A model of the cost of environmental management systems based on ISO

Transcription

1 ISSN paper version ISSN electronic version Economic and Environmental Studies Vol. 11, No.1 (17/2011), 43-54, March 2011 A model of the cost of environmental management systems based on ISO Bartosz FORTUŃSKI Opole University, Poland Abstract: In this article, a simple model of the costs of an environmental management system on the basis of the ISO series is presented. Based on this model, the level of engagement in environmental management and activities supporting sustainable development can be identified. Keywords: ISO series, environmental management systems, sustainable development 1. Introduction The international series ISO belongs to the groups of instruments supporting sustainable development. It is the basis of an environmental management system (EMS) which does not impose strict requirements regarding the effectiveness of environmental management on an organization. However, they are obliged to act in accordance with current legal acts, and to continuously improve its functioning in order to produce in a more environmentally sound way (ISO, 1998, 2005). Thus, the ISO series take the form of a kind of voluntary agreement (Bansal and hunter, 2003) which may reduce costs of enforcement of existing laws and regulations. The introduction of the ISO norm 14001, which is the basis of the functioning of the EMS in the organizations fulfilling the norm, is not costless. Although organizations may become more and more aware of the importance of environmental management for long term survival, still 1 The information on the ISO norms used in this paper is based on ISO (1998, 1998b, 2005). Correspondence Address: Bartosz Fortuński, Opole University, Faculty of Economics, ul. Ozimska 46a, Opole, Poland. b.fortunski@uni.opole.pl Opole University

2 Bartosz FORTUŃSKI short term goals may contradict the aim of environmental sustainability. This is also one of the difficulties in developing a model of cost of introducing and functioning of an EMS. Many economic costs and revenues are measurable, while environmental damage is often difficult to measure, long-term, uncertain and indirect (Platje, 2011). There are many uncertainties about future technological development, and an excessively positive attitude to technological advance may lead to neglect of possible threats, as it is believed a solution will be found or that the damage is not as bad as predicted (see Gladwin et al., 1995). The expected costs of lack of environmental management are not taken into consideration in this study. Focus in this article is on creating a simple model of costs of the EMS, which makes it for an organization s management easier to assess the short-term effects of such a system. This is relevant because of short time horizons in decision making and limited budgets, which may be used for alternative purposes. Furthermore, this model makes it possible to identify the level of engagement of an organization in the realization of environmental management and activities supporting sustainable development. This may be relevant for external stakeholders to assess the activity of the organization from the point of view of environmental soundness. The model presented in this paper should be the basis for deeper analysis including a wider range of costs in the future. 2. The environmental management system according to the ISO norm The norms related to the ISO series should contribute to the minimization of negative environmental externalities caused by organizations and the improvement of environmental quality (Polski Komitet Normalizacyjny, 2003: 3). The application of the norms concerns each stage of existence of goods and services. The norms can be categorized according to different aspects, including environmental management systems, audits, research, environmental impact assessment, eco-labeling, life cycle assessment, terminology, design and communication. Important documents are, among others, ISO and ISO While all the norms of the ISO series may be applied separately by organizations of any size, only the ISO norm is a necessary condition for certification (ISO, 1998: 12; 1998b: 13). An environmental management system (EMS) is an element of an organization s management system, which aim is to design and implement its environmental policy as well as management of environmental aspects of the activities of the organization (ISO, 2005: 15). The 44

3 A MODEL OF THE COST OF ENVIRONMENTAL MANAGEMENT SYSTEMS BASED ON ISO EMS includes the organizational structure, planning, responsibility, practices, procedures, processes and resources. The system is a collection of mutually related elements needed for the design of policy and establishment of its aims. The basis for the EMS according to the norms of the ISO series are norms from ISO (environmental management systems, requirements and implementation guidelines) and ISO (environmental management systems, general guidelines concerning principles, systems and support techniques). As the ISO norm is a necessary condition for certification, it will be the basis for the model of costs of EMS to be developed. The EMS based on the ISO norms can be applied by each type of organization, independent of its size and kind of activity, as well as geographical, cultural and social environment. This creates difficulties with comparing the costs made in different organizations, as they may have different goals and, in turn, may use different measures of efficiency. By its nature, the highest level of management is responsible for the introduction and functioning of the EMS. However, no EMS is likely to be successful without engagement of employees at different levels in the organizational hierarchy. Lack of understanding, mistakes in communication, unclear management procedures, etc. may in turn lead to employees opportunistic behavior (Williamson, 1985), which may lead to an increase in cost and likeliness of failure of the EMS. A model of the EMS is presented in Fig. 1. All activities presented in the model are related to costs. Focus of analysis will be on the division between the costs of implementation and operation or functioning of the system. In the process of planning, implementation and functioning, the organizational structure should be adapted, competencies assigned, activities undertaken concerning training and awareness raising, communication mechanisms developed, an administrative system for documentation as well as a monitoring, audit, intervention and crisis management system established, etc. For the model of costs of the EMS, an important issue is whether the new activities fit into the existing organizational structure, and what additional changes have to be made. 45

