Managing selected types of costs related to ESG implementation in enterprises

Monika Szczerbak, Paweł Dec

Abstract

Keywords: ESG, enterprise value, cost management, quality costs, environmental protection costs, integrated quality, and environmental protection cost accounting

Introduction

Keeping up with the pace, meeting and often exceeding customer requirements, and at the same time pressure to reduce costs without affecting the quality of the products offered or services provided, and environmental protection are just some of the variables forcing enenterprises to search for increasingly sophisticated, holistic management strategies, including the implementation of environmental management and quality best practices. In such economic conditions, the concept of environmental, social, and governance (ESG) assumptions becomes more important and assumes consideration of environmental and social aspects and management in making decisions and running a business. Within the ESG assumptions, the costs of quality and environmental protection are important factors influencing a company's strategy. Their detailed verification and monitoring can more accurately reflect the risk facing the business on the one hand, and on the other hand identify costs in many areas. It can integrate environmental, quality, and social data in a financially relevant way. Traditional financial accounting allows stakeholders to evaluate the company's activities, but without taking into account the impact of environmental, qualitative, and social factors, the picture is incomplete. Efforts to achieve a greater balance between financial reporting and environmental and quality reporting have become increasingly important in recent years.

The aim of this article is to describe the impact of the ESG concept on cost management in enterprises, including quality and environmental protection costs, as well as the benefits resulting from applying this concept. The subject of the research includes quality costs, environmental protection costs, and tools aimed at their reduction and improvement of financial results. An attempt was made to show the benefits that a company can achieve by utilising the model of integrated accounting for quality and environmental protection costs, using a service enterprise as an example.

A critical analysis of the literature on quality management, environmental protection, and accounting was conducted. This analysis covered both classical approaches to these issues and the latest publications that take into account trends related to the increasing importance of ESG in corporate management. Induction methods were used, which involve drawing general conclusions from the observation of a specific case, as well as deduction, which meant that recommendations could be formulated based on existing theories.

The research adopted a case study approach, enabling an in-depth analysis of the service enterprise, allowing a detailed examination of the implementation of the integrated accounting model for quality and environmental protection costs in practice, in order to demonstrate how it improves operational efficiency, cost transparency, and the company’s sustainable development. The study aimed to identify the benefits that a company can obtain through the implementation of this model, such as cost optimisation, better management of environmental risks, enhanced service quality, and increased competitiveness in the market.

The essence and importance of the ESG concept

The concept of ESG assumptions is becoming increasingly important and has developed in response to global challenges such as climate change, social inequality, and the need for more responsible corporate management. This trend is intensified by growing environmental pressure, including changing expectations of investors and the financial sector, legislative changes, growing social awareness, and the resulting fear of deterioration of the company's image. Introduction of 17 Sustainable Development Goals (SDGs) and 169 related actions to be achieved by all parties - state governments, international organisations, non-governmental organisations, science and business sectors, as well as citizens, which focus on the five Ps: people, planet, prosperity, peace, and partnership, not only increased interest in the ESG concept but also gave investors an additional tool in the form of sustainable financing (Biermann et al., 2017). Interest in products such as green or blue bonds has increased significantly (Flammer, 2021). The ESG approach focuses on all market participants actively contributing to positive changes in society and the environment. ESG is an important factor taken into account when making business decisions in many enterprises around the world (Whelan et al., 2020). More and more investors choose to invest in companies that consistently implement ESG principles (Johnson, 2020). Currently, these are the aspects to which companies that care about their reputation in the eyes of customers and investors, for whom sustainable development policy plays an increasingly important role, should pay attention. On this basis, investors often choose companies that correspond to their values (van Duuren et al., 2016). Environmental issues such as energy consumption, waste management, pollutant emissions, testing products on animals, compliance with government environmental regulations, social factors, and corporate policy are important and increasingly publicised today (Velte, 2017).

