Chapter 1

Introduction

Rationale of the Study

Over the past 30 years, global environmental awareness has

increased progressively, driven by a number of factors from increased

media coverage to rising evidence of environmental problems (Charter,

2017). Public pressures on governments and calls for responsible

corporate behavior to ensure a cleaner environment have prompted

businesses to apply proactive environmental management strategies

(Weng, Chen J., & Chen P., 2015). As a response, efforts were made to

promote good environmental practice in businesses such as the ISO

14001 standard which includes the use of an environmental management

system (EMS) (Morrow & Rondinelli, 2002). In the Philippines, however,

ISO 14001 certification is not a regulation, resulting in a highly variable

application of environmental management accounting (EMA) between

industries. In addition, only three IASC core standards (impairment of

assets, provisions on contingent liabilities and contingent assets,

intangible assets) relate to business environmental issues (Reyes, 2004).

The emergence of environmental management accounting (EMA)

was due to the fact that management needed financial data on

environmental costs as a result of the increasing needs of various

stakeholders, such as government, investors, lenders, general public,

customers, etc., to gather financial data on environmental performances

of different organizations reported in financial statements (Ezeagba,

Rachael, & Chiamaka, 2017). It was mentioned that environmental

management systems (EMS) are used mainly to manage and improve

the financial and environmental performance of an entity (Perera &

Meepagama, 2015). On the contrary, Olaoye and Adekanmbi (2018) said

that based on prior studies, business entities sometimes were unable to

improve their performances. They also mentioned that in order to

implement environmental management accounting practices, there is a

need to incur high level of costs (Olaoye & Adekanmbi, 2018). As a result,

the benefits of being environmentally responsible, as to whether or not

the gain from the benefits can outweigh the costs of implementing it, are

being questioned by some managers (Olaoye & Adekanmbi, 2018).

In the Philippines, it is evident that the level of awareness of

companies on EMA between industries varies since ISO 14001

certification was said to be less relevant for most manufacturers in the

country due to low exports, problems with enforcing regulations, and

weak pressure from stakeholders (Fryxell & Szeto, 2001). Although

numerous studies have been conducted on the relationship between

corporate environmental performance and financial performance, the

results of the researches conducted are contradictory (Albertini, 2013).

The relationship between environmental management accounting

practices and financial performance has not yet been clarified, so it is not

clear whether there is a significant relationship between the two variables.

Objective of the study

This research aims to determine the relationship between

environmental management accounting practices and financial

performance of manufacturers in Davao City. Specifically, this research

seeks to achieve the following objectives:

1. To determine the level of environmental management

accounting practices of manufacturers in terms of:

1.1 Environmental management matters

1.2 Physical environmental information in EMA

1.3 Monetary environmental information in EMA

2. To measure the financial performance of manufacturers in

terms of:

2.1 Return on equity

2.2 Earnings per share

3. To establish the significance of the relationship between

environmental management accounting practices and financial

performance of manufacturers in Davao City.

Statement of hypothesis

At .05 level of significance, the null hypothesis below shall be

tested:
 Ho: There is no significant relationship between environmental

management accounting practices and financial performance of

manufacturers in Davao City.

Significance of the study

With this study, people and institutions who may benefit are the

following:

Organizations/Businesses – understanding the level of current EMA

being conducted at the corporate level will help government and

corporate industries in Davao City to understand the factors

encouraging better accounting sustainability.

University of Mindanao – this study will directly benefit UM, as it is also

a part of the corporate industry, through the evaluation of its current

EMA practices in relation to sustainability and its financial

performance.

College of Accounting Education – will benefit from this study by

serving as a study guide to faculty, students and administrative

staff for deeper knowledge on environmental management

accounting practices. The college will be able to have a wider

perspective on topics that envelop environmental management

accounting.

Future Researchers – may use this study as their reference for further

investigation with regards to the relationship

 between environmental management accounting practices and

financial performance of manufacturers in Davao City.

Definition of Terms

Environmental Management Accounting practices – refer to

management’s activities and operations of manufacturers related

to environmental costs such as recording physical and monetary

information of these costs, as well as the uses and benefits of EMA.

Financial Performance – in this study, refers to the measure of

profitability of manufacturers by using return on equity and earnings

per share.
 Chapter 2

Review of Related Literature

This chapter will include reading in literature and studies which

have contributed to the betterment of the research. This covers the

discussion on environmental management accounting and related

studies on the relationship between financial performance and EMA.

