Green-Budget Matrix Model:

Theory and Practices

EMAN-EU 2004 Conference (March 2004)
Yoshihiro ITO (Kobe University), Hiroyuki YAGI (Yokohama National University) and Akira OMORI (Aichi Gakuin University)
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A Structure of Presentation
1. 2. 3. 4. 5. Introduction Necessity of Environmental Budgeting in Firms Theory of the Green-Budget Matrix Model Case Studies at Japanese Firms Conclusion

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1. Introduction
Working Groups on EMA (METI Project)
WG1: Tools for Environmental Capital Investment Decision Making WG2: Tools for Environmental Cost Management WG3: Material Flow Cost Accounting WG4: Environment Oriented Life Cycle Costing

Authors were engaged in WG2

Prof. ITO was the chairperson of WG2.
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2. Necessity of Environmental Budgeting in Firms

Corporate budgeting is useful to internal management.
Three roles of budgeting. (1) Planning, (2) Control, and (3) Coordination

From the viewpoint of environmental conservation activities,

A lot of economic resources are invested in these activities. There are need to formulate a budget to accomplish target which are set at the beginning of the fiscal year.
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2. Necessity of Environmental Budgeting in Firms (continued)

There are many Japanese corporations that have formulated and implemented environmental accounting. (From a survey of MOE)
355 listed corporations(2002) 298 listed corporations(2001) 202 listed corporations(2000)

But a few corporations have introduced environmental budgeting into their environmental accounting information systems (From a survey of Yokohama National University). Some evidences supports the contention that budgeting for environmental conservation activities plays a useful role in their management.
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3. Theory of the Green-Budget Matrix Model

What is the Green-Budget Matrix Model (GBMM)? An approach which adapts the framework of the quality cost matrix model to environmental cost management. The aims and/or objectives of the model.
Reduction of environmental costs. Reduction of environmental burden. Generation of various information which will support environmental activities.

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3. (continued)
Classification of Environmental Costs used in the GBMM. Environmental The Ex ante expenses designed to conservation costs prevent environmental problems from arising and to reduce future outlay. Environmental The expenses for monitoring appraisal costs environmental effects that a firm is responsible for, and the checking and inspecting expenses to prevent the designing, developing and shipping of environmentally harmful products.
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Internal environmental losses External environmental losses

The losses caused by imperfect environmental conservation measures, inspection and so on. The losses borne by community or residents. These losses are caused by inadequacies in a firms environmental conservation measures, inspection procedures and so on.

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Structure of the GBMM and the Process of Preparing the Matrix

Absolute weight
Details of activities Details of expenses
Actual amount

Materiality

Evaluation weight of losses

Environmental conservation costs (Cj ) ( j = 1. 2..m ) (+Environmental appraisal costs) C1 Rij (*2) C2 C3 C4 2.0/4.0 0.4/4.0 Cm -

Targeted amount of losses

Difficulty

(*3) (Wai) 20 500

L 1 (*1) L2 L3 Ln

50 -

5 -

10

4.0 100%

Internal environmental losses External environmenta l losses

1.2/4.0 0.4/4.0 -

Green budget weight Estimated environmental costs and/or losses Actual environmental costs and/or losses (*1) (*2) (*3) Li = Environmental internal and external losses (i = 1.2..n ) Rij = Correlation between costs and losses ( j = 1.2..m ) W ai = Absolute weight ( i = 1.2.n ) Total Total

Total absolute weight

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Process of Preparing the Matrix

(1) Identifying the details of internal environmental losses and external environmental losses. (2) Evaluating materiality of each detail of losses. (3) Setting targets by each detail and evaluating each difficulty to accomplish the targets. (4) Deciding absolute weight and evaluation weight of losses. (5) Deploying the details of environmental conservation costs. (6) Evaluating the relationship between cost and loss in each cell. (7) Calculating green budget weight. (8) Environmental budgeting.

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(1) Identifying the details of internal environmental losses and external environmental losses.
Necessary to classify internal and external environmental losses systematically and to accurately ascertain these amounts and quantities.

(2) Evaluating materiality of each detail of losses.

Materiality = The priority given to tackling the problem depending on seriousness or the situation of the firm. The materiality are evaluated according to a fivepoint scale for each detail of losses.

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(3) Setting targets by each detail and evaluating each difficulty to accomplish the targets.
First, the next periods targets are determined by each details loss. Next, the difficulty will be evaluated according to the five-point scale.

(4) Deciding absolute weight (Wai) and evaluation weight of losses.

First, the absolute weight is calculated by multiplying the materiality and difficulty by each detail. Next, sum all the details, and then calculate the evaluation weight of losses. Wai
EW =

wa (i = 1.2.....n)
i =1

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(5) Deploying the details of environmental conservation costs.

The details of environmental conservation costs and appraisal costs are arranged on the column in the matrix.

(6) Evaluating the relationship between cost and loss in each cell.
(strong correlation), (moderate correlation), and (weak correlation) for each cell. Next, the marks could be converting to numerical values, as 5 points, as 3points and as 1point.
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(7) Calculating the green budget weight.

The numerical values of each cell are added by each columns.

(8) Environmental budgeting.

Total amount of environmental conservation costs are allocated proportionally to each detail by ratios of the green budget weight. Consequently, the targeted costs for the environmental conservation (and appraisal) activities could be determined.

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4. Case Studies at Japanese Firms

4-1. A Case study at Nitto Denko Corp.
Nitto Denko is a industrial tape manufacturing firm. Nitto Denko has applied environmental accounting to environmental budget since fiscal year 2000. (Nitto Denko Corp., 2003, 21) Why Nitto Denko introduced the Matrix?
Nitto Denko has already introduced the PAF classification as a support tool to quality improvement. Nitto Denko is pursuing to reduce the value of industrial wastes, hence, it is important to measure failure costs or environmental losses.

