INTERNATIONAL CONFERENCE ON MANAGEMENT (ICM 2011) PROCEEDING

ENVIRONMENTAL MANAGEMENT ACCOUNTING AND FIRM

PERFORMANCE

Sayedeh Parastoo Saeidi*, Saudah Sofian, Parvaneh Saeidi

Abstract
Increasing awareness and concerns of environmental problems has led organizations to confront with
environmental issues in their path process to better firm performance. This paper aims to have a
comprehensive review on the relationship between environmental management accounting and firm
performance and also explores the role of innovation and competitive advantage as two effective mediator
variables in this relationship. This study presents a comprehensive picture of this path process which has
previously been partially discussed in the literatures. Finally, this paper suggests a framework for future
research on how EMA lead to firm performance through innovation and competitive advantage.
Keywords: Environmental Management Accounting, Firm performance, Innovation, Competitive advantage

1. Introduction
Increasing concerns and awareness of environmental problems by society on one hand (Lopez-Gamero,
Molina-Azorin, & Claver-Cortes, 2009), and increasing the complexity of business environment as a result of
the changing in consumers demand on the other hand, have led firms to confront with environmental issues
(Johannessen & Olsen, 2009) to manage and reduce their activities environmental impact (Galdeano-Gomez,
Cespedes-Lorente, & Martinez-del-Rio, 2008), so that, managing the environmental performance and
measuring the corporate environmental costs have changed now to two strategic issues within firms (Henri &
Journeault, 2008).
------------------------------------------------------* Faculty of Management and Human Resource Development University Technology Malaysia, Johor, Skudai
E-mail: Parastoo_saeidi@ymail.com

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Managing the environment by firms has two dimensions. First, Process of being environmental pro-active
and second, measuring the environmental costs. Being proactive in environmental issues by firms definitely
leads to changing in amount of product costs. Therefore, firms need to estimate all corporate costs (including
environmental costs) for better decision making (Jasch, 2003). Under the Environmental Management
Accounting (EMA), costs which have remained hidden and scattered in different accounts in conventional
accounting system are identified, classified, allocated, and measured that allow firms to prevent missing
opportunities to obtain environmental improvements (Henri & Journeault, 2008).
The existence of EMA in the business would allow firms to promote their sustainable growth through cost
reduction (Burritt & Saka, 2006; Gibson & Martin, 2004), cleaner production (Burritt, Herzig, & Tadeo, 2009),
competitive advantage (Dunk, 2007; Lopez-Gamero, et al., 2009), better product pricing (De Beer & Friend,
2006; Gibson & Martin, 2004) and increasing shareholder value (Lopez-Gamero, et al., 2009).
Lately, according to Jamaluddin et al. (2009), Malaysia under her vision of 2020, has introduced
environmentally sound and sustainable development as two main factors in social, cultural, and economics
progress and enhancement of the quality of life of Malaysians. Therefore firms are encouraged by Malaysia
government to enhance their performance by minimizing their activities impacts on environment and
increasing their innovative capacity through superior environmental cost information for creating and
sustaining competitive advantages (Jamaluddin, et al., 2009). Therefore, EMA as a new tool in management
accounting is strongly viewed as a strategic issue that can create and drive companies values to higher level of
firm performance.
This paper has two aims. First, we seek to review some of the existing literature on EMA and firm
performance. Deriving from this review, we then seek to link EMA with the firm performance through
innovation and competitive advantage as two mediator variables which has previously been partially discussed
in the literatures. Our second aim is to extend our literature analysis to initiate a basis for future research by
presenting a proposal on effects of EMA on firm performance through innovation and competitive advantages
in Malaysia.
This is a conceptual paper where it reviews EMA literature critically to draw attention on importance of the
role of EMA in firm performance. Finally, this paper suggests future empirical research that aims to fill the gap
in EMA research that will provide fruitful contribution to existing literature.

2. Definition of EMA
According to Verschoor and Reijnders (2001), companies do not monitor all environmental costs, because
of the lack of a clear definition of environmental costs. Because of this managers must be aware that
environmental costs often are hidden and scattered in different accounts in conventional accounting system,
even many costs that organizations impose on the environment, are never accounted by finance department
(UNDSD, 2003). Therefore, companies are encouraged to adapt a more holistic approach in management
accounting to respond to environmental issues termed as Environmental Management Accounting (EMA) that
helps them to identify, allocate, and measure the environment related costs (Frost & Wilmshurst, 2000).