Bofinger et al. (2022) identify several key areas of emphasis in the area of corporate social responsibility, including employee relations, working conditions, organisational diversity, human rights, employee equality and justice, product liability, and community health and safety. Corporate governance, as one of the three pillars of the ESG concept, is an integral part of the way companies are managed, controlled, and reported. It focuses on governance structure, transparency, business ethics, the board of directors, and relationships with shareholders. It is the company's internal supervision system. It consists of procedures, standards, and control mechanisms implemented to ensure effective management, improve decision-making processes, and comply with legal regulations, taking into account the needs of external stakeholders, in particular investors (Khan, 2019; Zhang et al., 2021). Virtually every entity needs efficient corporate governance rules adequate to its size, individual conditions, and strategic goals. Gyönyörová et al. (2021) point out that this ESG pillar assesses the way a company's management exercises control and supervision over organisational allocation, and whether companies' decisions are ethical, environmentally conscious, and forward-thinking. It examines the functions and role of the board of directors, remuneration policy, lobbying activities, corruption, donations, and strategic goals and approaches (Gyönyörová et al., 2021). Lee and Isa (2023) find that companies that follow ESG principles have stronger governance and care more about the company, the environment, and sustainability. They have less variable income and access to lower financing costs (Lee & Isa, 2023).

As a subject of scientific discussion and practical activities, ESG has become particularly important in the last few years. Many authors present definitions and meanings of this concept. According to Amel-Zadeh and Serafeim, ESG means implementing environmental, social, and corporate governance in enterprises and changing the way enterprises can be analysed and assessed (Amel-Zadeh & Serafeim, 2018). Rau and Yu (2024) define ESG as going beyond financial issues in the assessment of companies and the need to measure, report, and improve performance relating to environmental footprint, social impact, and governance. Rau and Yu show that the ESG approach requires investors to prefer projects that help to solve global environmental and social challenges or do not exacerbate existing problems. Wróbel and Kowalski (2022) analyse the definition of ESG in the context of the market position of enterprises, indicating that the application of ESG principles applies not only to investors but also to enterprises that try to improve their environmental, social, and management indicators to strengthen their competitive position. Inderst and Stewart (2018) say that ESG is a term that describes a company's responsibility to advance well-being and provide stakeholders with equitable and sustainable long-term wealth. They also state that investors, lenders, and other sources of capital use ESG to evaluate the ethical and sustainable business practices of borrowers.

The presented definitions complement each other and all highlight the importance of environmental, social, and governance factors in shaping sustainable business activities, which mutually interact and support the overall sustainability of the enterprise. Pro-environmental actions such as reducing greenhouse gas emissions, efficient resource management, and the introduction of sustainable technologies not only minimise the company’s impact on the environment but also improve its reputation in the eyes of customers, investors, and business partners. This, in turn, leads to better relationships with communities, who view the company as an entity committed to the common good, engaging in efforts to improve quality of life, supporting diversity and inclusivity, and providing appropriate working conditions for its employees. Such a socially responsible approach not only builds loyalty but also promotes the implementation of further ecological and social initiatives, thanks to greater employee engagement, as they feel they are working for a company guided by higher values. Strong governance structures, based on transparency, accountability, and corporate ethics, play a key role here, ensuring that the company’s decisions comply with legal regulations and meet stakeholder expectations. Good governance also helps to minimise regulatory and financial risks, making the company better prepared for market and social changes. In this way, all ESG elements work together, contributing to the company’s long-term success, improving its financial performance, and increasing its resilience to external fluctuations, ultimately leading to the development of a stable and sustainable organisation that enjoys the trust and support of a wide range of stakeholders.

ESG reporting – disclosure of non-financial information

ESG reporting is one of the elements of the management process. Recognising the value that comes from integrating ESG factors into key business processes by the company's management and understanding the need to assume responsibility for its actions, also in the social and environmental areas, is of fundamental importance for building a more sustainable business model. According to Ackah and Lamptey (2017), the use of ESG reporting is perceived as a management instrument that facilitates the restoration of credibility and trust and reflects the process of continuous improvement of the company. Krzysztofik and others (2021) emphasise that the information included in the ESG report should be relevant, objective and balanced, clear and concise, comparable and reliable, strategic and forward-looking, and verifiable. Presenting clearly and comprehensibly how an organisation incorporates ESG issues into its strategy and business activities is the basis for effective ESG communication.