4 Bartosz FORTUŃSKI Figure. 1. A model of an environmental management system Continual improvement Environmental policy Management review Planning Checking and corrective action Implementation and operation Source: ISO (1998, 2005); Fortuński, 2008, A model of costs of an environmental management system As the introduction and operation of an EMS may draw resources away from other expenditure or investment opportunities, it is important to know the level and type of costs connected with this venture. This not only facilitates the calculation of costs and assessment of attractiveness of introducing an EMS, but also the assessment of level of progress of activities. While expected benefits are essential in decision-making, focus is here on the cost side of the EMS. The model of costs is presented in Fig

5 A MODEL OF THE COST OF ENVIRONMENTAL MANAGEMENT SYSTEMS BASED ON ISO Figure. 2. A simple model of costs o fan EMS according to the norm Cost of EMS Implementation cost of EMS Preparation documentation inspections, reviews audits consultations work of implementation teams trainings Certification Operational cost of EMS Costs connected with workers and their positions Directly from EMS Without EMS Costs of internal and recertification audits Directly from EMS Cost of certification audit Remaining implementation cost of EMS Trainings costs Directly from EMS Without EMS Costs of changes to be made in the organization as a result of implementing EMS EMS investments Without EMS law, renovation etc. Directly from EMS, continual improvement Without EMS Source: author s own elaboration. Directly from EMS Remaining operation cost of EMS 47

6 Bartosz FORTUŃSKI A general requirement of the norm ISO is the necessity to create, document, implement, maintain and continuously improve the EMS. Environmental policy should include the organization s obligation to fulfill the legal regulations, which should be taken into consideration in each of the mentioned elements of the creation and functioning of the EMS. As mentioned, each activity connected with this creates costs and expenditures. For analytical reasons, these costs are divided into costs of implementation and operation of the EMS. Implementation costs include the costs of all kinds of preparation activities, certification and other costs. Costs of preparation embrace design, documentation and planning. In the preparation phase, it is necessary to create new and adapt existing documents, carry out inspections, reviews (e.g., initial environmental inspection, research on environmental aspects), audits, consultations and trainings. There are also costs related to the work of the EMS implementation team and consultants. The preparation costs are related to the collection and processing of the data that serve as an input for the EMS. The certification costs mainly concern the costs of the certification audit. The remaining implementation costs are organizational costs which are often difficult to identify, such as the creation of programs, identification of key processes and operations, etc., due to the lack of measurement methods. The costs of operation of the EMS are the costs of maintaining and improvement of the EMS as well as costs of verification and self-evaluation of conformity with the rules. These costs include employment and related expenditures (office, etc.), internal audits, recertification audits, trainings, investment in EMS and other costs related to the functioning of the EMS. All costs, with the exception of audits, can be divided into costs that also would have to be borne without the EMS and costs directly related to the EMS. The first category, the costs of activities without EMS, i.e., the costs the organization would incur anyway, includes legally required renovations, investments increasing the organization s effectiveness, etc. The second category, costs related to activities directly from EMS, are costs which would not have been incurred when the EMS would not have been introduced. These costs include expenditure for, e.g., noise reduction in excess of existing norms. As mentioned, the costs of an EMS based on the norms of ISO (KSZś) can be divided into implementation (KW) and operation costs (KF) (see Equation 1). KSZś = KW + KF (1) 48