Environmental Management Accounting

An environmental management system (EMS) provides a business

with a structure to identify and evaluate how its business activities affect

the environment in which it operates. Then, the organization develops a

strategy to ensure that appropriate measures are taken to manage its

environmental impacts and achieve legal compliance, while pursuing to

lower material inputs and improving productivity (Govender, 2016).

Similarly, Stapleton and Glover (2001) defined EMS as a continual cycle

of planning, implementing, reviewing and improving the processes and

actions that an entity takes on to meet its environmental responsibilities.

The European Commission and the ISO are the frontrunner of a

series of policy tools, which include the EMS, for companies to

simultaneously pursue environmental objectives and competitive targets

in a synergetic way (Iraldo, Testa & Frey, 2009). According to Marinova

and Altham (2000), organizations with an environmental management

system are more likely to embrace new environmental technologies.

Furthermore, they are more aware of the environmental impacts of their

activities than those organizations without an environmental

management system. The need for international EMS standards is

multidimensional, drawing on technical, production, and financial factors

such as customer and peer pressure, stakeholder interests, a desire to

improve performance and to implement integrated management systems

(Carruthers & Vanclay, 2012). This led to the development of the ISO

14000 family of standards which aims at achieving standardization in the

field of environmental management and thereby guides the

implementation and maintenance of an EMS (Zhang, Shen, Love, &

Treloar, 2000).

The International Organization for Standardization (ISO) has a

series of standards, namely ISO 14000, which relate to environmental

management and are recognized globally (Govender, 2016). ISO 14000

has been developed to help any company around the world to attain

sustainability and environmental friendliness (Quazi, Khoo, Tan, & Wong,

2001). Also, the ISO 14000 series seeks to provide guidance to

organizations for developing a comprehensive approach to

environmental management and for standardizing some key

environmental tools of analysis (Quazi, Khoo, Tan, & Wong, 2001).

According to Jasch (2003), cost or management accounting

constitutes the central tool for internal management decisions such as

product pricing and is not regulated by law. In contrast, financial

accounting is based on historic information with emphasis on verifiability

and precision. Organizations must follow prescribed formats, such as

those set by the International Accounting Standards Board. Cost or

Management accounting provides information for managers of an

organization who direct and control its operations (Govender, 2016). In

practice, however, there are many companies without a separate cost

accounting system, but calculate on the basis of the financial accounting

data from bookkeeping instead (Jasch, 2003).

Environmental Management Accounting (EMA) as defined by

Jasch (2003) represents a combined approach which provides for the

transition of data from financial accounting, cost accounting and material

flow balances to improve material efficiency, reduce environmental

impact and risk and reduce costs of environmental protection. According

to Govender (2016), EMA focuses on environmental issues, such as

physical information on the flow of energy, water, products and materials,

as well as monetary information which includes cost of waste,

environmental projects, and material cost of product outputs. According

to Seal, Garrison, and Noreen (2012) environmental management

accounting may be defined as the identification, collection and analysis

of physical and monetary information. Both monetary and physical

environmental accounting information should be used to attain

sustainability.

United Nations Division for Sustainable Development (UN DSD)

(2001) cited that EMA information will provide data to support

organizational calculations for environmental management and

comprehensive decision making processes. Businesses can also link

financial and environmental performance indicators for benchmarking

process by considering environmental concerns in business decision

making. As such, environmental management accounting overall helps

managers with environmental-related information which supports

decision making processes that lead to improved environmental and

financial performance (Wahyuni, 2009).

EMA includes both physical and monetary procedures also called

as physical EMA (PEMA) and monetary EMA (MEMA) (UN DSD, 2001).

The former refers to procedures for the utilization, flows and ultimate

disposal of material and energy. The latter, on the other hand, refers

procedures for quantifying costs, savings and revenues which relate to

activities with potential environmental effects (UN DSD, 2001). Wahyuni

(2009) pointed out that a key difference of PEMA and MEMA is the type

of measurement used and information resulted, namely financial and

non-financial measures and information, respectively. UN DSD (2001)

illustrates EMA as follows:

Accounting in Physical
Accounting in Monetary Units Units
Environmental Management
Accounting
(MEMA) (PEMA)
Monetary EMA Physical EMA

Figure 1: EMA elements (UN DSD, 2001)

 Govender (2001) mentioned a common problem with

environmental management accounting is the non-standardization of

environmental costs, because what should be included and excluded as

environmental costs depends on the interest of the person answering the

question. Moreover, these costs have no specific product allocations but

simply allocated to an overhead account (United Nations, 2001).