ESG reporting in the EU has been mandatory for the largest entities since 2017 under the Non-Financial Reporting Directive (European Union, 2014). Under this directive, large public interest entities, (listed companies and financial institutions employing over 500 employees and meeting one of two criteria - balance sheet total greater than EUR 20 million and net sales revenues greater than EUR 40 million) are required to submit non-financial information every year, such as:

• description of the business model;
• description of policies and their results regarding environmental, social, and labour issues, regarding human rights and counteracting corruption and bribery (Dec & Wysocki, 2022);
• description of significant types of risk (and due diligence procedures) concerning the above issues;
• key performance indicators (KPIs).

Entities subject to this obligation submit non-financial information (information on ESG factors) in a report on activities or in a separate report containing non-financial information. In December 2022, a new Directive on Corporate Sustainability Reporting (European Union, 2022) was enacted. Other important legal acts regarding ESG issues are the Regulation of the European Parliament and of the Council on establishing of a framework to facilitate sustainable investments – EU Taxonomy Regulation (European Union, 2020) and the Sustainable Finance Disclosure Regulation (SFDR) (EU) 2019/2088 of the European Parliament and the Council in on the disclosure of information related to sustainable development in the financial services sector European Union, 2019). The EU Taxonomy Regulation aims to support investors in making investment decisions. The main environmental objectives under this regulation are:

• climate change mitigation;
• adaptation to climate change;
• sustainable use and protection of water and marine resources;
• transition to a circular economy;
• pollution prevention and control;
• protection and restoration of biodiversity and ecosystems.

A business must meet four requirements to qualify for the EU taxonomy framework (European Union, 2020):

• Significant Contribution to at least one of the above six environmental purposes;
• DNSH – Do No Significant Harm rule;
• compliance with technical selection criteria (established by delegated acts);
• compliance with minimum social security guarantees and management.

The CSRD modernises and strengthens the rules on social and environmental information that companies must publish. The publication obligation covers a wider range of large companies, as well as small companies listed on stock exchanges and medium-sized enterprises – SMEs (approximately 50,000 companies in total in the EU). The new rules aim to ensure that investors and other interested parties have access to the information needed to assess investment risks arising from climate change and other sustainability issues. The current scope of ESG reporting specified in the NFRD directive will be expanded to include the need to provide data such as the degree of compliance of the company's activities with the six environmental objectives of the EU taxonomy. Concerning large companies that are public interest entities, as defined in the NFRD, there is an obligation to disclose whether and to what extent their business activities are consistent with the assumptions of the taxonomy. Companies are also required to determine the percentage of turnover, investments (CAPEX), and expenses (OPEX) in a given reporting year concerning assets or processes contributing to the achievement of the objectives specified in the taxonomy (Krzysztofik, 2021). At the core of ESG, the assumption made when investing is the pursuit of value creation over time, sustainable development, and a positive impact on the environment and society, and not short-term profitability as in the past. There will be a requirement for mandatory verification of disclosed ESG information by a statutory auditor or another authorised entity and an obligation to present the disclosed information in a structured electronic format for ease of presentation and comparison. A description of the business model and the ESG management system is necessary to understand whether and to what extent the company is prepared to respond to sustainable development challenges and opportunities (Maniora, 2017).

Including environmental and social risks in the overall risk management process helps embed ESG considerations more deeply into a company's operations and strategic business decisions. It is important to take into account both the risks within one’s own business and in the supply chain. Implementing due diligence procedures concerning areas that may have a negative impact on sustainable development factors is an effective tool for mitigating potential and actual types of risk. Environmental indicators concern a company's impact on the natural environment and, depending on the nature of the business, some companies may have a significant impact on natural resources. The lack of appropriate management systems in these areas may result in increased regulatory risk or loss of reputation and opposition from local communities.

Environmental issues can cause operational disruptions, financial penalties, and challenges in maintaining stakeholder trust and sustainability compliance. Appropriate management of hazardous waste and measures to reduce waste production, reuse, and recycling is particularly important for companies whose activities involve significant waste generation. The lack of an appropriate management system may have negative consequences in the form of financial penalties or harm to image. Waste management is a series of activities aimed at monitoring, managing, and reducing waste (including reuse or recycling) produced within an enterprise. The quality of corporate governance is demonstrated by factors such as professional management staff, the structure of the management board and supervisory board, and a well-organised management system. Good corporate governance reduces the risks the company faces and is intended to ensure that key decisions are made in the interests of the company and its shareholders.