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Despite the importance of EMA, there is no universal definition of EMA yet. According to United Nations
Division for Sustainable Development (UNDSD, 2003). Burritt (2004:13) also has a definition that EMA is
concerned with the accounting information needs of managers in relation to corporate activities that affect the
environment as well as environment-related impacts on the corporation.
There are a range of different perceptions and conceptions of EMA. For example, Burritt et al. (2002)
distinguished EMA from environmental accounting, which is in distinction to conventional accounting
concerned with environmentally induced impacts of companies measured in monetary units and company
related impacts on environmental systems expressed in physical units.
Bennett and James (1998) have known EMA as generation, analysis and use of financial and non-financial
information in order to improve corporate environmental and economic performance and stated that EMA is a
complementary management accounting approach to the financial accounting approach.
The International Federation of Accountants (IFAC, 2005) has presented a guideline for EMA and defined it
as use of both monetary and physical information in internal decision making process by identification,
collection and analysis these information (monetary and physical). Physical information is included of flows
and fates of energy, water, and materials (including waste), and environmental related costs, saving and earning
are applicable in monetary information (Burritt, et al., 2009). Burritt et al. (2002), Bartolomeo et al. (2000), and
Graff et al. (1998) also introduced EMA as a tool to evaluates and measure organizational environmental
impacts in term of monetary and physical aspects.
In general, the mission of EMA is generating, measurement, analyzing and usage of monetary and physical
information which are related to environment. As Gray et al (2001) stated, if you cant measure it, then you
cant manage it. Therefore the important point in environmental management accounting is that the information
should be able to measured. According to Jamaluddin et al. (2009) there are still problems related to
environmental management measures in Malaysia, and this is worth nothing that the lack of a systematic
manner in recognizing, managing, and measuring environmental issues will cause a risk of extreme lost of
creativity, profitability, competitiveness, firm performance, and so on (Burritt, et al., 2009; Jasch, 2003). Thus,
EMA as a new tool in management accounting is strongly viewed as the strategic issue that can create and drive
the companies values to higher level of firm performance (Gale, 2006a; Lopez-Gamero, et al., 2009).

3. Environmental Management and Firm Performance

Discussion about the relationship between environmental pro-activity and firm performance is very
complicated and difficult because there is no consensus both in the definition of firm performance and in the
results of this link by different studies. Some authors have found a positive relationship (Aragon-Correa &
Rubio-Lopez, 2007; Galdeano-Gomez, et al., 2008; Nakao, Amano, Matsumura, Genba, & Nakano, 2007;
Wahba, 2008) while others didnt find the same result (Link & Naveh, 2006; Wagner, 2005; Watson,
Klingenberg, Polito, & Geurts, 2004).
Lopez-Gamero, et al. (2009) believed that being proactive in environmental management in addition to
reducing the environmental impacts, also may lead to sustainable economic success but only some authors
knew economic success equal to the firm performance and have focused on financial performance in
environmental management practices researches (Al-Tuwaijri, Christensen, & Hughes, 2004; Link & Naveh,
2006; Nakao, et al., 2007; Wahba, 2008) while, others measured competitive advantage to assess the firm
performance. Thus, they have concentrated on competitive advantage (Christmann, 2000; Shrivastava, 1995).
The second group argues that improving differentiation and lower costs can be considered as potential
outcomes of being environmentally proactive which may lead to improving competitive advantage. Klassen and
McLaughlin (1996) and Sharma and Vredenburg (1998) also claimed better environmental performance
provides competitive advantage which leads to firm performance through improving financial performance.

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This is an important reason which has led studies document different results of the link between environmental
management and firm performance.
Following stated studies, this study aims to focus on accounting dimension of environmental management
(EMA) and considers firm performance as a result of competitive advantage, which has previously not been
done comprehensively. Since, innovation cannot be a separate part of firms strategies (Porter, 1990) and
companies are advising to focus their attention toward innovation as a main source of competitive advantage
and economic rent (Baden-Fuller & Pitt, 1996; Davenport & Prusar, 1998; Johannessen & Olsen, 2009; Nonaka
& Takeuchi, 1995) it should be interesting to consider innovation beside competitive advantage as another
mediator variable in the process of identification the relationship between environmental management
accounting and firm performance.