Govender (2016) defined physical environmental management

accounting (PEMA) as the measurement and recording of actual unit

inputs of materials, energy and water, and the outputs of waste, products

and emissions, generated during the manufacturing of valuable products.

Jasch (2003) mentioned that the physical component of EMA, PEMA,

plays an important role in internal decision-making as it accounts for

activities directly affecting the environment such as material and energy

consumption, flows, and final disposal. The boundaries for these inflows

and outflows can be set on any level, from unit facility to organization

wide to nationwide (see Figure 2).

Figure 2: Boundary limits set on a facility of a manufacturing organization
(United Nations, 2001)

Similarly, according to Burritt, Hahn and Schaltegger (2002), PEMA

refers to a company’s impact on the natural environment, expressed in

terms of physical units such as kilograms, cubic meters or joules (e.g.

kilograms of material per customer served, joules of energy used per unit

product). To put it simply, PEMA is about direct effects on the environment,

which uses non-financial measures and information (Burritt, Hahn &

Schaltegger, 2002).

Savage and Jasch (2005) defined monetary environmental

management accounting (MEMA) as a subsystem of environmental

management accounting that deals with the financial impacts of

environmental performance. Monetary environmental information

provides management with the ability to perform a better evaluation of

financial aspects of products. According to Ambe (2007), organizations

define costs related to environmental issues differently depending on the

required use of the information, the organizations economic and

environmental targets, to name a few. Prior to 2000 the most widely used

sets of definitions and process for allocating environmental costs were

from the United States Environmental Protection Agency and the Japan

Ministry of the Environment. Currently the most recognized sets of

definitions and processes for allocating environmental costs is the United

Nations procedure and principle document on Environmental

Management Accounting (United Nations, 2001). Most Governments and

Non-governmental organizations have used this United Nations

procedure and principle document as a base for their own process.

Environmental cost categories are a part of monetary environmental

management accounting. Savage and Jasch (2005), gives some

examples of environmental related cost categories:

Materials Costs of Product Outputs - includes the purchase costs of

natural resources such as water and other materials that are converted

into products and packaging

Materials Costs of Non-Product Outputs - includes the purchase (and

sometimes processing) costs of energy, water and other materials that

become Non-Product Output (Waste and Emissions)

Waste and Emission Control Costs - includes costs for: handling,

treatment and disposal of waste and emissions; remediation and

compensation costs related to environmental damage; and any control

related regulatory compliance costs.

Prevention and Other Environmental Management Costs - includes the

costs of preventative environmental management activities such as

cleaner production projects. This also includes costs for other

environmental management activities such as environmental planning

and systems, environmental measurement, environmental

communication and any other relevant activities.

Research and development cost - includes the costs for Research and

Development projects related to environmental issues.

Less Tangible Costs - includes both internal and external costs related to

less tangible issues. Examples include liability, future regulations,

productivity, company image, stakeholder relations and externalities.

Monetary environmental information and physical accounting data can be

combined and used as environmental performance indictors known as

eco-efficient indicators that can be used to reduce cost and increase

profits in an organization.

Financial Performance and EMA

Return on equity (ROE) is a measure of financial performance

calculated by dividing net income by shareholders' equity. Lan (2012)

defined return on equity as a measurement on how efficiently a company

is able to generate profits using shareholder’s equity, which includes

stock offerings and retained earnings. Earnings per share (EPS), on the

other hand, is calculated as a company's profit divided by the outstanding

shares of its common stock (Little, 2018). The resulting number indicates

a company's profitability.

Both measures of financial performance were used in the study

conducted by Qiu, Shaukat, and Tharyan (2016) on ‘Environmental and

social disclosures: Link with corporate financial performance’. In their

study, Qiu, Shaukat and Tharyan (2016) found that there is no relation

between environmental disclosures and profitability, which coincided with

the existing evidence they had prior to the study. In addition, the study on

‘The Effects of Environmental Disclosure on Financial Performance in

Malaysia’ (Nor, Bahari, Adnan, Kamal, & Ali, 2016) showed that there is

a significant relationship between total environmental disclosure and

profit margin, while other profitability determinants , return on asset,

return on equity, and earnings per share, showed otherwise.