The ESG report is currently the preferred type of non-financial report, which is the culmination of the process during which a company analyses its activities, shares results, and sets new goals. The report is an important communication tool between the company and its stakeholders, e.g. investors, business partners, customers, or the state. The concept of ESG is related to the idea of corporate social responsibility (CSR), which also includes the entity's impact on social and environmental issues. The main difference lies in the regulatory context. The definition of CSR indicates that an enterprise voluntarily takes into account interests other than its own, while ESG translates into a change in entrepreneurial practice because it is intertwined with legal requirements that are intended to make it mandatory to take care of the social interest. A study conducted on a sample of companies listed on the Warsaw Stock Exchange showed that the introduction by the EU of the ESG reporting obligation contributed in particular to the environmental and social responsibility measures taken by listed companies (Aluchna et al., 2023). Traditionally, ESG issues have been seen as a way to reduce risk and fully comply with best sustainable practices in companies (Firlej, 2018; Żukowska et al., 2016). The introduction of regulations and the obligation to report and present ESG results ensures a consistent methodological approach to climate-related risk management and helps companies avoid problems related to social changes. In this context, sustainable development is not only perceived as a market requirement but also as a factor in strengthening competitive advantage (Kolasiński, 2023).

Cost management in the context of ESG

The primary goal of cost management is to increase financial results and value for stakeholders, especially the value of the enterprise for owners and value for customers. This goal is achieved by increasing the effectiveness and efficiency of the resources used, which consequently helps to reduce costs. This improvement is facilitated by the use of appropriate cost management techniques, methods, and tools in various areas of the company's operations. The essence of cost management in an enterprise is accurately reflected in the definition framed by VanDerbeck, who defined cost management as a set of techniques and methods for controlling activities and improving company processes and products. In this concept, managers are focused on optimal allocation of all resources owned by the enterprise and using them more efficiently (Nowak, 2015; VanDerbeck, 2013). According to the authors, the concept of cost management should be understood as measures taken by managers intentionally, aimed at continuous analysis of the level and structure of costs in all areas of the company's activity, to put its human, material, financial and information resources to more efficient use. Importantly, for these activities to be effective, managers need to obtain reliable, useful information with specific qualitative features (Szczerbak, 2022; Wysocki & Dec, 2021).

New development paradigms, ESG, global changes in the economy, and technological development have resulted in a new environment requiring entrepreneurs to use modern management tools in the management process, including Lean Accounting tools such as target costing, product life cycle accounting, the cost reduction account (Kaizen costing), value stream cost and results account, cost account of product features and characteristics and activity-based costing (Sobańska, 2010). The above-mentioned Lean Accounting tools create a cost accounting system integrated with the production system and management system based on lean enterprise principles. Comprehensive implementation of Lean Accounting methods, while applying the principles of the Lean approach in management systems, improves the quality of information and increases customer value at both the strategic and operational levels, thus enabling the implementation of strategic goals. Lean Accounting provides new tools for measuring not only the profitability of the value stream. These tools ensure maintaining the required process control in the future, and are an integral part of the comprehensive implementation of the Lean approach in the organisation. They also serve to motivate employees to continuously improve processes, understand the value created for the customer, and analyse financial results achieved due to the use of lean management methods. The overarching principle of Lean Accounting in generating and communicating financial and non-financial information is the concept of the product flow path adopted in the production and management processes. Hence, the main object of cost measurement in LA is the value stream of a product group, and not every product is included in such a group.

In Lean Accounting, information about the unit cost of a product created in the management accounting system of traditionally managed enterprises is eliminated, as is thinking about cost reduction in the short term. The unsuitability of this information results from the fact that in the Lean approach, sales prices are estimated based on the product value, and not on unit cost, - minimum inventories in the JIT or Kanban system are valued based on information about product costs determined using methods that are less complicated than standard cost accounting, - the optimisation criterion in accept or reject, buy or produce in-house decisions is the profitability of the value stream, not individual products; the effects of eliminating waste and the process of continuous improvement from top to bottom must be assessed on an ongoing basis, and not after a month (analysis of deviations in standard cost accounting) (Ofileanu & Topor, 2014).