4. EMA, Innovation, Competitive Advantage, and Firm Performance

Being proactive in environmental issues leads to changes in the amount of their product costs. Therefore,
firms need to estimate all corporate costs (including environmental costs) for better decision making (Jasch,
2003). Many of environmental costs are hidden, not accounted, and sometimes scattered in different accounts in
conventional management accounting (UNDSD, 2003). Management accounting introduced a new and holistic
subset and approach to opens up managers eyes about hidden and disregarded environmental costs termed as
Environmental Management Accounting (EMA), which subsequently helps them to identify, control and
minimize total corporate costs and their impacts (Burritt, 2004; Jasch, 2003).
EMA also through disclosing costs hidden by traditional accounting can recognizes lost chances for cost
savings, innovation regarding product and gaining competitive advantage in the market (Gale, 2006a).
Rennings (2000) defined Innovation as measures of relevant factors which develop new ideas, behavior,
products and processes, apply or introduce them, and contribute to a reduction of environmental burdens or to
ecologically specified sustainability targets. Masanet-Llodra (2006) found a favorable relationship between
environmental accounting and firms innovation activities, because the author introduced environmental
accounting as an information system which leads to adopting both mandatory and voluntary environmental
standards by firms such as ISO 14001, ISO 9000 to improve their business performance and quality
management systems (Cahil, 1998). Wagner (2005) claimed that environmental management systems are
effective on process innovation rather than product innovations.
Since the process of innovation is not separated from competitive context (Porter, 1990) and some authors
measured competitive advantage to assess the firm performance (Christmann, 2000; Shrivastava, 1995), the
assumption of this study is that environmental innovation very likely leads to environmental performance and
subsequently firm performance. The role of EMA in gaining competitive advantage and then firm performance,
is providing detailed environmental-related information on one hand and reporting them to the market and
stakeholders on the other hand, because as stated by Sulaiman and Mokhtar (2009), Frondel et al. (2008), and
Gale (2006a), firms need to prove their claim about being proactive in environmental issues and their efforts on
environmental performance to public through periodic reports.
EMA with its techniques in identifying, classification and analyzing operating costs (including
environmental cost) can turn environmental information into monetary and physical shapes and improve firms
connection with external resources information through reporting internal information and gaining external

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information (Sulaiman & Mokhtar, 2009). So that some authors such as Hohannessen and Olsen (2009),
Freeman (1995), Dodgeson (1993), and Burritt (2009) claimed that in this hyper-competitive environment,
companies operation are dependent upon external information to increase their innovation capacity in order to
gain and sustain competitive advantages. Wagner (2008) also stated that product innovation is mainly
dependent on consumers information. Deegan (2002) noted that environmental and social disclosures have
favorable legitimizing effect for a firm, and environmental management practices are strategic issues for a
firms longer term competitiveness (Cagno, Trucco, & Tardini, 2005); and since corporate reputation as an
intangible asset is dependent on financial performance and marketing, firms are encouraged to seek innovative
ways through superior information collected by EMA to utilize environment, resources, management, and
green marketing as sources of enhancing reputational and competitive advantages (Miles & Covin, 2000).
Consequently, identifying the complete and accurate costs (including environmental costs) through EMA
has three main effects on firms which may lead to high firm performance. First, total annual costs provide a
frightening picture of costs for firms, because, EMA also discovers the extent of costs of inefficiency.
Therefore, firms try to identify, control and reduce them through first, tracking and tracing costs to their
original sources, and then seeking new and innovative ways in their manufacturing process to reduce these
costs and improve their performance (Gale, 2006a; Jasch, 2003). For example, Canadian Mackenzie Paper
Division paper mill identified its environmental costs from Cdn$2.196.838 to Cdn$4.858.753, after
implementing EMA (Gale, 2006b). Second, it provides decision makers to consider better cost information in
manufacturing processes and operational decisions, including designing new processes and products and
benefits and costs of new technologies (Gale, 2006a). But Bartolomeo et al. (2000) believes EMA does not lead
to introduction of completely new processes, but it leads to incremental changes to existing activities. Third,
EMA through its tools leads to efficient usage of resources by helping to reduce resource waste and costs and
improving firm performance (IFAC, 2005). Jasch (2003) believes that waste is costly because of the wasted
material purchase value not because of disposal fees.
Fuji Xerox in radical departure from end of pipe approaches now have several zero emission factories which
is reducing its packaging costs by replacing 23 different packaging types and size to only two reusable and
adjustable sizes with packaging costs of US $12.08 less per shipping unit and finally US $1.2 million cost
saving (Gale, 2006a). A Philippine rice mill also could reduce the amount of its solid waste and social risk by
addressing the social and environmental problems associated with burning and dumping of RH (Burritt, et al.,
2009).
Such evidences show that EMA is viewed as the core driving forces to keep a company remained
sustainable for a long term period.

5. Future research
Considering the heightened importance of EMA in todays business, future researches should consider EMA
to be more useful in its practical application. So far, there are some countable studies of EMA in Malaysia.
Focusing at potential effects of EMA on internal and external organizational behavior will be very
interesting. For example focusing on innovative behavior and competitive advantage on track to achieve firm
performance through EMA which has not previously done as an empirical research.