7 A MODEL OF THE COST OF ENVIRONMENTAL MANAGEMENT SYSTEMS BASED ON ISO The implementation costs can be divided into certification costs (C), the costs of preparing the organization for implementation and certification of the EMS (P) and remaining implementation costs (Pkw) (see Equation 2). KW = C + P + Pkw (2) The costs of operation of the EMS include costs connected with workers and their positions (Kps), internal audit and recertification costs (Kawir), training costs (Ks), costs of environmental tasks (KZ) and remaining costs (Pkf). Remaining costs include the transaction costs related to communication, increase of awareness, documentation, readiness to intervene in case of emergency, monitoring and measurement, control, assessment of achievements, corrective and preventive measures, audits and systemic inspection (see Equation 3). KF = Kps + Kawir + Ks + KZś + Pkf (3) A further distinction was made between costs that also have to be incurred without the introduction and operation of the EMS (Kz.( )SZś) and costs which only appear due to the implementation and operation of the EMS (Kz.(+)SZś) (see equation 4). KZś = Kz.( )SZś + Kz.(+)SZś (4) Integrating equations 2, 3 and 4 into equation 1, gives the following cost function: KSZś = (C+P+Pkw) + (Ko+Kawir+Ks+KZś+Pkf) (5) As the implementation and operation of an EMS is a multi-year project, it is necessary to correct the costs incurred in different years for inflation in order to create a basis for comparison. The indexed costs (KSZś i ) over a range of years can be presented as follows: 49

8 Bartosz FORTUŃSKI n i 1 KSZś i (6) With help of the presented mode, it is possible to define the real costs an organization incurred related to the functioning of the EMS: RzKSZś = KSZś K.( )SZś (7) where: RzKSZś real costs of the EMS, KSZś costs of the EMS, K.( )SZś all costs the organization also would have incurred without the EMS. These costs are presented in Equation 8. K.( )SZś=Ko.( )SZś+Kaw.( )SZś+Ks.( )SZś+Kz.( )SZś (8) where: Ko.( )SZś costs of employees incurred without the EMS, Kaw.( )SZś audit costs incurred without the EMS, Ks.( )SZś training costs incurred without the EMS, Kz.( )SZś costs of environmental tasks incurred without the EMS. The real costs of the EMS in a multi-year perspective can be presented as follows: n i 1 RzKSZś i = n i 1 (KSZś K.( )SZś) i (9) The model presented is directly based on the guidelines included in the ISO norm. This makes it possible to qualify the level of engagement of the organization in the EMS from the cost perspective. The model presented has the advantage of presenting a complex issue in a simplified way, while it can be used in any type of organization, independently of its size or activity. 4. The model of the costs of an EMS and the level of engagement in sustainable development A fundament of sustainable development is that our future depends on the ability to solve environmental problems (Kozłowski, 2002, 80). A challenge in this context is that many 50

9 A MODEL OF THE COST OF ENVIRONMENTAL MANAGEMENT SYSTEMS BASED ON ISO organizations create their policies based on relatively short-term horizons. While the consciousness about the importance of environmental resources and pro-environmental technology for the development and survival of organizations is increasing, the short-term goals of many organizations may contradict this. For this reason, the model of costs of the EMS may be a useful instrument for analyzing the effort an organization makes in the field of environmental sustainability, as these issues appear at each stage of the implementation and functioning of the EMS (ISO, 2005; Fortuński, 2008). Of course, while analysis of costs provides an indicator of an organization s engagement in environmental management, it does not provide information on the effectiveness and efficiency of the EMS. The level of engagement can be assessed by using the distinction between costs that have also to be incurred without the EMS and the costs generated by the EMS. Total costs of the EMS (Equation 6 - KSZś) should be compared with the real costs (Equation 7 RzKSZś). The share of RzKSZś in KSZś shows the effort for environmental management, and in turn contribution to environmental sustainability. This concerns new activities undertaken by the organization (such as costs of preparation and certification KW). From the costs of functioning of the EMS (KF), in particular the costs of environmental tasks (KZś) are important, in particular the costs related to continuous improvement, as it shows directly the costs related to environmental issues and new efforts to support sustainable development. In general, the higher the level of Kz.(+)SZś (costs of tasks directly related to the implementation of the EMS), the higher the engagement in environmental management. The tasks related with the continuous improvement of the EMS are additional to legal requirements. On the other hand, a high level of Kz.( )bszś (costs also incurred without the EMS) may imply: 1. restrictive laws and regulations on environmental protection, 2. frequent legal changes leading to continuous pressure for changes in the organization, 3. weak preparation of the organization at the moment of the introduction of the EMS based on the ISO norms, leading to the necessity of expenditure to fulfill existing legal requirements, 4. the intention to obtain the EMS certification at least possible cost, while adding environmental elements to the existing investment policy in order to fulfill the ISO norms. These organizations are likely to be more interested in, e.g., marketing or competitive advantages of possessing ISO certification than in pro-environmental activity. 51

