Accounting for carbon in the FTSE100: Numbers, narratives and credibility John Malamatenios Submitted in partial fulfilment of the requirements of Queen Mary University of London, for the award of Doctor of Philosophy 2014 1 Statement of originality I, John Malamatenios , confirm that the research included within this thesis is my own work or where it has been carried out in collaboration with, or supported by others, that this is duly acknowledged below and my contribution indicated. I attest that I have exercised reasonable care to ensure that the work is original, and does not to the best of my knowledge break any UK law, infringe any third party’s copyright or other Intellectual Property Right, or contain any confidential material. I accept that the College has the right to use plagiarism detection software to check the electronic version of the thesis. I conform that this thesis has not been previously submitted for the award of a degree by this or any other university. The copyright of this thesis rests with the author and no quotation from it or information derived from it may be published without the prior written consent of the author. Signature: Date: 1 July, 2014 Details of collaboration and publications: The carbon risk software toolkit described in Chapter 9 is a collaborative venture under the organisation of RVA Consulting (http://rvaconsulting.se). The Ph.D. candidate has contributed by sharing the FTSE62carbon dataset prepared for this thesis, which the software incorporates into the calculation of its carbon-financial metrics. In addition, the Ph.D. candidate has collaborated in writing a peer-reviewed paper (Haslam et al ., 2014b) and a summary of a small research project published in the Institute of Chartered Accountants of Scotland (ICAS) research newsletter (Haslam et al ., 2014a) 2 Dedication To my parents, John George and Patricia Ann Malamatenios 3 Acknowledgements Albert Einstein once observed that if he knew what he was doing, it would not be called research. Perhaps for this reason, it is essential that a Ph.D. researcher can call upon the wisdom and insight of their supervisory team. I owe a huge debt of gratitude to Professor Colin Haslam, not just for his expertise but also for his patient and kind support through my moments of intensity. I would also like to thank Dr. Nicholas Tsitsianis who provided invaluable specialist counsel in the role of second supervisor. Special thanks go to Dr. Peter Harris. A stern critic and the finest of friends, it was Peter who first gave me the confidence to undertake the Ph.D. and, in the process, to change my life for the better. His encouragement and guidance have played a huge part in my journey. I am fortunate to work for some fine people. Mr. Jonathan Easter and Mrs. Emma Elkington, of the University of Hertfordshire, have both shown a great interest in my personal development and have done everything possible to ensure that my work commitments have allowed me the time and energy to devote to my studies. I thank them both. Lastly, but most importantly, I would like to thank my wife, Karen, whose love and warmth have sustained me through almost ten years of postgraduate study. I could not have done this without her. 4 Abstract The United Kingdom Government has mandated ambitious carbon objectives, requiring an 80% reduction in emissions by 2050, and a 20% interim reduction by 2020. Their achievement will require government and large companies to work together, and for each to be assured of the other’s strategic intent. An emergent carbon accounting can provide reassurance if it produces credible information that supports the claims made by each party. This thesis investigates the extent to which carbon reduction narratives are supported or contradicted by actual carbon emissions disclosed in corporate accounting reports. It also investigates whether large corporations have delivered absolute carbon reductions in support of the government’s legally binding objectives. As a result of these and other investigations, the thesis contributes to the carbon accounting literature by critiquing the method of framing emissions employed by the Greenhouse Gas Protocol, the extent to which carbon reduction is supported by meaningful managerial incentives and the means by which analysts might rebalance financial return with carbon risk in portfolio construction. Following a middle ground approach, the research employs a numbers and narratives analysis in which critical alternative narratives are created at national, sectoral and firm levels. The analysis disaggregates macro carbon emissions data, and considers carbon emissions at a corporate meso and micro level. Narratives constituted out of these numbers, together with counter-narratives generated from corporate disclosures, are then evaluated to assess their credibility. The thesis adopts a practical approach, utilising multiple framing devices. In addition to reporting scopes 1, 2 and 3 carbon emissions, it describes a business model framework in which firms are expected to disclose their carbon-material stakeholder relations. Further recommendations are aimed at aligning the interests of corporate managers, investors and financial analysts with government carbon policy in order to modify behaviour and reduce emissions trajectories towards a lower carbon future. 