Impact of Carbon Pricing on Voluntary Environmental Disclosures of Electricity Generating Sector: A Multi Country Analysis
A thesis submitted in fulfilment of the requirements for the degree of Master of Business
Sohanur Rahman MBA (AIS) University of Dhaka, Bangladesh BBA (AIS) University of Dhaka, Bangladesh
School of Accounting College of Business RMIT University June 2018 Declaration
I, Sohanur Rahman, certify that the work completed is mine alone, that this document has not been submitted for qualifications at any other academic institution, that the content of this thesis is the result of work which has been carried out since the official commencement date of the approved research program, that any editorial work undertaken by a third party is acknowledged, and relevant procedures and guidelines have been followed.
Sohanur Rahman
June, 2018
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Acknowledgements
First of all, I am grateful to almighty Allah who has sent me here on earth to learn and grow and blessed me in so many ways through special people who are an inseparable part of my life.
I wish to offer my deepest gratitude to both of my supervisors, Dr. Tehmina Khan and Dr. Pavithra Siriwardhane. This project could not have been accomplished without their valuable input and proper guidance. I am deeply appreciative for the excellent direction and support I have received from them throughout this entire process. Since the very beginning, they have been monitoring my progress and giving advice on both thesis and personal matters. It has been my privilege to have them as my supervisors and mentors.
I would also like to thank Dr. Prem Yapa, PhD coordinator, School of Accounting, for his support throughout my candidature. Many thanks are also due to the School of Accounting research staff and other RMIT staff for their guidance and cooperation in making my journey at RMIT smoother.
I am grateful to my distinguished colleagues in the research lab at RMIT who were always very kind and friendly while helping and motivating me in every critical situation at different stages throughout my research work at RMIT. It would be impossible to list all the outstanding individuals who I have met here. I specially want to mention the name of Tinh and Lalitha for their unconditional support and assistance. I also thank all of my friends in Bangladesh and Australia.
I was fortunate to receive a considerable amount of valuable feedback from examiners, academic journal reviewers, discussants and audiences in conferences I attended. Their comments and suggestions assisted me to improvise my thesis and other publication works.
Finally, I wish to express my heartfelt gratitude to my father, mother and younger brother for their unconditional love and support. I am grateful to my wife, Mumtaheena Anwar, for providing me with friendship and an extraordinary level of support, encouragement and understanding during this endeavour. They all made my journey enjoyable. I dedicate this thesis to them.
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Thesis Related Research Outcomes
Refereed Conference Papers
Rahman, S., Khan, T. and Siriwardhane, P., 2018, ‘Impact of the non-government guidance on the voluntary environmental disclosures of EU electricity companies’, 41st Annual Congress of the European Accounting Association (EAA, Milan, Italy) 30 May – 1 June.
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Table of Contents
Declaration …………………………………………………………………………..... i Acknowledgements ………………………………………………………………..... ii Thesis Related Research Outcomes ……………………………………………… iii Table of Contents …………………………………………………………………….. iv List of Tables ………………………………………………………………………….. vii List of Figures ………………………………………………………………………… vii List of Graphs ………………………………………………………………………… vii Abbreviation …………………………………………………………………………... viii Abstract ………………………………………………………………………………... ix
Chapter One: Introduction 1.1 Introduction ………………………………………………………………………… 1 1.2 Background and rationale for the research ……………………………………. 1 1.3 Research objectives ……………………………………………………………… 3 1.4 Research questions ………………………………………………………………. 4 1.5 Overview of methodology and methods ……………………………………….. 4 1.6 Organisation of the remaining chapters ………………………………………… 6 1.7 Structure of the research 7 Chapter Two: Emergence of Carbon Pricing as an Emissions Reduction Strategy 2.1 Introduction ………………………………………………………………………… 9 2.2 Emissions: Causes and effects ………………………………………………….. 9 2.3 Carbon/ GHG emissions as a major concern for the environment ………….. 11 2.3.1 Impact of carbon emissions around the world ……………………… 12 2.3.2 Carbon emissions by different sectors ………………………………. 13 2.3.3 Electricity generating sector and carbon emissions ……………….. 15 2.4 Carbon emissions pricing mechanisms ………………………………………… 19 2.4.1 Carbon tax ……………………………………………………………… 20 2.4.2 Emissions trading scheme ……………………………………………. 21 2.4.3 Carbon pricing and reduction of emissions …………………………. 23 2.5 Carbon pricing and voluntary environmental reporting ……………………….. 26
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2.6 Chapter conclusion ……………………………………………………………….. 27 Chapter Three: Literature Review 3.1 Introduction ………………………………………………………………………… 28 3.2 Environmental accounting: An overview ………………………………………... 28 3.2.1 Environmental management accounting …………………………….. 30 3.2.2 External environmental reporting and disclosures …………………. 31 3.3 Environmental reporting and voluntary environmental disclosures ………….. 31 3.3.1 Prior research on voluntary environmental disclosures ……………. 31 3.3.2 National or International environmental policy and Voluntary 34 environmental disclosures …………………………………………….. 3.4 Carbon pricing and voluntary reporting of the organizations …………………. 36 3.4.1 Carbon pricing and voluntary environmental disclosures ………….. 38 3.5 Voluntary environmental disclosures by the Electricity generating sector ….. 40 3.6 Research contribution to literature ………………………………………………. 42 3.7 Chapter conclusion ………………………………………………………………... 43 Chapter Four: Theoretical Perspectives Underpinning the Research 4.1 Introduction ………………………………………………………………………… 44 4.2 Legitimacy theory ………………………………………………………………… 45 4.2.1 Strategic legitimacy theory ……………………………………………. 47 4.2.2 Institutional legitimacy theory ………………………………………… 47 4.2.3 Legitimacy theory applied in environmental accounting/reporting 48 literature ………………………………………………………………… 4.3 Institutional theory ………………………………………………………………… 49 4.3.1 Institutional isomorphism ……………………………………………… 51 4.3.1.1 Coercive isomorphism ………………………………………… 52 4.3.1.2 Mimetic isomorphism ………………………………………….. 53 4.3.1.3 Normative isomorphism ………………………………………. 54 4.3.2 Institutional theory applied in environmental accounting/reporting 54 literature ………………………………………………………………… 4.4 Justification of the theories underpinning the current research ……………… 55 4.5 Conclusion …………………………………………………………………………. 57 Chapter Five: Methodology of the study 5.1 Introduction ………………………………………………………………………… 58
