Industry 4.0 and environmental accounting: a new revolution?

The previous three decades have brought a burgeoning interest in corporate sustainability to the fore. Not only are members of the public demanding organisations treat natural resources such as water, air, and soil with respect, government and non-government organisations are encouraging corporations to undertake activities in a manner that is economically, environmentally and socially sustainable. However, beyond the need to satisfy external stakeholders, organisations have also begun to realise the benefit associated with proactive environmental activity.

In 1995, Porter and van der Linde argued that pollution equates to inefficiency and that inefficiency is in turn a source of economic disadvantage. Thus pollution prevention represents an opportunity for business entities to improve their financial performance through, for example, enhanced productivity and innovation. The work of Porter and van der Linde (1995) was an important step towards establishing what has become known as the ‘business case’ for sustainability. Their work challenged the long held belief that acting ‘environmentally’ could only ever be seen as a source of expense.

Notwithstanding the aforesaid shift in conventional thought, in reality the notion of environmentally friendly action as a potential business opportunity was not always intuitive to managers. Thus there was a need for tools to be developed that would allow them to assess how their organisation is impacted by environmental matters and how in turn, it impacts the environment in which it operates. This need gave rise to the development of environmental accounting in the 1990s. Environmental accounting goes beyond generic environmental management as it encourages an integrated approach to economic and environmental control which allows win-win scenarios, and sometimes potential trade-offs, to be identified and an appropriate course of action selected.

There is no denying environmental accounting has come a long way in 30 years. Nonetheless, many studies still report a lack of engagement on the part of business entities. One reason for these observations may be a lack of appropriate data, or the technology to collect appropriate data, combined with the inherent complexity of corporate sustainability as a concept (Searcy and Elkhawas, 2012; Wiedmann and Barrett, 2010). Lack of timely and accurate data could undermine the credibility of environmental accounting efforts in the long-term and render the practice open to accusations of greenwashing (Hsu et al., 2013). However, the industrialised world is on the cusp of a new stage in its evolutionary development which looks set to change the nature of environmental accounting forever: Industry 4.0.

The paper proceeds as follows. Problems with environmental accounting initiatives section examines the data gathering problems of environmental accounting techniques. An overview of Industry 4.0 is provided in the Overview of industry 4.0 section. Using the impetus from industry 4.0 for environmental accounting section explores how to capture the impetus of Industry 4.0 to contemplate enhancements in environmental accounting, while Discussion - capturing the potential of industry 4.0 for environmental accounting section concludes the paper.

Although it has grown in popularity a number of problems with environmental accounting have restricted stakeholder interest and management take-up of the techniques thus far. These problems relate to the two interrelated components of environmental accounting: external environmental accounting and environmental management accounting (Schaltegger and Burritt, 2000). The former delivers environmental accounting information to external stakeholders while the latter provides support for decisions made by internal managers.

External environmental accounting was developed because environmental issues were growing in importance and conventional financial accounting did not separately identify, classify and measure environmentally related impacts on the economic situation of companies (Schaltegger et al., 2003). Neither did conventional financial accounting record in physical terms company-related impacts on environmental systems. But data quality and measurement problems in external environmental accounting mean comparability and reliability of reported environmental data are compromised. The availability and quality of external environmental accounting disclosures remain locked into the problems of greenwash and brownwash.

Greenwash is where corporate environmental performance is overstated (Deegan and Rankin, 1996), whereas brownwash is where green credentials are understated (Kim and Lyon, 2014). For example, greenwash is possible when stakeholders have no direct measures of greenhouse gas emissions and rely on managers to address modeling complexity, estimation processes and assumptions made behind data disclosed. Management have discretion as to whether to recognise greenhouse gas emissions, and whether and how to manipulate measures and perceptions of greenhouse emissions (Hrasky, 2011). Likewise, brownwash is encouraged by fear of adverse stock market reactions to emphasis being placed on environmental performance, such as winning green awards, rather than monetary performance (Kim and Lyon, 2014). Both greenwash and brownwash can diminish the usefulness of external environmental accounting initiatives in the eyes of stakeholders as management retain considerable discretion over the environmental issues to recognise, how to measure these, and what to disclose. Skepticism about the veracity of reported environmental accounting disclosures leads to lost credibility of the data.

