New Accounting and The Sweet Spot

Sources: Environmental Accounting
By U.S. EPA, Office of Pollution Prevention and Toxics, 1995
The Sustainability Sweet Spot
By Andrew Savitz and Karl Weber

Synopsis (Environmental Accounting): The central purpose of this primer is twofold: (1) to orient readers to key concepts often referred to as environmental accounting, and (2) to explain how the terms that refer to environmental accounting are currently being used, so that confusion about the terms does not impede progress in understanding and applying the core concepts.

EPA prepared this document to be a starting point for readers who have questions about environmental accounting. The intended audience includes business managers and other professionals who wish to understand environmental accounting. In addition, people involved with activity-based costing, total quality management, business re-engineering, or design for the environment should find environmental accounting to be compatible with and potentially helpful to their programs.

EPA’s Environmental Accounting Project has produced this primer at the behest of stakeholders who have suggested that an important step in promoting environmental accounting is to clarify key concepts and terms to facilitate more widespread adoption of environmental accounting practices. 1

This primer focuses on environmental accounting as a management tool for a variety of purposes, such as improving environmental performance, controlling costs, investing in "cleaner" technologies, developing "greener" processes and products, and informing decisions related to product mix, product retention, and product pricing. The primer does not cover all of these potential applications but does summarize how environmental accounting can be applied to cost allocation, capital budgeting, and process/product design. Specific applications of environmental accounting are illustrated in case studies that EPA has prepared documenting companies' programs to implement environmental accounting. For more information on EPA's activities in this area or for copies of the case studies, please contact the EPA's Pollution Prevention Information Clearinghouse at (202) 260-1023. (Verbatim from document)

Synopsis (Sustainability Sweet Spot): Businesses are recognizing that sustainable business practices are not antithetical to good business practices. Evidence for this includes better-than-average market performance by businesses embracing the so-called triple bottom line. Given this evidence, businesses seeking this sweet spot are maximizing profit and positive social impact.

Reflection: I decided I’ve had it with book learning. See, I’ve got this idea for a new widget that’s going to revolutionize the cycling industry. Best of all, producing it is cheap. It doesn’t take a lot of room – I’m going to rent a garage outside town. Overhead is low, since the raw materials and tooling are cheap and I’m going to be a one-man operation. All of the waste produced is completely compostable, and there’s enough room on-site to set up the composting operation. In fact, it’s not so much an operation as it is me dumping a couple wheelbarrow’s full at the end of the week.

So, I go into business, and my widgets are everything I hoped them to be. I start with regional distribution, but pretty soon the coasts are demanding my widgets. I easily expand – it’s a two-car garage and I’d only been using one stall. Twice as many widgets mean twice as much waste, however. I’m not worried though, because the compost operation can still handle it.

Well, my widgets are a hit on the coasts, and Europe catches on and wants them. I double again. I can now afford to build an additional two stalls for production, along with a couple employees to run things therein. Problem is, my composting operation can’t keep up with four times the waste. The piles are getting too large for my lot.

So, I hop the fence and talk to the guy on the next lot over. His property butts right up against my compost piles. He agrees I’ve got a problem and is amenable to some compost on his land, but he wants to charge me for the space. That’s OK, I can afford it, although it eats a couple points from my profit margin.

Well, Asia and South America have been paying attention, so I double operations again. Raw materials, labor, and production space are no problem. The problem is, I’m now producing waste faster than it can be composted. I read in a trade journal about another young entrepreneur who’s devised a biomechanical digester that could take care of my waste for me, so I give her a call. Sure, she’s got the capacity to take care of me, and it’ll only cost me this much… Hmmm…paying for waste disposal changes a lot of things.

OK, it’s not a terribly sophisticated analogy, but I’m hoping it makes clear my point that to not consider the potential cost of waste disposal was shortsighted. It was easily overlooked because I could take it for granted. Furthermore, the issue was compounded when my operation outstripped the capacity of the natural systems I’d been taking for granted. And of course, my analogy assumes unlimited and cheap raw materials…

Well, we’re finding ourselves in a similar situation now, except our waste is not so easily quantified as are piles of compost. But why should waste that we can’t see or feel be any different? Why is it so ridiculous to hold industry accountable for waste products like greenhouse gases? Because it will cripple our economy? It seems we’ve just been spoiled and we’re now trying to come to terms with evidence that the way we’ve been doing things was destined to be unsustainable because we didn’t/couldn’t/refused to accurately account for ALL costs.

In my analogy, natural systems were taking care of waste disposal for me. This is true for the world economy as well, but the processes aren’t as visible and tangible as watching a pile of garbage turn to humus. Furthermore, we aren’t relying on a single or even multiple natural systems, but all of them. We’re relying on systems we don’t understand and systems we haven’t yet discovered. Then, as if things weren’t complicated enough, it’s those same systems that supply us with raw materials.

Now, let’s take a step backward and say I did have some foresight. From the very beginning, I paid closer attention to how quickly my waste was converted to compost than I did to units of production, recognizing that the two are inextricably linked and that waste disposal, not production capacity, was my limiting factor. So I found out that I could process X units of waste every year which corresponded to Y units of production, and that became my benchmark. Well, I’m still producing outstanding widgets subject to the law of supply and demand. I’m holding true to my benchmark, so demand is outstripping supply, prices are rising, and my profit margin’s growing. I give all my employees raises and better benefits. Morale is high and production increases slightly. Furthermore, I funnel the increased profits into R&D and find a more efficient way of making my widgets that produces less waste per unit of production. Production increases again, and we’re still maximizing profit, and my employees are still happy. I take the padding from my profit margin and install some renewable energy sources. Sure, it’ll take a few years before they’re paid off, but I plan on being here longer than a few years. Plus, remember my neighbor over the fence? Turns out his passion is gardening. I’ve been giving him compost in exchange for food. There, we’re in the sweet spot. We’re making money, living comfortable lives, and we fall asleep at night content in the knowledge that our business will be viable beyond the next quarter.

I know, this is all a childishly simplistic rendering of some complicated processes. But it comes down to some very simple rules. Don’t use raw materials faster than they can be replenished. If you do, you’ll run out. Don’t make waste faster than it can be processed. If you do, you’ll be sitting in it. Take care of the people upon whom your business depends. If you don’t, they’ll stop taking care of you. Turns out it’s pretty simple after all.