Lean Accounting tools are designed to deliver real value in lean environments, contributing to improved resource management, better cost management, and more effective decision-making. Due to the increased focus on the efficiency of the raw materials and materials used, waste minimisation, and energy efficiency, Lean Accounting tools enable the identification and management of costs related to environmental protection. Lean Accounting also highlights the costs of quality by focusing on preventing defects and improving the quality of products or services. Lean Accounting also supports social aspects by increasing work efficiency and creating better conditions for employees, which translates into improved quality of life (Chanegrih & Creusier, 2016). Lean Accounting tools not only help identify and control quality and environmental costs, but also support efforts to achieve sustainable development and meet ESG criteria by focusing on efficiency, eliminating waste, and improving quality, which is consistent with the ESG philosophy.

Quality costs

The need to meet increasing quality requirements in the context of ESG results in new tasks for the company. Its management is forced to exercise the highest management diligence with regard to quality. Activities in this regard are aimed not only at searching for ways to optimise costs. Above all, it is necessary to know the amount of costs and the basic relationships between them. Quality costs are not a precisely and clearly defined concept. As Ciechan-Kujawa (2005) points out, this is due to differences in the approach to quality and the fact that in companies the areas of activities related to quality and other processes interpenetrate. For quality management experts, quality costs are an element, a separate part of an entity’s own production costs, which can be a resource used to reduce total production costs. For economists, quality costs may mean the sum of costs incurred to produce a specific product of a specific quality that meets the customer's requirements and expectations (Balon, 2006). Quality costs are also defined as all expenses aimed at maintaining, ensuring, and improving the level of quality of products and services that is expected by the customer or agreed with the customer in binding fashion (Fajczak-Kowalska, 2004).

Petrus (2019) emphasises that the philosophy of comprehensive quality management aims at the most effective use of all the resources of a given organisation to achieve its goals. Separate records of quality costs help the organisation control and optimise costs related to the quality of products or services provided. This is important not only from a financial perspective but also under ESG principles, which emphasise the importance of quality, safety, and regulatory compliance. Therefore, companies should consider recording quality costs separately in accounting records as an element of effective management.

One way to confirm that the organisation meets high-quality requirements is to hold a certificate of compliance with the PN-EN ISO 9001:2015 standard. This certificate improves the company's image and confirms that the organisation operates correctly in terms of international standards. More importantly, it confirms the practical implementation of principles related to management culture in the organisation. This standard aims to ensure the stability and repeatability of processes conducted in the organisation. Its universality lies in the fact that the written rules of conduct will be appropriate for an organisation offering services and an organisation whose main process is the production process.

Information on quality costs undoubtedly has a major impact on decision-making processes. However, with economic development, the demand for information among internal and external stakeholders in the implementation of the company's environmental activities also increases. For a modern enterprise, an important area of cost management is not only quality cost management but also environmental protection cost management. The link between this and meeting customer expectations and needs is unquestionable.

Karmańska (2007) and Sadkowski (2020) emphasise that the more detailed the classification of costs, the greater the potential for minimising waste, optimising resource management, and achieving better financial results. Information about environmental costs is important for internal recipients in terms of future measures to reduce these costs and knowledge of the impact of the business on the quality of the surrounding environment. This data also serves the company's external needs. Dobija and Kucharczyk (2014) point out that environmental protection should be a central part of a company's strategic policy. Those companies that use Lean Accounting tools such as continuous improvement accounting, Poka-Yoke product life cycle accounting, TPM, JiT, Kanban, and others can achieve better financial results, a more positive impact on the environment, and more favourable social effects.

Environmental protection costs

Due to the rapid development of the concept of environmental costs, there are many approaches and definitions in the literature. The costs of environmental protection may be expressed in pecuniary terms - the deliberate use of material resources, labour, and external services, due to which ecological balance is maintained (optimal state of the environment with the possibility of self-cleaning) (Stępień, 2002). In practice, environmental costs usually include various categories of costs related to environmental management, environmental protection activities, and environmental impacts (Małecki & Urbaniec 2014, p. 90).

