CHAPTER ONE

INTRODUCTION

1.0 Background to the Study

Environmental issues have emerged in recent decades as a major aspect of the discussion in the problems of economic growth and development. Such issues have taken, inter alia, the form of global warming; atmospheric, soil and water pollution caused by industrial activities; and the quick decline of forest areas, noise pollution and chemical wastes being dumped into oceans and rivers (Dutta and Bose, 2008). All these problems are generally associated with industrialization and economic growth; but is it a necessary condition of economic growth that the environment has to suffer? Jasch (2003) opined that this is not so, where the prospects of sustainable development are in sight. Consequently, the pursuit of sustainable development as an object of policy is now much in vogue; and governments of different countries have long been engaged in setting up regulatory, voluntary, incentive-based, informational and cooperative instruments of policy geared towards promoting sustainable development (Li, 2001). This policy trend has heightened concern about environmental accounting theory and practice worldwide.

In years past, both corporations and individuals often ignored environmental issues. However, time has changed as stakeholders now realize the effects of waste products as a potential source of damage to the environment (Xiaoping, 2003). Most people now recognize that preserving clean air, water and land are more important than to lower cost of products for consumers. This therefore makes people to be willing to pay more for products that are environmentally friendly. Many companies are now interested in being green, as many investors place a high value on Environmental responsibility. Regulations have also been developed to govern waste management and to ensure that corporations are environmentally conscious (Boyd, 1998). Some organizations have had to clean up their past environmentally unfriendly behaviour. However, most firms have established good reputation as being environmentally friendly organisations (United States Environmental Protection Agency, 1995).

Since 1990, environmental accounting has been rapidly introduced and utilized as an effective tool for environmental management. Global leading companies around the world, especially in Australia, Bangladesh, China, Japan, Malaysia, Netherland, New Zealand, Norway and Turkey have applied environmental accounting to enhance their eco-efficiency and resource productivity (Banerjee, 2002). Also, the increasing external pressure from many stakeholders such as financial institutions, socially responsible investors, government, and community lobby groups (i.e. members of host communities) among others, now makes companies to have more interest in environmental accountability issues. In line with this trend, the rapid increase in environmental costs has now caused companies to begin to integrate environmental aspects into managerial decisions at all levels (Dorweiler and Yakhou, 2002). Nevertheless, measuring and reporting environmental monetary performance is still in its infant stage in spite of the development of a number of methodologies and practices. In this context, environmental accounting was recently considered as one of the most important tools in adopting a successful environmental management. This suggests that the traditional accounting system, which handles most environmental costs as over-head cost, is insufficient to provide managers with proper information for their strategic decision-making (Fryxell and Vryza, 1999). In today‟s business paradigm, shifting from a traditional-profit focused management to a progressive environmental management has become a key factor in strengthening corporate competitiveness. Global leading companies have come to realize that environmental accounting can play an important role not only to prevent or restrict negative environmental impacts but also to facilitate positive and proactive actions (Owen and Lehman, 2000).

The term environmental accounting as frequently used within the environmental management literature, relates to the provision of environmental performance related information to stakeholders both within and outside an organization (Medley, 1997). According to the United State Environmental Protection Agency (1995:18), “an important function of environmental accounting is to bring environmental costs to the attention of corporate stakeholders who may be able and motivated to identify ways of reducing or avoiding those environmental costs while at the same time, improving environmental quality.” Furthermore, environmental accounting according to Coopers and Lybrand (1998:2) can be expressed within the context of global environmental accounting, national environmental accounting and corporate environmental accounting. In contrast to the global and national environmental accounting, corporate environmental accounting is further sub-divided into environmental management accounting and environmental reporting/disclosure. This study therefore focused on the environmental reporting (disclosure) aspect of corporate environmental accounting. This process involves communicating the social and environmental effects of organizations‟ economic actions to particular interest groups within the society (Gray et al., 1996:3). It seeks to reflect several social and environmental aspects upon which companies‟ activities have an impact on employee-related issues, community involvement, environmental concerns and other ethical environmental issues (Kuasirikun, 2005). It also refers to the process through which companies often disclose environmental information to their stakeholders to provide evidence that they are accountable for their activities and the resultant impact on the environment (Lodhia, 2006 cited in Dutta and Bose, 2008). Environmental reporting is an accounting system which focuses on reporting the cost of environmental liabilities and other significant environmental costs, thereby providing related environmental financial information to external stakeholders (Belal, 2001).