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5.2 Related research and hypotheses development ………………………………. 58 5.3 Data collection and method ……………………………………………………… 62 5.3.1 Selection of countries …………………………………………………... 63 5.3.2 Selection of companies ………………………………………………… 64 5.3.3 Method …………………………………………………………………… 65 5.3.3.1 GRI framework-basis of the dependent variable ……………. 66 5.4 Empirical models and variable definitions ……………………………………… 68 5.5 Chapter Conclusion ……………………………………………………………….. 73
Chapter Six: Carbon Pricing Mechanism – Impact on Quantity and Quality of VED: Analysis and Findings 6.1 Introduction ………………………………………………………………………… 74 6.2. Descriptive statistics ……………………………………………………………… 74 6.3 Results – quantity of voluntary environmental disclosures …………………… 76 6.3.1 Testing assumptions of linear regression analysis …………………. 76 6.3.2 Correlation statistics …………………………………………………….. 78 6.3.3 Multiple linear regression analysis …………………………………….. 79 6.4 Results – quality of voluntary environmental disclosures …………………….. 81 6.4.1 Testing assumptions of linear regression analysis ………………….. 81 6.4.2 Correlation statistics …………………………………………………….. 83 6.4.3 Multiple linear regression analysis …………………………………….. 84 6.5 Conclusion …………………………………………………………………………. 85 Chapter Seven: Discussion and Conclusion 7.1 Introduction ………………………………………………………………………… 87 7.2 Discussion …………………………………………………………………………. 87 7.3 Conclusion …………………………………………………………………………. 92 7.4 Contributions of the research ……………………………………………………. 94 7.5 Research limitations ………………………………………………………………. 95 7.6 Suggestions for future research …………………………………………………. 96 Bibliography …………………………………………………………………………... 97 Appendix A ……………………………………………………………………………. x Appendix B ……………………………………………………………………………. xii Appendix C ……………………………………………………………………………. xiii
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List of Tables Table 2.1 Carbon emissions by electricity generating sector of each 18 country Table 2.2 National greenhouse gas inventory data of selected carbon 25 pricing countries Table 3.1 Summary of prior literature on determinants for VED 32 Table 3.2 Summary of prior literature on VED of electricity generating 41 companies Table 5.1 List of carbon pricing and non-carbon pricing countries 64 Table 5.2 Prior studies which used global reporting initiative guidelines to 67 develop indices Table 6.1 Summary statistics for dependent variables 75
Table 6.2 Summary statistics for continuous independent variables 76 Table 6.3 Summary statistics for dichotomous variables 76 Table 6.4 Results of multicollinearity Test 78 Table 6.5: Correlation statistics for dependent and independent variables 79 Table 6.6: Regression results 80 Table 6.7: Correlation statistics for dependent and independent variables 83 Table 6.8: Regression results 85
List of Figures Figure 1.1: Research structure 8 Figure 2.1 Global greenhouse gas emissions by gas 10 Figure 2.2 Global emissions by different sectors 14 Figure 2.3 Power consumption by electricity generating sector 16 Figure 4.1 Broad classification of theoretical framework 45 Figure 4.2 Theoretical perspectives underpinning the current study 56
List of Graphs Graph 6.1 Normal p- plot regression standardized residual 77 Graph 6.2 Scatterplot 78 Graph 6.3 Normal p- plot regression standardized residual 82 Graph 6.4 Scatterplot 82
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Abbreviations
AAA American Accounting Association AICPA American Institute of Certified Public Accountants EEA European Environment Agency EMS Environmental Management System EPA Environmental Protection Agency ETS Emissions Trading Scheme EU European Union GHG Greenhouse Gases GRI Global Reporting Initiative IEA International Energy Agency IPCC Intergovernmental Panel on Climate Change ISO International Organization for Standardization NPI National Pollutant Inventory UNEP United Nations Environment Programme UNFCC United Nations Framework Convention on Climate Change VED Voluntary Environmental Disclosures
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Abstract
The electricity generating sector is one of the highest carbon emitting sectors in the world. In accordance with legitimacy theory, sectors with higher emissions undertake a greater amount of voluntary environmental reporting. According to institutional theory, carbon pricing such as carbon tax or emissions trading scheme, as an institutional setting in the form of soft law, has an indirect impact on voluntary environmental reporting. The aim in this project is to identify the impact of carbon pricing along with GRI and ISO adoption on the voluntary environmental disclosures (VED) of electricity generating companies, segregating the companies from carbon pricing countries (e.g. Italy, Belgium, Japan etc.) and non-carbon pricing countries (e.g. Turkey, Brazil, Vietnam etc.). Few studies have considered the impact of carbon pricing on VED and this study adds to the growing literature about the impact of factors such as carbon pricing on VED.
Secondary data was collected from the 2015 annual reports or standalone sustainability reports of electricity generating companies from 53 countries around the world. Content analysis approach was adopted for measuring the extent of the quantity and quality of VED. This quantitative study used two separate indices, based on Global Reporting Initiative (GRI) guidelines for quantity and quality measurement adopted from prior studies, with some modification to align it with G4 Sustainability Reporting Guidelines.