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Seetharaman et al. (2007) revealed that EM contribute to firm performance of Malaysian companies. But,
according to Jamalludin et al. (2009) measuring and reporting environmental management in a formal manner
for Malaysian firms seems to be less feasible because there are still problems related to environmental
management measures.
Evidences also show that little is known on how EMA play role in innovation and competitive advantage to
gain high level of firm performance (Jamaluddin, et al., 2009; Klassen & McLaughlin, 1996; Lopez-Gamero, et
al., 2009; Masanet-Llodra, 2006; Theyel, 2000).
Realizing there is extremely little evidence linking EMA and firm performance through innovation and
competitive advantage as two important mediator variables, this study is held important in filling these
absences, especially in Malaysia.
We suggest that a future research should cover these four given objectives:
(i)
To explore EMA in Malaysian firms.
(ii)
To identify the effect of EMA on firm performance in Malaysian firms.
(iii)
To identify the effect of innovation (as a mediator variable) in the relationship between EMA and firm
performance in Malaysian firms.
(iv)
To identify the effect of competitive advantage (as another mediator variable) in the relationship
between EMA and firm performance in Malaysian firms.
The expected contributions of this study are as follows:
(i)
To present a better understanding on the effects of EMA on firm performance in Malaysia. This study
will provide important insights of the effect of EMA within Malaysian firms to further enhance firm
performance.
(ii)
Provide an impetus to Malaysian companies and encourage them to seriously utilize EMA to help
sustain growth in their performance.

6. Conclusion
In response to increasing concerns by stakeholders and consumers, a trend for companies has appeared to
provide more information on environmental matters both within management accounting systems and in annual
reporting (Bartolomeo, et al., 2000). Li (2004) knew environmental issues as a major aspect of economic
growth and development.
Stakeholders are looking for corporation with more ability in creating wealth, and consumers for higher
quality products and services along with environmental and societal values (Browning & Frank, 1997; Miles &
Covin, 2000). Therefore, if firms want to remain competitive in the market, must be activate in environmental
issues and observe consumers demands in their activities (Miles & Covin, 2000). In addition, firms need to
prove their efforts on gaining environmental performance to the society through reporting the results in
published monetary and physical figure (Frondel, et al., 2008). Many authors have pointed that conventional
accounting is not able to address environmental issues properly (Burritt, et al., 2002; De Beer & Friend, 2006;
Hubbard, 2009; Jasch, 2003) but, EMA with its techniques in identifying, classification and analyzing all costs
(including hidden and revealed environmental costs) can turn information into monetary and physical reports in

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order to offer to public (Sulaiman & Mokhtar, 2009) and helping managers in better internal decision making
process (Burritt, 2004; Burritt, et al., 2002; De Beer & Friend, 2006).
As Gale (2006b) noted, after implementing EMA, corporate costs will become twice and will make a
frightening picture of costs for managers. This factor on the one hand and firms awareness of public concerns
toward environmental problem and their demands for higher quality products and services, on the other hand
caused firms to improve their innovation capacity to seek innovative ways to utilize environment and resources.
Gray and Bebbington (2001) stated that it is not possible for many environmental innovations to get off without
a greener accounting. Since innovations are not separated from firms competitive strategies and enhances
reputational and competitive advantages (Miles & Covin, 2000; Porter, 1990); we can corroborate some
authors claim based on the positive effects of EMA on innovation and competitive advantages (Cagno, et al.,
2005; Dunk, 2007; Frost & Wilmshurst, 2000; Hendro, Ferreira, & Moulang, 2008). Post and Altman (1992)
noted that addressing environmental issues by firms affect their products, marketability, competitive position,
and consequently, their financial performance. Dunk (2007) also stated that firms which rely on EMA in their
product quality have greater extent of competitive advantage than other firms with little reliance. Dunk (2007)
stated that product quality and the implementation of environmental accounting positively influence quality
performance. Since a competitive advantage is a source of firm performance (Christmann, 2000; Gale, 2006a;
Miles & Covin, 2000; Sharma & Vredenburg, 1998) believed EMA techniques lead to business performance
through identification opportunities to decision makers.
Our literature review points to the importance of managing and measuring environmental management by
EMA in all organizations, particularly manufactured companies which has the most effects on environment.
Little empirical evidence is found on the overall impact of EMA in Malaysia on firm performance by focusing
on innovation and competitive advantage leading us to highlight that future research should cover these issues.
This is expected that more research should be carried out to study EMA in Malaysia as the area is still new in
the country.
In conclusion, we present a conceptual model of EMA and firm performance by innovation and competitive
advantage as two mediator variables as follow, as a basic for the future research:

Figure1: Conceptual framework of EMA and firm performance

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