At the enterprise level, external environmental costs can be defined as pollution caused by enterprises that has not been internalised, reduced, eliminated, or processed, and as a result has not yet been included in the economic calculation of the perpetrator's enterprise, but is a burden borne by others in the form of material or intangible costs (Seidel, 2005, p. 364). According to Szadziewska, the category of environmental costs at the enterprise level should include (2014):

• current costs of environmental protection - costs of operation and maintenance of activities aimed primarily at preventing, neutralising, reducing or eliminating pollution and other impacts on the environment, and fees and purchase of environmental services aimed at reducing the negative impact on the environment;
• costs incurred for environmental protection projects, which constitute the sum of financial outlays on pollution prevention and neutralisation;
• internalised external costs - ecological fees and taxes, including emissions trading fees for substance emission permits, including integrated permits.

Broadly speaking, the costs of environmental protection can be defined as the equivalent of the sum of the most valuable other economic and social benefits that must be foregone in exchange for taking protective measures (Górka et al., 2001, p. 196).

The definitions presented have common areas, which include inclusion in environmental costs of resource use, pollution prevention, and restitution. As interest in quality and environmental protection costs has increased, various cost categorisations have emerged, the types of which overlap in the structure, and new elements used for division have appeared, such as the costs of lost benefits and the so-called hidden cost estimates. The most important criterion for the division of costs related to quality or environmental protection should be their availability. Most cost items are hidden costs, and there are relatively few visible and easily measurable ones, especially quality costs. This is crucial and is most problematic from the point of view of an enterprise that strives to increase the efficiency of management systems, improve quality, and optimise related costs to identify where they are created, so that they are recorded according to the actual places of creation, not the places of disclosure (Sadkowski & Kołodziejczuk, 2017, p. 374).

Lean Accounting tools enable the optimisation of raw material supplies, elimination of all waste, reduction of consumption of materials and raw materials, reduction of transport costs, and reduction of consumption of fuel, energy, water, etc. Although these tools are not directly focused on protecting the environment, their effectiveness in eliminating mismanagement, reducing errors, and process optimisation can help reduce the negative impact of business activities on the natural environment. The growing environmental trend within ESG is very important and reflects the expectations that investors, customers, employees, and society as a whole have of companies and organisations. For this reason, it is essential in the long run to try to identify all possible environmental costs and quality costs.

Lean Accounting tools enable the optimisation of raw material supplies, elimination of all waste, reduction of consumption of materials and raw materials, reduction of transport costs, and reduction of consumption of fuel, energy, water, etc. Although these tools are not directly focused on protecting the environment, their effectiveness in eliminating mismanagement, reducing errors, and process optimisation can help reduce the negative impact of business activities on the natural environment. They also provide valuable support for identifying and managing the costs of quality and environmental protection.

Integrated cost accounting for quality and environmental protection

Both the increase in the importance of reporting non-financial data regarding, in particular, environmental protection in enterprise operations, and the expected increase in the quality of manufactured products or services provided mean that information has to be obtained regarding the impact of the enterprise's activities on the natural environment, including environmental costs and knowledge of the costs of maintaining quality.

According to the authors, the integrated quality and environmental protection cost account (IQEPCA), which is part of the Lean Accounting subsystem, may play a special role in providing this type of data. Its tasks include primarily providing information necessary for:

• external assessment (i.e. carried out by the environment (by the surrounding community/by external organisations)) of the company's activities in terms of their impact on the environment;
• determining the burden incurred due to the use of or pollution of the environment in the form of ecological fees and taxes, emissions trading fees, compensation fees, and product and deposit fees;
• monitoring and actions aimed at minimising emerging pollution; identifying the company's environmental costs that may be hidden in overhead costs and allocating them to products;
• designing pro-ecological products, processes and services;
• determining the quality costs of new products and their production process or services provided;
• assessing the quality of new products or services provided;
• calculating the costs related to the prevention and detection of internal non-compliance;
• assessing opportunity cost;
• assessing the impact of the costs of quality and environmental protection on the economic efficiency of the enterprise (Szczerbak & Wikarczyk, 2023).