Problems of environmental management accounting in guiding management decisions largely relate to the unavailability and poor quality of data, the need to change information gathered by extant management control systems, and the need to introduce infrastructure for information gathering and sharing in supply chains (Kokubu and Kitada, 2015). In environmental management accounting data is gathered to identify win-win settings in organisations where both economic and environmental performance can be improved (Burritt et al., 2002). Such improvement can be calculated as eco-efficiency, a relative measure used to compare economic and environmental performance e.g. dollar sales per tonne of carbon emissions. If eco-efficiency data is missing, inaccurate or of poor quality, then there is less incentive for managers to adopt environmental management accounting as calculations will be unreliable and profitable opportunities which support improvement lost.

The International Federation of Accountants (IFAC, 2005) in particular highlighted that material use, flow and cost data were not being adequately identified and tracked. Instead they suggested that following their guidelines might encourage adoption of reliable data for eco-efficient decision-making. Although no assessment of adoption of the International Federation of Accountants guideline has since taken place others have commented on data problems. In the early days of environmental management accounting Epstein (1996) observed “…careful identification and tracking of all environmental costs have often produced totals that are four or five times the estimates” (p. 12).

The complexity of obtaining environmental cost data is illustrated by Ditz et al. (1999) who in an early study spent 6 months at Yorketown Refinery in the USA to establish that environmental costs were inaccurately estimated as 3% of non-crude operating costs when actual calculations revealed them to be 22%. The U.K. provides another example of poor estimation where it was found the actual cost of waste to be on average 25 times that estimated in the sample of businesses examined (Phillips et al. 1999).

There has been slow development of tools to encourage managers to obtain data on environmental costs and losses, the identification and size of which were a key stimulus to development of environmental management accounting so that once identified they could be managed and reduced (US EPA, 1995). It was only in 2011 that a voluntary environmental management standard for Material Flow Cost Accounting, ISO 14051, to reduce physical waste and cost from materials resources use became available (Christ and Burritt, 2015; ISO, 2011). The tool, which also includes water and energy, provides a systematic way in which to gather physical and monetary material flow information. Although monetary measures of material losses are a key part of Material Flow Cost Accounting to assist with eco-efficiency calculations linking economic and environmental performance, problems remain as management resist being accountable for such losses. Toyota’s Kaizen system is illustrative as material losses are not accepted as a part of continuous improvement targets (Kokubu and Kitada, 2015). As Scavone (2006) points out in Argentina very few companies have been able to integrate environmental actions into their broader management systems. Likewise, Kokubu and Kitada (2015) identify only three such companies in Japan. Scavone (2006) identifies this lack of integration to be a major obstacle for the generation of assessable information about environmental and economic performance. Furthermore, in countries such as Lithuania companies do not fully estimate their waste streams, with opportunities to improve environmental and financial performance through better informed operations and investment decisions being lost (Staniskis and Stasiskiene, 2006).

When suitable data is unavailable environmental costs can also be transferred between departments, or between parties in supply chains leading to lost opportunities and a need for suitable cost-effective technological infrastructure to help gather and share environmental management accounting information. Evidence from Burritt et al. (2011) indicates that within top German companies sampled information about the effects and successes of carbon emissions is not transferred between departments, rather a silo mentality exists whereby managers focus on the carbon consequences of their own departments. Similarly, Viere et al. (2011) identify the need for investing in supply chain information systems in the coffee industry to support decision making between parties if environmental management accounting is to provide necessary support for eco-efficient decisions.

In short, the discussion about problems with EA considered above accords with Brown et al.’s (2005) view that to meet the environmental imperatives of the future requires better information technology and richer information. The next section considers the emergence of Industry 4.0, which might provide a foundation for overcoming these challenges.

Industry 4.0 is driven by improved data gathering processes enabled by transistors in integrated circuits doubling in capacity every 2 years (called Moore’s Law), thereby lowering cost of digital electronics, reducing size of components, facilitating portability and increasing availability of data through connected machines (Deloitte, 2015).

Key concepts underlying Industry 4.0 are increased connectivity of networks using the Internet of Things and Internet of Services through Cyber-Physical Systems. The Internet of Things is the network of physical devices (things) embedded with networked microchip technology, software, sensors and controllers enabled to collect and exchange data, while the Internet of Services is the offering of services through the internet. Cyber-physical systems are physical things monitored and controlled wired and wirelessly by computer-based (cyber) algorithms (Deloitte, 2015) through artificial (non-human) intelligence to trigger automated action (Atzori et al., 2010). In smart factories of the future it is anticipated that sensors will monitor the physical environment and computer algorithms be used to control physical operating parameters. The result would be a manufacturing environment which has “self-awareness, self-prediction, self-comparison, self-reconfiguration, and self-maintenance” (Lee et al., 2014, p. 4). Typical would be Philips Electronics’ advanced manufacturing of 600 models of electric shavers in the Netherlands, which optimises economic efficiency in a factory with 128 robots and only nine workers there to provide quality assurance (Davies, 2015, p. 5).