The findings of the multiple regression analysis in SPSS suggest that there is an institutional impact of carbon pricing on the quantity and quality of VED along with the institutional impact of non-government guidance of GRI or ISO. This study also finds that VED is affected by the company size where this study finds no significant relationship of leverage with VED.
A key conclusion from this study is that due to the indirect coercive pressure of government carbon pricing policies, organisations try to legitimise their environmental actions through VED. Moreover, quantity and quality of VED are influenced by management decisions regarding the adoption of GRI guidelines for external reporting or certification to ISO 14001 for a better environmental management system (EMS).
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Chapter One: Introduction
1.1 Introduction Global climate change is occurring at a rapid pace with potential for serious impacts in recent years around the world. These impacts include rising sea levels, global warming, depletion of forest coverage, reduced availability of clean drinking water, to mention a few. Minimising global warming, climate change and their related impacts is a major concern for the international community. There are different types of initiatives in different parts of the world to combat global climate change and carbon pricing is one them. Carbon pricing mechanisms trigger carbon emissions reduction by imposing a price on carbon emissions including those of the Business sector. This sector is responsible for more than 50% of global carbon emissions (Intergovernmental Panel on Climate Change (IPCC) 2014). As far as Business is concerned, the electricity generating sector is one of the most emitting sectors due to the massive use of fossil fuels compared to other sectors. Voluntary environmental reporting is a critical mechanism for transparency in the impacts of business activities relating to climate change. Thus, the current study investigates the impact of carbon pricing on the voluntary environmental disclosures of the electricity generating sector. This study first identifies the voluntary environmental disclosures of companies from 53 selected countries, using a wide range of 2015 annual reports. Differences in voluntary environmental disclosure patterns are examined, focusing on companies selected from carbon pricing countries and companies from non- carbon pricing countries. The impact of carbon pricing is analysed. This study is an attempt to enrich the knowledge and prevailing literature on the unexplored area of indirect impact of carbon pricing (which is a regulation for carbon emissions not disclosures) on the voluntary environmental disclosures of companies around the world.
1.2 Background and rationale for the research In accordance with the Intergovernmental Panel on Climate Change (IPCC) (2007), scientific evidence for warming of the climate system is unequivocal. The world communities‟ concerns for global warming, or massive climate change, can be exemplified by the recent data provided by NASA on their official website. NASA
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(2018b) mentions that global carbon dioxide levels in the air are at their highest compared to past years. Sixteen of the seventeen warmest years have been recorded just since 2001, while 2016 was the warmest year of all time (NASA 2018a). Earth‟s polar ice sheets are melting at an alarming rate (286 Gigatonnes per year) resulting in rise of sea level 3.4 millimetres per year.
If the emissions level continues to increase at the current level, the Intergovernmental Panel on Climate Change (IPCC) forecasts a temperature increase of 2.5 to 10 degrees Fahrenheit over the next century (Intergovernmental Panel on Climate Change (IPCC) 2014). The IPCC mentions, in its fifth assessment report, that the reason behind the global climate change or global temperature rise is the human expansion of the “greenhouse effect”. Greenhouse Gases (GHG) or carbon emissions are the major contributors to global climate change where carbon occupies 92% of GHG (this study uses the terms GHG emissions and carbon emissions interchangeably). Use of fossil fuels, such as coal or oil, is one of major contributors to these global emissions. Over the last century, burning of fossil fuel has increased the greenhouse gas concentration in the atmosphere dramatically.
Over the last few decades, key initiatives such as the Kyoto protocol, 1992; Paris agreement, 2015, have been undertaken by the international community to minimise global climate change. Many different countries or regions have also introduced different mechanisms to reduce their emissions. Carbon pricing is one of the most important mechanisms introduced by different countries/regions to reduce emissions. Pricing carbon gives an economic signal to polluters to decide for themselves whether to reduce emissions, discontinue their polluting activity, or continue polluting and pay for it (World Bank 2014a). So, carbon pricing is a process to convert the concern for environment protection into economic action.
The electricity generating sector accounts for the largest share of global anthropogenic GHG emissions, which accounts for 42% of total emissions (IEA 2016c). Although there is a move toward renewable sources of energy for electricity generation, organisations of many countries still use fossil fuel as the prime source of energy for electricity generation. This sector is subject to many different types of
2 policies and actions. Different policies and actions adopted to tackle global climate change have accounting and reporting implications which deserve further research by accounting academics (Bebbington & Larrinaga-Gonzalez 2008). As a result, this study focuses on this sector for examining the impact of carbon pricing on the voluntary environmental disclosures.
There is an assumption that the carbon pricing mechanism (a form of government regulation for carbon emissions but not for reporting) exerts indirect pressure on the reporting of companies, according to the coercive isomorphism branch of institutional theory (Scott 1987). This assumption may not hold under all circumstances (Freedman & Jaggi 2005). As this is a critical assumption with major implications, it requires a detailed investigation, which is the main purpose of this study.
When regulations require organisations to disclose carbon emissions data to the state/government, and subsequently this information becomes public, organisations also provide more disclosures voluntarily as a result, to legitimize their actions (Liu et al. 2017). Voluntary environmental disclosures (VED) are the means of symbolic representation of legitimacy (Guthrie & Parker 1989). The attainment of legitimacy is also a critical issue for business, as legitimacy is a relative concept and function of time and place where the entity operates, which is very dynamic in nature and ever changing (Deegan 2009; Suchman 1995).
This study uses the Global reporting initiatives guidelines (G4 guidelines) as a measurement tool for investigating the degree of voluntary environmental disclosures by electricity generating companies. The two opposing notions are investigated as a significant problem: GRI as a legitimacy tool; and GRI as an effective tool to demonstrate environmental performances.
