Black and red should take account of green

Environmental auditing looks set to take off, after several years of gradual growth, as business comes under more pressure from insurers to clean up its act.

Insurers are seeking to limit their exposure from pollution claims and reduce their disaster payouts as the relationship between global warming and freak weather becomes generally accepted. As big investors in business, insurers are also keen to maximise their returns - which means minimising potential future liabilities.

"Environmental auditing is a widely-used environmental management tool," Environmental Data Services (Ends) wrote in its recently released study, Environmental Consulting in the UK. "However, most audits are conducted by in-house staff with only a small proportion, estimated at between 10 and 20 per cent, carried out by consultancies." Ends calculates that the environment consultancy sector has a turnover of pounds 400m, with environmental auditing worth about 7.5 per cent of that.

The leading practitioners say customers are often unrealistic, expecting far too much on very limited budgets. John Elkington, of the environmental consultants and auditors Sustainability, says: "There is a limit to what you can do for the money that companies are prepared to pay. A lot of verification statements just look at the data and say it looks OK."

Mr Elkington believes it would be more productive if companies commissioned detailed environmental audits every three years or so, rather than produce superficial annual reports aimed at making the companies look good. "Companies that have done PR-based environmental reporting have found themselves pushed to be more specific," he adds.

KPMG says verification of company statements is the key issue. "It is 100 years since the [financial] audit was established, and it will still be a few years before the environmental audit is there," says Jan Vernon, principal consultant with KPMG.

"Companies don't have the systems in place to record for an environmental audit; much of it is estimates. With a financial audit, there is another party you can check with, which is not the case with an environmental audit. Much of the data held by companies is guesswork, and verifying guesswork is very difficult."

Ms Vernon adds that companies should recognise the potential for the savings that can be achieved through an effective environmental audit. "Companies see it as a cost, but in one recent report we identified waste savings of pounds 800,000 a year per plant through reduced losses on raw materials."

The Chartered Association of Certified Accountants (ACCA), which sponsors an annual Environmental Reporting Award scheme, is keen that company accounts include a clearer indication of potential liabilities arising from bad environmental practice.

ACCA's 1994 awards paper - Standards, Stakeholders and Sustainability, by Rob Gray, David Owen and Roger Adams - said: "The most striking general omission from current practice in environmental reporting is any systematic attempt to link the economic and financial attributes of the business with its environmental activities. It is probable that 'best practice' in environmental reporting will eventually emerge as requiring both an explicit identification of the financial implications of the environmental agenda and the production, at least in summary, of an environmental report within the Annual Report alongside the financial statements."

ACCA points to Danish Steel Works as an example of how environmental auditing and reporting could develop. Danish Steel publishes "green accounts" within the body of its annual report, and produces targets for future years. This is within the context of a "mass balance approach", which examines the flow-through of materials and energy within the whole manufacturing cycle.

In Britain, according to the Ends study, the main demand for environmental consultancy is to clean contaminated land and to reduce water pollution. But it is to be expected that the market will become more focused on overall company performance.

KPMG's Environmental Reporting Survey for 1994, released earlier this year, found mixed signals. While companies were taking environmental reporting more seriously, of the FT top 100, only 34 last year published environmental reports, and just six obtained independent verification of their contents. Few companies publish targets on improving their environmental performance; only 10 referred to costs associated with the environment, and just five set out an accounting policy to provide for environmental costs and liabilities.

Nevertheless, as confirmed by the Ends report, companies will be increasingly forced to look to environmental auditing and reporting in the future. Environmental accreditation, using BS7750 or EMAS (the EU's eco-management and audit regulations) which require environmental auditing, will become much more important in the market.

Many companies, such as B&Q, are now requiring suppliers to be environmentally audited to ensure that sources are sustainable. And one in three mergers or acquisitions involves some form of environmental report.

Ends predicts that, given a following wind of environmental legislation and general acceptance of the need for environmental management systems, the environmental consultancy sector is now poised to double in the next five years.