The Fundamentals of Green Accounting

Updated: May 05, 2009

Issue

Even as the economy continues to slide downward, more businesses are seeing green. But it's environmental accounting tools, not the color of money, that a growing number of companies are gazing at.

With a new administration in Washington and concern about global climate change heating up, green accounting is shaping up as the financial and accounting technology of the year. According to S2 Intelligence, an Australian market research firm, worldwide spending on green accounting systems will total $595 billion through 2015. In the United States alone, companies are projected to spend $91 billion on green accounting technology in the next six years.

Now that carbon accounting and sustainability reporting are shaping up as a potentially more costly obligation than Y2K remediation, a growing number of businesses are wondering just how the need for carbon accounting technology will impact both their budgets and their daily operations.

Considerations

Here's a look at the key issues of green accounting.

1. What is green accounting? The term "green accounting" hasn't yet been fully defined. Most agree, however, that in order for a business to be able to reduce its carbon footprint, it first must be able to measure it. Then, once the size of the carbon footprint is known, a business must be able to report the data to regulators, taxation officials, carbon credit trading organizations and other relevant parties.

2. What is green accounting? A rising demand by lawmakers and regulators for businesses to address the potential threats posed by climate change and other environmental issues is the primary force behind green accounting. The recent transition of power in Washington is also likely to speed the move to new green-oriented laws and regulations, because the Obama administration is generally viewed as being friendlier toward government environmental initiatives than the Bush administration.

3. Who will be affected? Energy-reliant manufacturers and power-generating utilities will feel the most pressure to embrace green accounting, but companies in nearly all business sectors can expect to embrace green accounting at some level within the next few years. Retailers, for example, may need green accounting software to calculate carbon ratings for each product on their shelves. It's possible that a wide number of businesses may need to use carbon accounting programs to calculate taxes based on the amount of energy consumed.

4. What technologies are involved? Green accounting encompasses several different technology areas. Look for both accounting and ERP (enterprise resource planning) software vendors to begin adding more green-oriented features into their products. Among the programs currently available, or headed to market, are carbon unit measurement and management tools, as well as programs designed to enable companies to trade carbon credits. Yet another type of green accounting software aims to help businesses cut through the "green tape" created by climate change regulations.

5. How much will green accounting cost my business? The financial impact will vary depending on your company's size and line of business. For small firms with a relatively modest CO2 impact, the costs could be minimal. In fact, many finance and accounting software vendors may simply incorporate green accounting features into upgraded versions of existing products. On the other hand, companies that are heavy users or producers of energy, or that must manage large amounts of CO2 emissions, will likely have to spend significant sums on specialized software and collection instrumentation that will track, organize and report vast amounts of carbon data, perhaps at a number of different sites.

Next Steps

Want to get your business prepared for this new trend? The first step is to learn all you can about green accounting. A good starting point is the United Nations Environment Program's Green Accounting Virtual Resource Center. Be sure to also consult Focus' comprehensive research on finance and accounting software, including the Market Primer: Finance & Accounting Systems and the Buyer's Guide: SMB Finance & Accounting Systems.

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