1.3 Research objectives The aim of this study is to analyse the differences between voluntary disclosures of the electricity generating sector from carbon pricing and non-carbon pricing countries. To achieve this aim the study fulfils the following five objectives:
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1. To identify the voluntary environmental disclosure pattern of companies operating in carbon pricing countries; 2. To identify the voluntary environmental disclosure pattern of organisations operating in non-carbon pricing countries; 3. To assess the quantity and quality of voluntary environmental disclosures of companies from different countries; and 4. To assess the implementation of G4 sustainability reporting guidelines by the selected companies of different countries. 5. To assess the certification to ISO 14001 by the selected companies of different countries.
1.4 Research questions To achieve the above research objectives a primary research question is formulated as follows: How do the voluntary environmental disclosures of electricity generating companies of carbon pricing countries vary from the voluntary environmental disclosures of companies from non-carbon pricing countries?
To answer this primary research question, the following two research sub-questions are addressed in the current study:
a. To what degree do the voluntary environmental disclosures of electricity generating companies vary between the carbon pricing and non-carbon pricing countries? b. To what degree do the voluntary environmental disclosures of electricity generating companies comply with the GRI guidelines in terms of quantity and quality?
1.5 Overview of methodology and methods Although a detailed discussion on methodological assumptions, data collection and analysis is conducted in chapter 5, a glimpse of methodological issues is outlined here. A quantitative approach has been used to assess if there is any impact of carbon pricing on the voluntary environmental disclosures of electricity companies of selected countries. Countries were broadly categorized as carbon pricing and non- carbon pricing countries based on the report “state and trends of carbon pricing”
4 published by the World Bank (World Bank 2014b, 2015). Carbon pricing countries include both carbon tax countries and emissions trading scheme (ETS) countries.
Data was collected from secondary sources such as annual reports, standalone sustainability reports or environmental reports published on the website of the respective organisations. Data was collected for the year 2015 as it was the latest year selected to avoid the time lag between the publication of G41 and the adoption of G4 by the organisations.
In order to examine the research questions, this study used content analysis (Guthrie & Farneti 2008; Krippendorff 2004) to investigate the VED in the organisations‟ aforementioned reports. Content analysis is a technique for making replicable inferences and is the most widely used method in social and environmental disclosure literature, specifically for scoring the extent of disclosure in terms of quantity and quality (Guthrie & Mathews 1985; Guthrie & Parker 1990; Milne & Adler 1999; Roberts, J 1991). Content analysis is conducted with a view to measuring the quantity and quality of voluntary environmental disclosures. Disclosure indices were used, based on GRI to assess whether any specific issues on a predefined index are disclosed or not (Joseph & Taplin 2011). GRI is the most extensively used voluntary sustainability reporting framework across the world (Manetti & Becatti 2009; Reynolds & Yuthas 2008). Two disclosure indices were adopted separately for quantity of VED and quality of VED. The extent of quantity of VED was measured by a disclosure index based on the modification of Dragomir (2010). It is very common for researchers to modify the existing disclosure indices to meet their own perceived needs (Marston & Shrives 1991). The range of unweighted score for the quantity measurement index varies from 0 to 21.On the other hand, the extent of quality of VED was measured by an index adopted from Hąbek and Wolniak (2016). The range of weighted score varies from 0 to 27. Finally this study uses multiple linear regression analysis in SPSS to reach the conclusion based on the collected data.
1 G4 refers to the Global Reporting Initiatives (GRI) guidelines 2013.
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1.6 Organisation of the remaining chapters This thesis is divided into seven chapters. Chapter 2 discusses the issues of emissions as a concern for the international community, and reasons and effects of emissions on the natural environment. Then the discussion flows to the major industrial sectors responsible vastly for the negative environmental impacts. At the end of this chapter, details of carbon pricing mechanisms such as carbon tax and emissions trading scheme (ETS) are discussed as these are the carbon reduction strategies adopted by different countries and regions. The discussion of this chapter leads to an investigation of whether and how carbon emissions related issues have been discussed in existing environmental accounting and reporting literature, more specifically voluntary environmental disclosure related literature which is ultimately discussed in chapter 3.
Chapter 3 begins with the discussion of environmental accounting and reporting literature. This chapter illustrates the related literature on national or international environmental policy and voluntary environmental disclosures. This discussion subsequently flows to the discussion on prior literature addressing the carbon pricing issues in voluntary environmental disclosures. Finally this chapter gives an overview of previous studies addressing the issues of voluntary environmental disclosures by the electricity generating sector worldwide, which is the selected sector for this broad study.
Chapter 4 discusses the theoretical framework for this study. This chapter aims to give a justification of the theoretical perspectives (legitimacy and institutional theory broadly) underpinning this study. This chapter discusses legitimacy and institutional theory broadly. After that, justification of theoretical perspectives, “institutional legitimacy theory”, “coercive isomorphism” and “mimetic isomorphism” branch of institutional theory are discussed.
Chapter 5 presents the methodology of this study which begins with the discussions about and formulation of the hypotheses in the light of findings of prior studies, followed by the method of testing those hypotheses along with the data collection procedures. Mode of data collection process is illustrated, followed by a discussion of the definitions and measurement criteria of dependent variables and independent variables of two separate linear models.
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Chapter 6 illustrates the results of the statistical operations conducted in SPSS software. The results of these statistical operations lead to the last chapter of this study which deals with the analysis of the findings of this study.
Chapter 7 provides a discussion and conclusion for this study by revisiting the research findings and contributions. Research limitations of this study are then described, followed by the further potential research scope within this area.
1.7 Structure of the research
Figure 1.1 shows the overall structure of the research.