Industry 4.0 is a vision of industry as it could be in the future or rather an aim to work towards, and not the industry of the present (Baur and Wee, 2015; Deloitte, 2015). Initially, Industry 4.0 was seen as a way for Germany to maintain a competitive advantage over emerging economies which have lower labour costs (Davies, 2015). The notion quickly spread in the European Union, the USA, and Asia/Pacific regions, especially in China, Russia and Brazil (Staufen 2016).

Commentators recognise there are no guarantees over the rate of take up of Industry 4.0 technologies and the benefits which might be secured. They speculate about anticipated large changes ahead with claims such as “The rise and fall of enterprises and entire national economies will hinge on making ‘intelligent factories’ a reality” (Wübbeke and Conrad, 2015), and “[Industry 4.0] is just beginning to take off and it’s difficult to imagine exactly how it’s all going to develop” (Gray and Hughes, 2016). Davies (2015, p. 5) advising the European Union warns “Industry 4.0 as a concept is poorly defined and suffers from exaggerated expectations”.

Notwithstanding this scepticism, large amounts of money are being invested by governments and business to try and make the Industry 4.0 vision a reality. Predictions have been made of US$15 (A$20) trillion being invested in the industrial internet, the US equivalent term for Industry 4.0, by 2030 (General Electric Company and Accenture, 2015). Under the Horizon 2020 research program between 2014 and 2020 the European Union has already committed almost €80 (A$118) billion for research and innovation, including support for developing key enabling technologies and made available at least €100 (A$145) billion for investment in innovation from European Structural and Investment Funds (Davies, 2015). Europe is predicted to need investment of €140 (A$200) billion each year with Germany providing €40 (A$60) billion of the annual total (Davies, 2015). China is experimenting with Industry 4.0 technologies through CNY 500 (A$100) billion of government funded support at national and regional levels (Gray and Hughes, 2016). Through its ‘Made in China 2025’ policy the state promotes the digitisation of the industry with elaborate support programmes for the Internet of Things, robots, intelligent manufacturing systems, cloud computing and the transformation and upgrading of industry (Gray and Hughes, 2016). Almost 60% of manufacturing companies in China have Industry 4.0 on their agenda, compared with the world leader, Germany, with almost 80% (Staufen, 2016).

This fourth industrial revolution has been promoted as providing annual efficiency gains from resource productivity in manufacturing of between 6 and 8% (Davies, 2015), greater capital intensity and more flexible models of work organisation (Germany Trade and Invest, 2014) through improvements in machine to machine information and communication technologies. Nonetheless, in Switzerland the anticipated relative advantages over low labour-cost developing country production is now recognised as unlikely to stem the flow of offshore activities (Deloitte, 2015), with the future direction of Industry 4.0 development viewed as speculative at best (Gray and Hughes 2016). Furthermore, competition from China is accompanied by proposed moves towards becoming the world’s leading industrial power by 2049, when the country turns 100 (Staufen, 2016). China intends to catch and overtake other countries in the near future and recognises networked production, in which machines and parts are engaged in an ongoing exchange of information, to be essential (Staufen, 2016). But progress is limited by the lack of standards for the language used by chips to communicate with each other, lack of know-how, poor legal standards for data protection which will slow take-up, and insufficient capital to invest in technology (Staufen, 2016). Nevertheless China is putting its full weight and funding behind the integration of industrialisation and informatisation (Wübbeke and Conrad, 2015).

Given the problems outlined in Problems with environmental accounting initiatives section, and the potential from new information and communication technologies being introduced into advanced manufacturing the paper turns to consider how Industry 4.0 might be used to improve current environmental accounting initiatives.

Industry 4.0 might be used to improve both external environmental accounting and environmental management accounting if extensive digitisation occurs in a fourth industrial revolution.

In technical terms the digitisation of data gathering and reporting in real time also means there is potentially less opportunity for greenwash and brownwash for three main reasons. Management discretion over the migration of mass data is removed as transfer to the common repository is in real time, through digital means data in the common pool can be made available directly to stakeholders, and there is less need for third party audit of such data which is digitally tagged as credible using universally accepted labels from a generally accepted taxonomy, and all at lower costs (Seele, 2016).

