The interaction of business and society - Business Environment

In assuming that business needs to be more aware of its environmental impacts, society as a whole is expressing a dissatisfaction with existing performance. The method by which a group or individual may come to this decision could be very subjective, based upon value judgements and experience. The Institute of Chartered Accountants of Scotland published a report that suggests that, in spite of increasing evidence that environmental issues have a potential impact on the numbers reported in financial statements, UK financial statements only rarely make explicit reference to such matters. The report identifies a small group of leading edge companies that is carefully monitoring environmental developments and, as a matter of policy, seeking to respond in advance of anticipated developments in the environmental area. It is in these leading-edge businesses where accountants are actively responsive, putting a focus on formal assessment of risks and liabilities, active provisioning and identification of environmental costs in their accounts. A number of bodies, including the Association of Certified and Corporate Accountants (ACCA), has recommended that company annual reports and accounts should contain an ‘environmental review section’ that would detail their environmental policies and contain a summary of their legal compliance status and a review of their actual environmental performance. To add weight to any argument there needs to be a more scientific measurement of performance that is based upon criteria other than those that can be easily assigned a monetary value.Cost-benefit analysis is one technique which attempts to set out and evaluate the social cost and benefits of an action. The essential difference between cost-benefit analysis and ordinary investment appraisal methods used by firms is the stress on the social costs and benefits, and such an approach can prove problematical.
Two specific difficulties arise:

  1. The measurement of physical units such as improvements or otherwise in the quality of life.
  2. The complexity involved in reducing all costs and benefits to some common unit of account in order to offer a degree of comparison. Since the unit of account most commonly used is money, this means that values must be attached to environmental degradation, resource usage and in some instances human life.

The main reasons why it is important to place a monetary valuation on environmental gains and losses is that it offers a measurement of society’s preference.Placing a value upon environmental degradation allows ordinal ranking of preferences between the desire to have goods and services against the desire to maintain the environment and reduce the use of scarce resources. Monetary values offer a direct and more tangible comparison. Cost-benefit analysis, therefore, allows careful itemization of all relevant classes of costs and benefits, the exclusion of irrelevant transfer payments, quantification of what can reasonably be quantified and a full specification of the complete set of alternatives to the action under consideration.

This is said to provide a sounder basis for the decision and, most importantly, to permit an estimate of the implicit money values that must be attached to particular non-monetary benefits and costs in order to justify a particular action. Thus cost-benefit analysis can be viewed as a means of making the best possible information available to the decision makers.

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