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Figure 1.1: Research structure Introduction (background, objectives, rationale, research questions) [Chapter 1]
Emergence of carbon pricing as an emissions trading strategy [Chapter 2] Gaps found in previous literature on Literature review indirect impact of carbon pricing on Review of relevant literature [Chapter 3] VED Methodology of the study [Chapter 5] Theoretical perspectives underpinning Institutional legitimacy theory, coercive the research and mimetic isomorphism branch of [Chapter 4] institutional theory Related research and hypothesis development
sample selection, empirical model and variable definition
Carbon pricing mechanism- impact on quantity and quality of VED: Analysis and findings
[Chapter 6]
Data scored and analysis using SPSS (Multiple regression performed) Statistical results
Discussion and conclusion Research contributions, [Chapter 7] limitations and future scope
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Chapter Two: Emergence of Carbon Pricing as an Emissions Reduction Strategy
2.1 Introduction This chapter provides an introduction to the issue of carbon/GHG emissions and carbon pricing mechanisms. First this chapter illustrates the causes and subsequent effects of emissions, major industries or sectors responsible for these emissions. This chapter also discusses the emissions reduction strategies adopted nationally and around the world. Finally this chapter discusses types of carbon pricing mechanisms and the current status of carbon pricing mechanisms around the world.
2.2 Emissions: Causes and effects Nowadays world climate is going through a drastic change. The Intergovernmental Panel on Climate Change (IPCC) (2014) mentions in its fifth assessment report that carbon emissions or GHG emissions around the world are the driving force behind this global climate change or global warming. Here emissions mean the release of carbon or any other gases to the atmosphere, which causes greenhouse gas (GHG) effects. So emissions are mostly responsible for air pollution. These air pollutants can originate from two sources: natural sources and anthropogenic or man-made sources. Water vapour is the major source of natural emissions. Other sources of natural emissions are lightning, soil bacteria, animal respiration, decay, biological processes etc. Anthropogenic or human made emissions originate from internal combustion engines. Major sources of human made emissions are combustion of fossil fuel such as coal or diesel by the industrial sector, high temperature fuel combustion by the industrial sector or motor vehicles, natural gas leaks and combustion, aerosol propellants etc. (Sher 1998b). Emissions originating from the combustion of fossil fuels by electricity and heat generations, industrial operations, agriculture and transportation are the major man-made economic causes of global emissions, which account for almost 78% of total emissions (Intergovernmental Panel on Climate Change (IPCC) 2014).
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Carbon dioxide, nitrogen oxide, carbon mono oxides, non-methane hydrocarbons, methane and chlorofluorocarbons are the major gases responsible for global emissions causing devastating global warming or destruction of stratospheric ozone layer.
Figure 2.1 Global greenhouse gas emissions by gas [Source: Intergovernmental Panel on Climate Change (IPCC) (2014)]
Nitrous Oxide Fluorinated 6% Gases 2%
Methane 16%
Carbon Dioxide 76%
Global emissions of carbon dioxide, a major greenhouse gas (GHG) and driver of climate change, increased from 22.4 billion metric tons in 1990 to 35.8 billion in 2013, a rise of 60% (World Bank 2017). The substances of global emissions adversely affect the environment worldwide by interfering with climate, negatively impacting the survival of animal species, the physiology of plants, entire ecosystems and human property in the form of agricultural crops or man-made structures. The environmental effects of emissions are very alarming. These emissions cause destruction of the stratospheric ozone layer which is a cause of various types of skin diseases or even skin cancer. These emissions instigate the possibility of acid rain which destroys plants and crops as well as being very detrimental for fish and wildlife (Sher 1998a).
The current trend of emissions may push 100 million more people into extreme poverty by 2030. Moreover, the impact of extreme natural disasters is equivalent to a
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$520 billion loss in annual consumption, and it forces some 26 million people into poverty each year (World Bank 2017)
2.3 Carbon/ GHG emissions as a major concern for the environment Global climate change (or global warming) has been recognized as the top most environmental challenge faced by humanity in the 21st century. Different organisations are working for the protection of the environment from global emissions. The Intergovernmental Panel on Climate Change (IPCC), United Nations Environment Programme (UNEP), Global Environment Facility (GEF), and European Environment Agency (EEA) are some of the major international organisations working with a view to protecting the world from global emissions.
The Kyoto protocol was the first agreement between different nations to mandate the country-to-country GHG reductions. This is a treaty which extends the 1992 United Nations Framework on Conventions. The main objective of this protocol is to reduce the human made GHG emissions in various ways, taking into consideration the differences in level of emissions, economic development and capability of making the reductions (Grubb 2004). The Kyoto protocol was adopted in Kyoto, Japan on 1991 and came into force on 2005. Currently 192 countries have ratified the agreement committing to a reduction of GHG emissions to achieve the predetermined threshold within a specified time.
The protocol is based on a common objective to reduce the concentration of emissions into the atmosphere to a level that would prevent dangerous anthropogenic interference with the climate system (Article 2: Kyoto Protocol 1997). The protocol outlines different degrees of responsibility as it puts the obligation to reduce current emissions on developed countries, on the basis that they are historically responsible for the current levels of greenhouse gases in the atmosphere. The first commitment period of the Kyoto protocol was 2008 to 2012 and the second commitment period is from 2012 to 2020. Each period binds each ratified country to lower the emissions level by a certain percentage.
The Paris climate agreement within the United Nations Framework Convention on Climate Change (UNFCC) is another notable movement by world politicians to deal with the global GHG or carbon emissions reduction and finance, starting from 2020.
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A total of 195 UNFCC countries have signed this agreement, of which 153 have ratified it. Each country has agreed to implement initiatives to reduce carbon emissions and report its contribution to the mitigation of global warming. The agreement is based on the voluntary mechanism by each country rather than on force (Reguly & Mccarthy 2015). Each country will set a target for reduction of emissions by a specific date and each subsequent target will go beyond the previous target.