Performing the above-mentioned tasks through integrated cost accounting for quality and environmental protection involves the adoption of appropriate solutions in the entity to measure environmental costs, quality costs, their grouping, and inclusion in the records. To determine them, the impact of the business entity's activities on the natural environment and the needs related to the implementation of its environmental protection and quality objectives have to be ascertained, and those activities and processes in which these costs occur have to be isolated. Processes and activities will generate quality costs or environmental protection costs to varying degrees. Some are more noticeable, others more difficult to identify. In each enterprise, the strength of this relationship will vary depending on the type of business, its scope, and the activities performed in the organisation.

To date, quality costs and environmental protection costs have been an element often treated superficially in corporate accounting, due to the low and insufficient level of knowledge in this area and the lack of implementation of integrated management systems. The current situation in the markets is forcing enterprises to implement integrated cost accounting for quality and environmental protection to make it easier to exercise control over their activities and compete with other entities by improving the quality of the products/services offered in line with the concept of sustainable development.

The purpose of this integrated quality and environmental protection cost accounting is primarily to provide information on the development of quality and environmental protection costs in various areas, and to show the impact of isolated costs on the company's financial results and the possibility of using this data for an in-depth financial analysis of the company (Szczerbak & Wikarczyk, 2023). These assumptions can be used in the ESG concept. Thanks to IQEPCA, enterprises can better manage costs, including quality and environmental protection costs, which translates into benefits for society and the environment. This can help improve the company's image.

To show the validity of the implementation and benefits of integrated quality and environmental protection cost accounting (IQEPCA), the example of a limited liability company was used from the service sector, using selected components of IQEPCA appearing in the business profile of the enterprise in question. The analysed company provides consulting services in accounting, human resources, payroll, and tax advisory, operating in the Masovian and Łódź Voivodeships. It serves over 120 clients. In 2007, a quality management system compliant with the ISO 9001:2015 standard was implemented, with costs amounting to only 2% of operating expenses, indicating low implementation costs. This system enables continuous improvement of services and cost monitoring, supporting the company's financial stability. Despite the 15 years of system operation, up until 2022, the company did not separate quality costs or environmental protection costs in its accounting system, which also applied to its clients. Only in the integrated account of quality and environmental protection costs (IQEPCA) for the years 2021-2022 were these costs identified.

The company is implementing a new tool, which is an integrated cost account for quality and environmental protection (Table 1)¹ with obtained additional information.

Table 1
Integrated Quality and Environmental Protection Cost Account (IQEPCA) for the period 2021-2022 (simplified version)

Source: authors' own work based on the systematics of costs presented in “Managing the costs of quality and environmental protection as an imperative of financial security of a modern enterprise”, M. Szczerbak & A. Ostanek, 2023, International Journal of Legal Studies, 2(14), pp. 344-348 (https://doi.org/10.5604/01.3001.0054.2719).

The presented data shows that the company effectively manages the quality of its services, and minimises non-compliance, complaint costs, and other related expenses. The costs incurred also show that the audited company focuses on activities to prevent non-compliance: it hires a quality management representative, organises internal and external training, conducts internal audits, and manages risk. It is also worth emphasising that lower quality costs are characteristic of the service industry because there is no risk of physical defects or complicated production processes. In the consulting industry represented by the examined company, there is a relatively frequent risk of non-compliance related to frequently changing legal regulations. The analysis of the provided documents, reports, and financial statements shows that the audited company is improving and optimising its processes to also reduce this risk (Szczerbak & Ostanek, 2023).

The information presented in part E includes the quality cost share index and environmental protection costs as a share of total costs, allowing customers to assess how important it is for the company to take care of quality and environmental protection in total costs. Such information may help to increase trust in the company, which in turn may translate into greater customer interest and positive relations with other stakeholders, such as employees, suppliers, and investors. In addition, customers increasingly demand that companies produce their products and services according to quality and ecological standards. In practice, it is assumed that the share of quality and environmental protection costs in total costs may have a significant impact on the company's financial results (Żukowska et al., 2016, p. 13).