In Industry 4.0 what was invisible and poor quality data about environmental impacts and costs of operations could be made visible or more accurate as a foundation for automated decisions by intelligent machines. Machines operating to real time data would no longer have to wait passively for an operator’s decisions and instructions before optimising production schedules, anticipating faults and undertaking maintenance and repairs. Instead, relevant and comprehensive digital data provided in real time “…should be able to actively suggest task arrangements and adjust operational parameters to maximise productivity and product quality” (Lee et al., p. 5). For example, in an Industry 4.0 world as support for ISO 14051 Material Flow and Cost Accounting cyber system sensors could be used to monitor the physical material and energy flows, make a virtual copy of the physical flows, and take autonomous decentralised decisions in real time to minimise material use and losses from actual and predicted inefficiencies.

Industry 4.0 could encourage improved transfers of data between silos and in supply chains leading to environmental and monetary gains from improved management. Data to assist with transfers between different departments, or between parties in a supply chain would be available from infrastructure investments in networked digital information and communication technologies.

At the departmental level a proclivity for silo thinking, as observed by Burritt et al. (2011) in the context of corporate responsibilities for carbon management accounting, could potentially be overcome in the fourth industrial revolution through shared real time common source information about transfer pricing (Burritt et al., 2011). Given appropriate algorithms for volumes and prices machines will self-select best courses of action by examining integrated data from sensors about environmental, costing and pricing aspects of performance in an impersonal way.

En route to Industry 4.0 human decision making would be informed by a common pool data base accessible by all, particularly transdisciplinary strategic teams. If through increased digitised connectivity provided by the Internet of Things and Cyber-physical Systems environmental and sustainability managers, in-house environmental lawyers and accountants would have access to shared data about environmental aspects of operations and investments and there would be an increased chance they could work together to use the real time environmental management accounting data and decide in a collaborative way on environmentally sound eco-efficient actions.

A further way in which Industry 4.0 could encourage environmental management accounting initiatives is by recognising the parallel between the data supply chain and eco-efficient supply chain management. For example, water-specific environmental management accounting in the wine supply chain in Australia provides a case in point as it requires the collection and communication of water specific data, often by the wine producer in a collaborative relationship (Christ, 2014). Industry 4.0 technologies mean that impacts on relative environmental and monetary performance are more transparent, being located in a commonly accessible data pool.

As noted in Overview of industry 4.0 section considerable uncertainty exists over whether or how quickly the world might move into the fourth industrial revolution. Nonetheless given the mounting interest and the large capital investments involved the question arises as to what academics, practitioners and policy makers might do now to try and secure the potential benefits from Industry 4.0 for development of environmental accounting.

Industry 4.0 presents a speculative vision of an advanced networked commercial society. Accompanying but currently not included in this vision for more highly digitised industries and trade is the possibility for improved corporate environmental performance and a stronger role for environmental accounting. Based on superior data availability, especially about opportunities for pollution and waste prevention, networked commercial societies of the future could be designed with digital data being made available in real time to monitor and certify optimal corporate environmental and monetary performance. However, there are no guarantees that the current vision for Industry 4.0 will be used to help address environmental crises, except by chance. Better than chance would be investigation by academics, practitioners and policy makers of How Industry 4.0, or the Internet of Things, might be employed to enhance the outcome of environmental accounting initiatives.

The paper raises questions for academics to explore and practitioners and policy makers to consider as Industry 4.0 holds the potential to facilitate better understanding of the value to the business of environmental accounting through greater transparency, reduction of the possibility of greenwash and brownwash, focus on the sectors and size of firms that matter most, etc. The marginal investment cost of such facilitation could be very low as generation of numbers revealing environmental performance for decision making and reporting could piggy-back on the large investments in infrastructure already being made to improve digitisation and connectivity. These investments would be sunk costs as far as environmental accounting is concerned but for those promoting Industry 4.0 could be seen as presenting additional benefits previously not considered.

Industry 4.0 development provides the background upon which environmental accounting tools could be enhanced. In particular, the tools could bring together measures of environmental and economic performance to demonstrate joint benefits in real time, more accurately and with higher quality data than has been possible before the spread of new digital technologies such as the Internet of Things and Services, and Cyber-physical Systems. Industry 4.0 networking of innovative computer systems channeling operational data to a common base, such as the cloud, for potential interrogation by multiple managers with different professional backgrounds and roles, multiple external stakeholder groups with their own interests and cultures, across multiple countries facing multiple environmental opportunities and concerns potentially holds great potential for securing the benefits of environmental accounting for larger companies. But if the Industry 4.0 vision extends further it has the potential to provide a platform for the take-up of environmental accounting by multitudinous smaller companies. As argued in the paper both present an opportunity and a challenge needing the attention of academics, practitioners and policy makers. Asian countries, particularly China with its heavy investment in Industry 4.0 and concerns over environmental issues associated with growth, might be prime contenders to take up this challenge.