2.3.1 Impact of carbon emissions around the world The effect of emissions is fearsome around the world. These carbon or other GHG emissions have contributed to a rise in the mean global temperature of .80 degrees Celsius above preindustrial times‟ trapped solar energy in the atmosphere (World Bank 2017). A study of Zeebe (2013) suggests that amplified warming due to unabated fossil fuel burning increases the possibility that large ice sheets, such as the Greenland ice sheet, will melt, leading to a significant sea level rise. Land ice is already melting 287.0 Gigatonnes per year and the sea level is increasing by 3.4 millimetres every year (NASA 2017). Different portions of the world have already gone under sea water and many others areas such as Maldives, Bangladesh, Tuvalu, Kiribati, Nauru, Palau and Seychelles are threatened with flooding in the near future, as the global arctic ice minimum is decreasing by 13.3% each decade (NASA 2017). The increased amount of emissions has also made the sea water 30% more acidic since the industrial revolution (Intergovernmental Panel on Climate Change (IPCC) 2007). As a result, people from low-lying coastal regions suffer from contamination of salt water.
Recent evidence suggests that droughts have been happening more frequently recently, due to the change in global climate; and they are expected to happen even more frequently and intensely in Africa, Southeast Asia , Australia, southern Europe, the Middle East and most of the Americas (Dai 2011). These droughts result in crop failures around the world and pose a threat to food security, specially to the poor countries (Ding, Hayes & Widhalm 2011). The World Economic Forum‟s Global Risks Report 2016 shows food crises due to the global climate change as the fourth top risk for business organisations.
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The Current trends of global climate change, caused by the increased amount of emissions, have some direct and indirect impacts on the operation of business organisations. If the agriculture sector is affected by flood or droughts then crop production will decline and the cost of raw materials will increase, which instigates the inflation of the economy. Due to the scarcity of proper water, production process may be hampered. According to World Economic Forum (2016), water crisis stands first as the long-term risk for business organisations in future. The infrastructure of business organisations may be threatened as well, and this will increase the insurance cost of business organisations as a result. Above all there is a possibility of failure of climate-change mitigation and adaption by business organisations in the near or far future, if they do not take initiatives to limit their level of emissions.
2.3.2 Carbon emissions by different sectors Business organisations, especially manufacturing organisations, are responsible for global emissions to a great extent directly or indirectly, as the source of power used by these organisations comes from the burning of fossil fuels, and fossil fuels are the largest source of anthropogenic GHG emissions (IEA 2017). The fossil fuel industry, along with its products and services, accounts for almost 91% of global industrial emissions and 70% of anthropogenic emissions, as identified in 2015 (Griffin 2017). If emissions by the industrial sector continue growing at this pace by 2050, the average global temperature will rise above pre-industrial levels and is projected to reach almost 5.5°C in the long term and an almost 4°C increase by the end of this century (IEA 2017). This rise of global temperature entails substantial species extinction, large risks of regional and global food scarcity, and could cross multiple tipping points in the Earth‟s climate system, leading to even more severe consequences as already mentioned (Intergovrnmental Panel on Climate Change 2014).
According to the Intergovernmental Panel on Climate Change (IPCC) (2014), global emissions can be broken down into several categories, based on the economic activities of different sectors. The electricity and heat generation sector stands first among the other economic sectors as it accounts for 25% of the total 2010 global emissions. Use of natural gas, coal and oil for the production of electricity and heat is the single largest source of global emissions.
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Emissions from agriculture, forestry and other land use come mostly from cultivation of crops, livestock and deforestation, and generate 24% of global emissions through its economic sector. This estimate does not include the CO2 emissions that ecosystems remove from the atmosphere by repossessing carbon in biomass, dead organic matter, and soils, which offset approximately 20% of emissions (FAO 2014).
Figure 2.2 Global emissions by different sectors [Source: Intergovernmental Panel on Climate Change (IPCC) (2014)]
Other energy 10% Buildings 6% Electricity and heat production 25% Transportation 14% Agriculture, forestry and other land use 24%
Industry 21%
Emissions by the industry sector account for 21% of the total 2010 global emissions. Global GHG emissions from the industry sector occur mainly through fossil fuel consumption by manufacturing organisations, to generate energy. This sector includes emissions from metallurgical, chemical and mineral transformation processes which are not associated with waste management or energy consumption activities.
GHG emissions from the transportation sector account for 14% of total global emissions by the economic sector. This involves fossil fuel burnt for road, rail, marine and air transportation. Almost 95% of global transportation energy comes from use
14 of petroleum-based fuels such as gasoline or diesel (Environmental Protection Agency 2017).
6% of total 2010 GHG comes from building sector which involves generating energy and heat for cooking in homes (electricity use in building is included in the electricity and heat generation segment).
GHG emissions from all other energy sectors which are not directly associated with electricity and heat generation such as fuel extraction, refining and transportation, account for 10% of total global emissions. As depicted in the figure 2.2 above, the most emitting sector is the electricity and heat generating sector. This sector comprises those types of companies which produce electricity and heat for final consumption and trade. These companies generate electricity and heat using renewable (e.g. wind or water) and non-renewable sources (e.g. coal or gas).
2.3.3 Electricity generating sector and carbon emissions The electricity generating sector is the most emitting sector compared to other sectors. This sector generates 42% of total global emissions as identified in 2014 (IEA 2016a). Electricity is produced from primary energy sources of coal, oil, natural gas, and less from uranium, the sun, wind or water (see Figure 2.3). The main methods of producing electricity cause CO2 or global GHG emissions. Emissions are heavily reliant on the source of energy production: renewable or non-renewable: coal, oil, natural gas and uranium.
The most widespread type of power stations are combustion power plants which burn fossil fuels such as coal, oil or natural gas and biomass (household waste or plant matter), as they are the least expensive to build. Coal-fired plants are still the most common and currently generate more than 40% of the world's electricity (IEA 2016b). They are also the most carbon emitting per kilowatt-hour (kWh). Large countries like India and China rely primarily on coal for their electricity.
Nuclear power plants function on the heat produced by fissioning of atoms of uranium-235 or plutonium-239. Concentrated solar power technology harnesses the heat of the sun, which is amplified by mirrors.