Among the researchers of Environmental Management

Accounting practices, many of them found a positive association

between profitability and the extent of corporate social and

environmental disclosure (Larojan & Thevaruban, 2014) whereas

Alikhani and Maranjory (2013) found no association between the

variables. Again, the mixed results of Nor et. al. (2016) tend to be more

intriguing.

Theoretical Framework

This study is anchored on stakeholders’ theory and the triple

bottom line theory. The main concern of the stakeholders’ theory is to

encourage business managers to implement environmental practices

which the non-financial stakeholders consider significant in maximizing

stakeholders’ value as well as minimizing environmental costs. The

stakeholders’ theory means that the entity’s success is reliant on the

successful management of all the relationships that an entity has with its

stakeholders- a term originally introduced by Stanford research institute

(SRI) to describe those groups supporting and enabling organizations to

continue to exist (Freeman, 1983; Ezeagba, Rachael, & Chiamaka,

2017).

Freeman’s stakeholders’ theory claims that managers must satisfy

a variety of constituents who can influence the firm’s outcomes. This view

asserts that it is not sufficient for managers to focus exclusively on the

needs of stockholders, or the owners of the business. That is, it can be

beneficial for the firm to engage in certain environmental activities that

non-financial stakeholders perceive important, since these groups might

withdraw their support from the business if they do not engage in such

activities. The stakeholders’ theory proposed a significant increase in

environmental awareness which encourages companies to extend their

corporate planning to include the non-traditional stakeholders like the

regulatory adversarial groups in order to adapt to changing social

demands (Ezeagba, Rachael, & Chiamaka, 2017).

Similarly, the triple bottom line (TBL) theory suggests that any

business organization should bring its attention to the better performance

balance among economy, environment, and society to achieve not only

economic benefits, but also environmental and societal gains (Wilson,

2015). When measuring the full cost of doing business, according to

Elkington’s TBL framework, a company should look beyond profits and

include social and environmental issues. Profit is quantitative in nature,

therefore it is easy to measure. However, the problem lies on how to

reliably measure social and environmental issues to fully account the cost
to include in the financial statement. The main concern of the

stakeholders’ theory and TBL theory in environmental accounting is to

address the environmental cost elements and valuation and its inclusion

in the financial statements.

Conceptual Framework

Figure 1 shows two variables namely: environmental management

accounting (EMA) practices and financial performance. EMA practices

have sub-indicators such as environmental management matters,

physical environmental information in EMA, and monetary environmental

information in EMA, while financial performance has return on equity and

earnings per share. The study seeks to determine the level of EMA

practices of manufacturers in Davao City. It also seeks to establish the

significance of the relationship between environmental management

accounting and financial performance of the respondents.

Environmental Financial
Management Performance
Accounting
Practices • Return on
Equity
• Environmental • Earnings Per
Management Share
Matters
• PEMA
• MEMA
 Chapter 3

Method

This chapter contains information about the research design,

research respondents, research instrument, data gathering procedure

and statistical tools to be used in conducting this research study.

Research Design

The study will use a correlational research design to determine

whether there is a relationship between environmental management

accounting practices and financial performance in the manufacturing

industry in Davao City. This study will also use a survey questionnaire to

determine the level of environmental management accounting practices

through its indicators: environmental management matters, physical

environmental information in EMA, and monetary environmental

information in EMA. The financial performance of the companies will be

measured through content analysis, which will analyze the financial

statements of the respondent companies in terms of return on equity and

earnings per share.

Research Subjects

The respondents of this study will be manufacturers within Davao

City. The study will use purposive sampling in determining the

respondents. Only manufacturers with financial statements from 2013 to

2018 will be selected to limit the number of participants and rule out newly

established companies to improve reliability of the result. Specifically, the

survey questionnaire will be answered by CFO/CEOs, managers, or

accountants of the respondent companies.

Research Instruments

The study will utilize a validated survey questionnaire adapted from

the study of Govender (2016) which was modified by the researchers to

fit the objectives of this research. A 5-point Likert-type-scale will be used,

ranging from (1) to (5), in which (1) is extremely low, (2) is low, (3) is

medium, (4) is high and (5) is extremely high. This will be used to

determine the level of environmental management accounting practices

through its indicators: environmental management matters, physical and

monetary environmental management accounting information.

Secondary data will also be gathered to measure the financial

performance of the manufacturers in the form of financial statements.

Data Gathering Procedures

The data for this research will be collected using the check-list

instrument. The following steps will be used to conduct the study:

1. Permission to conduct the study. A letter of permission to

conduct the study will be prepared and presented which will be

signed by the College of Accounting Education Dean.