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Nitto Denkos case (continued)

Nitto Denko selected a division to make trial of the matrix. Usefulness of the matrix to the firm.
Managers can understand the correlation between environmental impact costs and environmental conservation costs by using the matrix. The matrix can lead managers to grasp and solve some environmental related problem within the division. The matrix can be connected with material flow cost accounting that the firm already introduced. Hence, using both tools can contribute to clear up the causes of the generation of wastes, and to plan and analyze improvement measures.
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Green-Budget matrix prepared by a division of Nitto Denko Corp.

Environmental conservation costs
The defference between the cost of conventionally purchaced materials or services and the cost of those materials and services procured through green purchasing

Environmental weight of losses Absolute weight

Global environmental prevention costs conservation Other global environmental conservation costs
Details of activities

Pollution

Additional cost for reducing the enironmental impact of containers and packaging Providing environmentally friendly products and servicies The collection and recycling of used products

Targeted amount of losses

Resource circulation costs

The efficient utilization of resources Othe cost contributing to resource circulation Conservation of water and the utilization of rainwater

R&D costs Personnel expenses Opperational costs

Social activity costs Materiality

Disclosing environmental information and environmental Donation or financial support of environmental groups Environmental protection activities, including nature conservation, planting of

Administration costs

Difficulty

Appropriate disposal of wastes

Preventing other types of pollution Preventing water pollution Preventing air pollution

Recycling wastes

Energy saving

Details of expenses

Actual amount 308.0K Y

Losses caused by inefficient use of resources Voluntary

SOx levy
(Materials containing sulfer)

300K\ 3

2.1 17.6 11.3 14.1 2.1 0.0 6.3 17.6 11.3 17.6
100%

Environmental budget weight Budgeted amount of current period (plan) Actual amount of previous period

Internal environmental losses (monetary conversion) External environmental losses (Mass conversion)

Value of industrial
(Original estimation)

374.8M Y 129.4M Y

5 4

337M\ 5 128M\ 4

25 16

Energy Organic solvents Water

70.6M Y

64M\ 5

20

3.6M Y

3.6M\ 3

Losses of corporate prestige Waste recycling rate Value of industrial waste ratio Consumption of energy per product unit
(l/million yen)

98%

100% 3

9.5%

8.4% 5

25

843L/M\

831L/M\ 4

16

Solvent emission ratio

7.8%

4.5% 5

25

10.2
12,263 11,660

2.8
3,394 2,817

0.2
254 841

6.8
8,219 7,539 0 0

8.5
10,199 8,663

2.1
2,563 2,562

7.1
8,462 7,811

13.3
15,950 17,646 0 0 0 0 0 0 0 0 0 0

16.9
20,222 16,387

13.9
16,687 14,061

18.2
21,787 16,548 0 0 0 0 0 0

Total absolute

142

Total Total

120,000 106,535

KY KY

Notes:

Absolute weight: Environmental weight of Environmental conservation costs: Environmental budget weight:

Multiplying the materiality and difficulties by each detail. Sum all details, and then calculate the environmental weight of losses that can be calculated to make the vokume of each detail reThe grade could be assigned numerical values, such as (3point), (2point), and (1point), and then allocate the weight of the environmental losses to each cell by each row in the work sheet proportionally. The numerical values of each cell are added by each detail of the environmental conservation costs.

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4-2. Other Pilot Projects of GBMM

(1) Toyo Seikan Kaisha Ltd.
A packaging container manufacturing company.

(2) Toshiba Corporation.

An integrated manufacturer of electrical and electronic products spanning.

(3) Kyushu Electric Power Co. Inc.

An electric power company.

(4) Nissan Motor Co. Ltd.

A automobile manufacturing company.

(5) Kirin Brewery Co. Ltd.

An alcohol beverage manufacturing company.
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 Toshiba (Toshiba, 2003, pp. 10-11) Estimated and disclosed their environmental benefits by monetary term.
Closely related to external environmental losses.
Classification Detail
Toshiba Affiliated companies

Total 6,574

Actual benefits

Benefits that can be directly converted into monetary value, such as reduced charges for electricity, water, etc. Benefits concerning reduction in environmental impacts expressed in monetary value Reduction of environmental impacts at the usage phase expressed in monetary value The extent to which risks are reduced after the investment compared with before the investment is calculated
Total

5,139

1,435

Assumed benefits Customer benefits Risk prevention benefits

12,242 1,551 2,512

10,467 5,316 950

22,709 6,867 3,462

21,444

18,168

39,612

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5. Conclusion
Quite a few firms have exclusively focused on the external reporting aspect of environmental accounting in Japan. They also estimate environmental budget in the next fiscal year. However, sophisticated future action-plan for their environmental management has not made yet in many Japanese firms. Therefore, the success of EMS cannot be expected without having;
An action-plan which provides a map for driving activities, and A budget which guarantees to put the plan into effect.
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 Therefore, The GBMM is the most useful instrument for supporting managers in this context. Usefulness of the Green-Budget Matrix.
The GBMM is a tool to support managers; with identifying what sort of activities drive excellent environmental performance, and with allocating the economical resources for them effectively. The GBMM generates useful information for analyzing the status quo, foreseeing the future EMS and promotes corecognition about their mission among organizational members.
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 Recently, the development of Excel-based software has prompted an increase in number of Japanese firms which implement the GreenBudget matrix.

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