The company's managers, analysing IQEPCA information, have taken steps to improve work before the next IQEPCA, which the company will prepare for 2023. Firstly, accounting systems and processes will be supplemented with items of quality and environmental protection costs included in IQEPCA. Secondly, formulas will be introduced for calculations/estimates of difficult-to-measure costs, especially opportunity costs, and calculated quality and environmental protection cost indicators. Quality cost items related to the prevention of non-compliance and opportunity costs, on the one hand, raised doubts among the management staff of the audited company as to the estimated levels. On the other hand, these costs were considered important because they affect the results achieved, especially in the case of high-risk decisions and volatile market conditions. They will therefore be estimated and compared to previous years. Additionally, IQEPCA can provide comprehensive and reliable data that is key to preparing an ESG report, enabling the company to monitor and report its impact on the environment, society, and management. This means that the company can better communicate its commitment to ESG issues and build a positive image among stakeholders.

Conclusion

The growing significance of ESG issues presents both challenges and opportunities for organisations. Recent years have clearly indicated the emergence of a new trend where market participants, including financial ones (investors, lenders), expect companies to provide additional ESG data. ESG reporting is essential not only for the further development of modern capital markets but also necessary for businesses operating within the value chain. The increasing number of regulations in this area, the gradual direction of financial flows towards sustainable investments, and social pressure contribute to a systematic rise in the importance of sustainable development.

This study highlights selected Lean Accounting tools such as continuous improvement cost accounting, product life cycle costing, target costing, activity-based costing, and value stream costing, which have significant potential to impact ESG goals. It also presents an integrated cost accounting system for quality and environmental protection. This accounting approach comprehensively addresses economic issues related to the company's actions with regard to the quality of services provided or products manufactured and environmental protection, proposing a financial reflection of complex ecological processes and quality processes within the accounting system. Its implementation enables identification and separation of quality and environmental protection costs, which enhances transparency and control over these costs and minimises the risk associated with improper management of these expenses. Furthermore, it helps identify activities that do not add value to the services provided from the client's perspective, leading to resource waste, and generating additional costs. Additionally, the accounting system reveals areas where environmental protection measures are needed, diagnosing areas for improvement in quality and operational efficiency.

The integrated cost accounting system for quality and environmental protection serves as a valuable tool, particularly beneficial for the small and medium-sized enterprise (SME) sector. With this tool, these companies can streamline the implementation of ESG principles, especially concerning environmental data reporting and corporate governance. The integrated system allows these firms to gain a more comprehensive view of their operations, taking into account quality costs and environmental impacts. It also aids in identifying areas that require improvements and in creating more transparent and sustainable business strategies. As a result, it supports goals related to sustainable development, social responsibility, and a more comprehensive approach to management aligned with ESG principles.

Implementing the Integrated Cost Accounting System for Quality and Environmental Protection (IQEPCA) in the analysed company yields tangible benefits that can inspire other businesses, particularly in the service sector. An essential measure is the quality management system, which supports data identification in (IQEPCA). Companies, especially SMEs, should start with this system to effectively implement quality and environmental processes.

Regular internal audits allow early detection of problems and monitoring compliance with established standards, facilitating continuous process improvement. Introducing risk management procedures that identify and assess risks associated with quality and environmental issues helps minimise potential losses and increases operational stability.

Enhancing accounting systems with quality and environmental cost items improves transparency and enables better financial management. The introduction of specific formulas for calculating costs, such as opportunity costs, makes cost management more accurate and efficient.

Given the specific solutions that contributed to the success of the analysed company, other businesses should consider implementing IQEPCA. These actions not only reduce quality-related costs but also build trust among stakeholders and enhance market competitiveness. In light of increasing ESG reporting requirements, adopting IQEPCA is becoming a critical step toward sustainable development and responsible management.

Accounting firms can provide valuable support in implementing IQEPCA by offering assistance in accounting and finance. External funding sources, such as budget grants, can facilitate the implementation process.

In view of the benefits of applying IQEPCA, continued research to identify quality and environmental costs and their impact on company performance is recommended. Future studies should focus on analysing differences in the application of IQEPCA across various industries and economic sectors, which would provide a better understanding of the most effective tools and methods in specific operational contexts.

Additionally, it is recommended to isolate quality and environmental protection costs in the profit and loss account, enabling external users to better understand companies' commitments to ESG activities. Such an approach would not only facilitate comparative analysis of companies regarding sustainable development, but also help in a more precise evaluation of a company's long-term ESG strategy.

Research should concentrate on developing advanced formulas and indicators for better measurement of hard-to-measure costs, such as opportunity costs, which is particularly important in volatile market conditions.

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