounting system.

On the basis of cost reports and receipts it is possible to ascertain: the total expenses of compensations; their breakdown into external payments and expenses caused by own work; and the allocation of external payments on the basis of the payee.

In the accounting system the expenses raised by compensations can be followed on a specific expense account of business bookkeeping (or a subaccount when the main account is some existing expense account). In that case the expenses can be separated on the basis of the payee by employing a so-called partner code at the expense registration stage. The expenses of self-performed work relating to compensations can be followed by means of work orders, in which case a work number is set up for each case of damage and it is used to monitor the expenses of own work.

• insurance premium receipts;
• financial accounting system. An expense account can be created for both environmental damage and environmental liability insurance (or a subaccount when the main account is some existing expense account).

• invoices regarding waste management, water protection, oil waste and oil protection charges;
• financial accounting system.

If the amount of waste tax is not specified in waste invoices, it can be calculated in the following way: the quantity of waste charged during the review period (tonne) x waste tax (FIM per tonne of waste). The basis of the waste tax is defined in the Act and the quantity of waste can be ascertained either from waste management invoices or production reports.

To specify the waste tax, the invoicing party of the waste management invoices can be asked to separate the waste tax from the actual payment. In that case waste taxes can be registered separately into a waste tax subaccount created for them, whose main account is the waste charges expense account (a separate main account can be set up for taxes as well). An individual expense account can be created for monitoring tax-like charges.

• account sales;
• financial accounting system. Rewards can be followed on an individual revenue account of bookkeeping, for example. In that case the rewards received can be separated on the basis of their payer by employing a so-called partner code at the registration stage of the revenues.

• account sales;
• financial accounting system. Sales revenues can be followed on an individual revenue account of bookkeeping, for example. Monitoring may require that the specifications serving it are also made to the sales information system.

The reduction in operating and maintenance costs can be established from the maintenance information system or work number order monitoring when the reduction is directed to certain environmental protection equipment or work. Otherwise the reduction can be calculated or estimated.

• project documents, related documents on subsidies and financial management reports;
• the financial accounting system. Subsidies can be monitored project-specifically on the control account of the project's cost account, for example. All subsidies can be followed on an expense account of business bookkeeping (or a subaccount of some existing expense account) established for that purpose.