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The turbines of power plants can be driven by water and wind where hydropower plants use the energy of water as it is moved by dams, tides or rivers. Wind turbines capture the wind's energy with their enormous blades and use it to spin turbines. Some contemporary technologies use the energy of the ocean, capturing the wave power, but these are very few in number. If fossil fuel based power plants can be replaced by these renewable sources of energy based power plants, CO2 emissions by the electricity generating companies will decline remarkably in the future. Renewable energy sources are the world‟s fastest growing source of energy, and use of renewable energy is increasing by an average 2.6% per year (IEA 2016c). This increasing trend of using renewables can reduce GHG emissions 70% by 2050 (International Renewable Energy Agency 2017).
Electricity generation is increasing rapidly to keep pace with the population increases and economic growth worldwide, as electricity is essential for household and business activities. 41% of this world electricity is produced from coal, 22% from gas, 16% from hydropower, 11% from nuclear power, 4% from oil and a mere 6% from renewable sources like wind, solar or geothermal power (IEA 2017). Figure 2.3 Power consumption by electricity generating sector (IEA 2017) IEA (2017)
Oil Wind, solar, 4% geothermal power and others Nucler power 6% 11% Coal 41%
Hydropower 16%
Gas 22%
Electricity generation is responsible for 42.5% of global CO2 emissions and 73% of this can be attributed to coal-fired power plants, which emit 950 grams of CO2 for
16 every kilowatt-hour of electricity they generate, compared with 350 grams for gas- fired power plants and 3 to 22 grams for wind, hydropower or even nuclear (Réseau de Transport d'Électricité 2017) [CO2 emissions attributable to only the construction of plant].
Emissions from the electricity generating sector have increased by 50% between 2000 and 2014. Production of electricity is also expected to be increased in near future as well. So, increased production of electricity will result in increased amount of emissions. Due to carbon pricing in many countries, electricity generating companies are becoming interested in utilising renewable sources of energy instead of the combustion of fossil fuels. IEA reveals that electricity generation increased by 3% during the year 2015 compared to 2014; but there was a massive increase, 16%, in use of renewable sources and 1% fall in the use of fossil fuels such as coal or gas.
During the year 2014 over 60% of total global emissions originated from only ten countries (IEA 2016a). Use of fossil fuel is the prime reason behind these emissions by electricity generating companies all over the world. Among the other fossil fuels coal, the most carbon-intensive fossil fuel, is mostly used by the companies. India, China, Poland and South Africa produce over 70% of their electricity using coal (IEA 2014).
Carbon emissions from the electricity generating sector are very high compared to other sectors around the world. In most countries the volume of carbon emissions from the electricity generating sector is very alarming and varies from 30% to 70% of the total emissions in some instances. The following table shows the volume of carbon emissions and the percentage of carbon emissions by the electricity generating sector against the total emissions during the year 2014 from the sample countries.
Table 2.1 shows that solely the electricity generating sector from India, China, South Africa, Turkey, Russia, Poland etc. emits more than 50% carbon of total emissions of that specific country.
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Table 2.1 Carbon emissions by the electricity generating sector of each country [Source: IEA (2016a)]
Total carbon emissions Carbon emissions by electricity
Country (MtCO2) generating sector (MtCO2) % Austria 60.8 12.7 20.89 Belgium 87.4 16.4 18.76 Brazil 476 94.7 19.89 Bulgaria 42.1 28.2 66.98 Chile 75.8 29.6 39.05 China 9,134.90 4,415.70 48.34 Colombia 72.5 13 17.93 Croatia 15.1 3.3 21.85 Cyprus 5.8 2.9 50.00 Czech Republic 96.6 54.2 56.11 Denmark 34.5 13.5 39.13 Estonia 17.5 13.5 77.14 Finland 45.3 19.7 43.49 France 285.7 28.9 10.12 Germany 723.3 327.6 45.29 Greece 65.9 34 51.59 Hungary 40.3 11.1 27.54 Iceland 2 0 0.00 India 219.7 146.4 66.64 Indonesia 436.5 168.3 38.56 Iran 556.1 155.8 28.02 Ireland 33.9 11.1 32.74 Italy 319.7 103.4 32.34 Japan 1888.6 577.1 30.56 Jordan 24.1 12 49.79 Kazakhstan 223.7 95.9 42.87
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Korea 567.8 298.7 52.61 Latvia 6.7 1.8 26.87 Lithuania 10.3 1.8 17.48 Luxembourg 9.2 0.8 8.70 Malta 2.3 1.6 69.57 Mexico 430.9 137.8 31.98 Morocco 53.1 20.3 38.23 Netherlands 148.3 58.3 39.31 New Zealand 31.2 5.7 18.27 Norway 35.3 1.9 5.38 Peru 47.8 11.6 24.27 Poland 279 148.3 53.15 Portugal 42.8 15.4 35.98 Romania 68.2 27.3 40.03 Russian Federation 1467.6 830.9 56.62 Slovakia 29.3 6.6 22.53 Slovenia 12.8 4.5 35.16 South Africa 437.4 251.8 57.57 Spain 232 70.2 30.26 Sweden 37.4 6.3 16.84 Switzerland 37.7 2.6 6.90 Thailand 243.5 92.3 37.91 Turkey 307.1 132.1 43.02 Ukraine 236.5 113.1 47.82 United Kingdom 407.8 145.3 35.63 Vietnam 143.3 50 34.89
2.4 Carbon emissions pricing mechanisms If any country wants to curb the emissions or introduce carbon pricing mechanisms, government has to play a pivotal role, as government designs the policies and
19 implements those policies, relying on different wings. They have to coordinate different ministries and portfolios such as environmental protection authority/agency, ministry of commerce, ministry of planning, ministry of finance, ministry of foreign trade and affairs, ministry of transport, ministry of fuel/energy/electricity, ministry of business, local government etc. Only government can exercise power on these wings. These wings/departments have to work in an integrated way to ensure the reduction of emissions of respective countries. Pricing on carbon is a process to shift the burden for damage back to those parties who are actually responsible for it. Carbon pricing means to put a price on carbon (World Bank 2014a). Carbon Pricing Leadership Coalition (2016) defines carbon pricing as “putting a price on carbon pollution to account for the impacts of greenhouse gas (GHG) emissions that stem from the economic choices made by both producers and consumers”. So, carbon price is the amount to be paid by the responsible parties, with a view to getting the right to emit carbon into the atmosphere. Carbon tax and emissions trading schemes are the two major forms of carbon pricing mechanisms.