10 Bartosz FORTUŃSKI The following cost groups may be used as an indicator for organizational activity supporting environmental sustainability: KW a relatively weak indicator, as these costs are only incurred for the initiation of the functioning of the EMS. KF while these are the main costs indicating pro-environmental activity, only part of these costs concern new activities related to the EMS. The most important part of this cost group is KZś. RzKSZś is the best indicator of the organization s pro-environmental activity. The particular cost categories of the EMS should be compared to total costs KSZś the higher the share of the mentioned cost categories in total costs, the larger the organizational engagement in environmentally sustainable activities. The relationships are shown in more detail in Table 2. Table 2. Dependency between cost categories and engagement in environmentally sustainable activity Relation between different cost categories regarding the EMS RzKSZś RzKSZś Kz.(+)SZś Organizational engagement in environmental sustainable activity Ideal situation organization realizes the idea of environmental = KSZś sustainability < The organization should increase its pro-environmental efforts The organization focuses on other aims than environmental < sustainability K.( )SZś = The organization realizes legal requirements and environmental sustainability equally > The organization is mainly focused on environmental sustainability < = Kz.( )SZś The organization focuses on other aims than environmental sustainability The organization realizes legal requirements and environmental sustainability equally > The organization is mainly focused on environmental sustainability Source: author s own elaboration 5. Concluding remarks While the model of costs of an EMS is a relatively simple method to indicate an organization s effort for environmental sustainability, it should be mentioned that it is only part of assessment of organizational activity. It only provides a general picture from the cost side, and should be used in combination with other methods of assessment of effectiveness, efficiency and 52

11 A MODEL OF THE COST OF ENVIRONMENTAL MANAGEMENT SYSTEMS BASED ON ISO effects of organizational activity. However, in this field it may be difficult to compare different types of organizations. As goals differ, also measures of efficiency may differ. A study among 3,700 organizations in the USA shows that the ISO series support compliance with national law (Potoski and Prakash, 2005). In reality, it is difficult to find out whether the compliance is the result of introducing the EMS, or the EMS introduced as environmental standards are already fulfilled. Furthermore, environmental regulations differ in different countries, influencing the compliance costs. At this moment, the analysis of extra efforts from the cost side is useful as a starting point for further analysis. Publishing such analyses by the company may provide information on its efforts for environmental management, which may positively influence its brand name. However, the analysis should be extended in the future with including, for example, assessment of compliance and costs related to monitoring and enforcement, collection of reliable information, etc. Also costs of risk of future problems due to lack of environmental management may be taken into consideration in further analysis. Although this is an extremely difficult venture, and due to large uncertainties impossible to obtain a full picture, the process itself may increase awareness of importance of environmental management for future economic and social activity. It also reduces the threat of assessing the importance of environmental management only in terms of short term cost-benefit analysis. Literature Bansal, P.; Hunter, T. (2003). Strategic Explanations for the early Adoption of ISO Journal of Business Ethics 46(3): Fortunski, B. (2008). Does the Environmental Management Standard ISO Stimulate Sustainable Development? Management of Environmental Quality 19(2): Gladwin, T.N.; Kennelly, J.J.; Krause, T-S. (1995). Shifting Paradigms for Sustainable Development: implementations for management theory and research. The Academy of Management Review 20(4): ISO (International Organization for Standardization) (1998). PN-EN ISO 14001:1998. Geneva: International Organization for Standardization. ISO (International Organization for Standardization) (1998b). PN-ISO 14004: Geneva: International Organization for Standardization. ISO (International Organization for Standardization) (2005). PN-EN ISO 14001:2005. Geneva: International Organization for Standardization. Kozłowski, S. (2002). Ekorozwój. Wyzwanie XXI wieku. Warszawa: PWN. Platje, J. (2011). Institutional Capital capacity and capabilities for sustainable development. Opole: Opole University Press. In publication. Polski Komitet Normalizacyjny (2003). Polski Komitet Normalizacyjny. Zarządzanie środowiskowe, komentarz do norm serii ISO Warszawa: PKN. 53

12 Bartosz FORTUŃSKI Potoski, M.; Prakash, A. (2005). Green Clubs and Voluntary Governance: ISO and Firms Regulatory Compliance. American Journal of Political Science 49(2): Williamson, O.E. (1985). The Economic Institutions of Capitalism. New York: Free Press. Model kosztów systemów zarządzania środowiskiem w oparciu o ISO Streszczenie W niniejszym artykule przedstawiono prosty model kosztów systemu zarządzania środowiskiem na przykładzie serii ISO W oparciu o zaprezentowany model można zidentyfikować poziom zaangażowania w zarządzanie środowiskiem oraz działalności wspomagające zrównoważony rozwój. Słowa kluczowe: serie ISO 14001, systemy zarządzania środowiskiem, zrównoważony rozwój 54