 2. Formulation of research instrument. The survey questionnaire

will be comprised of three sections which relate to the

respondents regarding the level of environmental management

accounting practices in their organization.

3. Searching of respondents.

4. Collation of data. The researchers will collate the tallied data for

statistical analysis purposes and submit the data to the statiscian.

Statistical Tools

The following statistical tools will be used in the study:

Mean – this is to measure the level of environmental management

accounting practices of manufacturers in Davao City in terms of

environmental management matters, physical environmental information

in EMA, and monetary environmental information in EMA.

Standard Deviation – this is to measure the spread of the

variables used in determining the level of environmental accounting

practices from the mean.

Pearson R Test – this is to determine whether there is a

relationship between environmental management accounting practices

and financial performance of manufacturers.

Ethical Consideration

The researchers guarantee that all respondents choose to

participate of their own free will and will be fully informed regarding the
procedures of the research. All data that will be gathered will be treated

with the utmost confidentiality and integrity.

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Survey Questionnaire

Introduction

Environmental Management Accounting is a system that industries can implement to assist in

decision making of environmental issues and associated costs. Environmental Management

Accounting (EMA) is the application of conventional accounting principles to environmental

issues, such as waste and emissions analysis. EMA may also be defined as the identification,

collection and analysis of physical and monetary information. Both monetary and physical

environmental accounting information could be used by industry to be sustainable and more

profitable.

Section 1. Environmental management matters

1. How will you rate your area regarding the following environmental issues – where (1) is

“extremely low” and (5) “extremely high”?

1.1 Establishing and communicating the Environmental 1 2 3 4 5

policy in your area

1.2 Maintaining ISO 14001 certification 1 2 3 4 5

1.3 Compliance with regulation or standards (waste 1 2 3 4 5

emission certificates, air monitoring, etc.)

1.4 Reporting of environmental data for Sustainable 1 2 3 4 5

Development Reports.

Section 2: Physical information of environmental management accounting

Physical information is about the use, flows (kg/hr, etc.), and rates of energy (kJ/hr, etc.), water

(kilo litters) and materials (kg, tons, etc.), including wastes.

2. Indicate the level at which your organization generate and record physical environmental

information with regard to the following – where (1) is “extremely low” and (5) “extremely high”.

2.1 Raw materials (these are input materials that 1 2 3 4 5

become part of the final product or by-product)

2.2 Packaging materials (used to store and transport 1 2 3 4 5

the final products)

2.3 Operating materials (these are materials 1 2 3 4 5

purchased and used by the operating hub, but do

not become part of any tangible product delivered

to a customer)

2.4 Water (all water used by your operating hub) 1 2 3 4 5

2.5 Energy (all energy used by your operating hub) 1 2 3 4 5

2.6 Products (any tangible products produced by your 1 2 3 4 5

operating hub)

2.7 By-products (produced during the manufacture of 1 2 3 4 5

the primary product)

2.8 Solid waste (such as waste paper, plastic 1 2 3 4 5

containers, domestic waste)

2.9 Hazardous waste (solid form, liquid form or mixed 1 2 3 4 5

form)

2.10 Waste water 1 2 3 4 5

2.11 Air emissions 1 2 3 4 5

Section 3: Monetary information of environmental management accounting

Monetary information is about environment-related costs, earnings, and savings of related

physical information.
3. Indicate the level at which your organization generate and record monetary environmental

information with regard to the following – where (1) is “extremely low” and (5) “extremely high”?

7.1 Cost of material inputs (the purchasing cost of natural 1 2 3 4 5

resources, such as energy, water and other materials

that are converted into products and by-products)

7.2 Cost of material of non-product outputs (these are 1 2 3 4 5

materials purchased and used by the organization, but

which do not become part of any tangible product

delivered to a customer)

7.3 Waste and emission costs (including the handling, 1 2 3 4 5

treatment and disposal costs of waste and emissions;

remediation and compensation costs related to

environmental damage; and any control-related

regulatory compliance costs)

7.4 Prevention and other environmental management 1 2 3 4 5

costs

7.5 Research and development costs (the cost of 1 2 3 4 5

research and development projects related to

environmental issues)

7.6 Environmental operating expenditure independent 1 2 3 4 5

of any other operating expenditure

7.7 Environmental capital expenditure tracked 1 2 3 4 5

independent of capital expenditure