As the global climate crisis intensifies and concerns grow over potentially irreversible environmental changes, businesses worldwide are facing mounting pressure to adopt sustainable practices. In India, regulatory bodies are stepping up efforts to ensure corporate accountability for environmental impact.
The Securities and Exchange Board of India (SEBI) has mandated that the top 1,000 listed companies report their environmental performance through the Business Responsibility and Sustainability Reporting (BRSR) format. A core tenet of this mandate, Principle 6, emphasizes that businesses should actively “respect and make efforts to protect and restore the environment.” This regulatory push aims to foster transparency, enabling investors, customers, and other stakeholders to make informed decisions based on a company’s environmental footprint.
Accurate tracking and measurement form the bedrock of effective environmental reporting and analysis. Companies must first establish a clear understanding of their environmental impact before implementing reduction strategies. To ensure consistency and accuracy in this process, the Institute of Cost Accountants of India’s Professional Development Committee & CPE Committee established a Task Force. This Task Force was specifically charged with developing a standardized framework for measuring environmental impact, merging traditional cost accounting with carbon accounting.
The Task Force’s mandate included developing a framework for environmental costing, conceptualizing awareness and capacity-building modules, recommending standardization and policy pathways, proposing digitization for transparent environmental reporting, and assessing the feasibility of a certification program for environmental costing and reporting in India. The culmination of these efforts is the recently released “Guidance Note on Environmental Costing,” published in April 2025.
This ICMAI Guidance Note introduces a Holistic Environmental Costing (HEC) Framework. HEC aims to identify and measure environmental impact directly from a business’s operations and activities, effectively quantifying the environmental cost of conducting business. The framework offers multidimensional insights, mapping HEC data across three layers: Operations, Management, and Reporting. This layered approach is designed to facilitate internal efficiency improvements, aid in developing strategies for environmental footprint reduction, and streamline regulatory reporting, including data collation for ESG ratings, green finance, and audit and assurance. The Institute of Cost Accountants of India anticipates that this Guidance Note will significantly contribute to establishing robust environmental costing systems across various industries.
The Guidance Note details various categories of environmental impact, beginning with Greenhouse Gas (GHG) emissions. Following the GHG Protocol, emissions are categorized into three scopes to provide insight into their origin and guide reduction efforts:
- Scope 1 Emissions: These are direct emissions from sources controlled or operated by the business. Examples include emissions from on-site fuel combustion (e.g., coal for factory boilers, company vehicles) and fugitive emissions like coolant leakages from air-conditioning systems.
- Scope 2 Emissions: This category covers indirect emissions from the generation of purchased energy consumed by the company. This includes emissions from electricity used in factories, warehouses, offices, or retail outlets.
- Scope 3 Emissions: Encompassing emissions not directly produced by the company but associated with its value chain, Scope 3 includes a broad range of indirect emissions. These can stem from sourced components, logistics for finished products, business travel, leased spaces, and other activities. Scope 3 covers all GHG emissions not classified under Scope 1 or Scope 2, with fifteen distinct elements of interest.
Beyond GHG emissions, the Guidance Note also addresses other significant environmental impacts:
- Non-GHG Emissions: Several other gaseous emissions are crucial for sustainability and air pollution considerations, and some reporting standards, such as BRSR, require their disclosure. These include Nitrogen oxides (NOx), Sulphur oxides (SOx), Particulate Matter (PM), Persistent Organic Pollutants (POP), Volatile Organic Compounds (VOC), and Hazardous Air Pollutants (HAP). Unlike GHGs, these are reported in absolute quantum (tonnes or liters) as they do not have emission factors to calculate carbon dioxide equivalents.
- Water: Water usage is a critical aspect of sustainability. Businesses are expected to quantify water consumption, particularly fresh water, and detail its sources (surface water, groundwater, seawater, or other). Information on recycled water and water discharged with or without pollutant removal is also sought.
- Waste: Comprehensive waste management data is vital. The Guidance Note outlines typical waste types for quantification, including plastic, electronic, bio-medical, construction and demolition, battery, radioactive, and other hazardous or non-hazardous waste. Furthermore, companies are expected to report on waste disposal methods, such as recycling, reuse, other recovery operations, incineration, and landfilling.
- Biodiversity: Businesses are increasingly required to report on their impact on local biodiversity. This necessitates long-term assessments by experts (environmentalists, geologists, zoologists) to determine changes in flora and fauna species, impacts on animal movement patterns, or increased risks like landslides due to business operations.
Environmental Cost, as defined in the Guidance Note, refers to the quantified impact on the environment in relevant units across these five categories. While not a monetary cost, it signifies the “cost to the planet” due to business activities. Environmental Costing is the systematic process of recording these environmental costs, enabling accurate disclosure reports and providing insights for mitigation strategies.
The report also touches upon methodologies for environmental costing, drawing parallels with established accounting practices:
- Activity-based Costing (ABC): This method assigns costs to products or services based on the activities involved in their production. While traditionally used for financial costs, the HEC framework adapts this concept to environmental impacts, identifying activities and assigning environmental costs to them.
- Life Cycle Costing (LCC): Also known as “cradle-to-grave costing,” LCC calculates the total cost of a product or service over its entire lifespan, including acquisition, operation, maintenance, and disposal. The HEC framework integrates LCC by considering the environmental impact across a product’s entire lifecycle.
The Holistic Environmental Costing (HEC) Framework combines LCC and ABC principles. It involves three key steps: Lifecycle mapping, Activity-based breakdown, and assigning environmental costs to each activity.
Lifecycle Mapping: This initial step involves identifying the various stages a product or service undergoes, such as Design, Production, Use, and Disposal. The Guidance Note emphasizes that environmental considerations should begin at the design stage, focusing on aspects like energy efficiency, use of recycled materials, and designing for repair or reuse to minimize environmental impact throughout the product’s life.
Ultimately, the purpose of this enhanced environmental reporting is to assess the impact enterprises have on the environment. These disclosures serve as crucial information for regulators, governments, consumers, and the enterprises themselves, guiding collective efforts to protect the planet and ensure a habitable environment for future generations.
Read/Download: Guidance Note on Environmental Costing