5 Table of Contents Chapter One 18 Introduction to the thesis 18 1.0 Introduction 18 1.2 Aims of the thesis 19 1.3 Accounting for carbon emissions 20 1.4 Credibility 21 1.5 Approach to the research 22 1.6 Outline of the thesis 23 Chapter Two 26 Literature Review 26 2.1 Introduction 26 2.2 From sustainable development towards carbon emissions 27 2.3 The science of climate change and the commensuration of greenhouse emissions 29 2.4 Reducing carbon: numbers and targets set by the Kyoto Protocol 32 2.5 Reducing carbon and UK adoption of the Kyoto Protocol 34 2.6 Accounting for carbon: the challenge of measurement 35 2.7 Carbon accounting in academic literature and professional protocols 38 2.8 Evaluating the credibility of intention by reframing carbon accounting 44 2.9 Conclusions and implications for the research 50 Chapter Three 54 Research Methodology 54 3.1 Introduction 54 3.2 The nature and purpose of research methods 54 3.3 Paradigms – the sociology of science 56 3.4 Accounting research: disclosure 58 3.5 Framing accounting theory 60 3.6 Establishing an ontological position for the research 64 3.7 Thesis methodology: a middle ground approach 66 3.8 Numbers and narratives 71 3.9 The evaluation of methodology 73 3.10 Methodology within an organising framework 74 3.11 Analysis of physical carbon data – levels of aggregation 76 6 3.12 Macro datasets 77 3.13 Meso datasets 80 3.14 Narrative datasets 86 3.15 Micro case study: the FTSE100 mixed-retail sector 89 3.16 Conclusions and implications for the research 90 Chapter Four 93 Macro analysis: the United Kingdom national carbon footprint 93 4.1 Introduction 93 4.2 The national carbon reduction narrative 93 4.3 A national account of the United Kingdom carbon footprint 96 4.4 Method of deconstruction and analysis 102 4.5 Findings: structural analysis of the United Kingdom carbon footprint 104 4.6 Conclusions and implications for the research 124 Chapter Five 129 Meso analysis: the FTSE100 index of leading companies 129 5.1 Introduction 129 5.2 Identifying the FTSE carbon footprint 131 5.3 Data collection method for the FTSE62 group 135 5.4 Accounting for the FTSE62 Carbon Footprint 141 5.5 Data Limitations 146 5.6 Conclusions and implications for the research 152 Chapter Six 155 Micro analysis: carbon disclosure in the FTSE100 United Kingdom mixed-retail sector 155 6.1 Introduction 155 6.2 The FTSE100 mixed-retail sector: case study rationale 156 6.3 Background to the mixed-retail sector 159 6.4 The supermarket business model 161 6.5 The sociology of supermarkets 165 6.6 Framing carbon accounting in the mixed-retail sector 171 6.7 Theory of impression management, and alternative metrics 176 6.8 Carbon disclosures in the mixed-retail sector 178 6.9 Marks and Spencer plc 179 6.10 Tesco plc 184 6.11 J. Sainsbury plc 187 7 6.12 Wm. Morrison Supermarkets 191 6.13 Conclusions and implications for the research 191 Chapter Seven 196 Micro analysis: exploration of narrative and credibility 196 7.1 Introduction 196 7.2 Narratives in disclosure 197 7.3 Thematic content analysis 199 7.4 Theoretical application of the taxonomy 202 7.5 The taxonomy observed 203 7.6 Thematic content analysis 206 7.7 A semantic analysis of carbon-related narrative statements 211 7.8 Shareholder engagement with carbon reduction 216 7.9 Narrow incentive schemes 219 7.10 Broad incentive schemes 221 7.11 Financial impact of incentives on manager commitment 224 7.12 Conclusions and implications for the research 229 Chapter Eight 232 Accounting for carbon risk: towards a stakeholder approach 232 8.1 Introduction 232 8. 2 Accounting for value added and carbon emissions 233 8.3 Malleability of carbon reporting boundaries: a caveat 236 8.4 Carbon-financial intensity: trends and composite risk profiles 239 8.5 A business model approach to carbon disclosure 246 8.6 Accounting for business models 248 8.7 Accounting, stakeholders and carbon emissions 249 8.8 Conclusions 252 Chapter Nine 255 Carbon emissions: policy interventions and modifying behaviour 255 9.1 Introduction 255 9.2 Presentation and discussion of policy recommendations 256 9.7 Opportunities for future research 271 9.8 Conclusions 275 Chapter Ten 276 Conclusion 276 8 10.1 Introduction