2.4.1 Carbon tax Carbon tax is a form of tax that is levied on the carbon emissions generated from use of fossil fuel content (Hoeller & Wallin 1991). According to World Bank (2014a) “carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels”. Carbon exists in every sort of fossil fuel such as coal, petroleum and gas. Once this fuel is burnt, it produces carbon and other GHG which are responsible for global warming. Since combustion of these fossil fuels causes GHG emissions through the production process of goods or services, carbon tax is levied by imposing tax on the carbon content of fossil fuel at any point in the fuel product cycle. Carbon tax is imposed at the same rate per ton of carbon emitted.
Carbon tax was introduced in 1990 by Finland, the first country to use carbon pricing as an instrument for climate change mitigation (Kingsmill et al. 2015). Initially carbon tax was applied countrywide, with few exemptions for specific fuels or sectors (Vourc'h & Jimenez 2000). Norway, Sweden and Denmark implemented carbon tax in 1991 and 1992. In most cases carbon tax is imposed on products/services with
20 implications of carbon/GHG emissions (e.g. tax imposed on the electricity) rather than emissions of CO2 directly.
2.4.2 Emissions trading scheme Emissions trading scheme is a government-mandated cap-and-trade system which requires organisations to acquire a government „permit‟ if they emit greenhouse gas to control emissions by providing economic incentives for attaining the objectives of emissions reduction (Stavins 2003). In this mechanism, total allowable emissions in a country or regions are set in advance („capped‟). Governments permit organisations a certain level of greenhouse gas emission, and governments reduce the permits each year, resulting in the reduction of the emission gradually. If the emitters do not exhaust the permit fully in a particular year, they can carry forward the surplus permit to the following year, or they can trade the surplus with other companies for free or through auction in an open market.
The concept of an emissions trading scheme was first introduced by Ellison Burton and William Sanjour between 1967 and 1970 for National Air Pollution Control Administration (predecessor to the United States Environmental Protection Agency's Office of Air and Radiation), USA. Their studies used mathematical models to assess and compare the cost and effectiveness of different emissions control strategies of several cities (Burton & Sanjour 1967). One of the first successes of the emissions trading scheme concept was demonstrated by the 1980s USA program to phase out lead from motor fuel (Newell & Rogers 2003). This program was followed by the
Environmental Protection Agency sulphur dioxide (SO2) emissions trading program. The was the first large-scale application of the emissions cap-and-trade or emissions trading scheme initiated under Title IV of the 1990 Clean Air Act Amendments in the United States (Burtraw & Szambelan 2009).
The market-based emissions trading scheme gained widespread political support, which was reflected in the Kyoto Protocol. Several emissions trading schemes have been launched under the shade of Kyoto protocol in the ratified countries around the world.
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The European Union emissions trading scheme is the largest multi-country and multi-sector GHG emissions trading scheme (European Commission Climate Action 2017). In 1997 the Kyoto Protocol set binding emissions reduction targets for 37 highly industrialized countries for the first time. In 2000 the European Commission presented a paper mentioning preliminary ideas about the design of its EU ETS system. In 2003 the EU ETS directive was adopted, and in 2005 the EU ETS was officially launched. EU ETS has four phases (World Economic Forum 2016): phase 1 (2005-2007), phase 2 (2008-2012), phase 3 (2013-2020) and phase 4 (2021- 2020). The first phase of EU ETS started in 2005, a three-year trial period, which was a „learning by doing‟ stage to prepare for phase 2 (European Commission
Climate Action 2017). During phase one ETS covered only CO2 emissions from power generating companies and other energy intensive industries. The first phase was successful as it established the price for carbon of EU member countries. The second phase was 2008 to 2012. In this period EU member countries had concrete emissions reduction targets. The third phase of EU ETS started in 2013 and will end in 2020. One of the major reforms in this third phase is the provision of reducing cap on emissions of power stations by 1.74% every year (European Commission Climate Action 2017). The European Commission revised the EU ETS for its fourth phase (2021-2030) in its legislative proposal in 2015, in line with the EU‟s 2030 climate and energy policy framework. The aim of this proposal is to reduce the emissions of EU ETS by 43% compared to the 2005 level.
The EU ETS regulates around 45% of total GHG emissions of 28 EU member countries along with Norway, Iceland and Liechtenstein, covering 11,000 power stations and manufacturing plants. Now Europe is looking forward to linking the EU ETS with some other compatible schemes of different countries around the world.
Currently the EU ETS covers CO2 emissions from the power and heat generating industry, energy intensive industries such as oil refineries, steel work and production of iron, metals, aluminium, lime, cement, glass, ceramics, paper, pulp, acids and the bulk organic chemicals. Another prominent emissions trading scheme is New Zealand ETS which begun in 2008. At the initial stage this scheme covered only the forestry sector, but subsequently, in July 2010, it expanded the coverage to incorporate fishing, industrial process, and liquid fossil fuel and energy sectors. In 2015 the New Zealand
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Government implemented the ETS nationally to cover all sectors (including agriculture).
Switzerland introduced both carbon tax and the Swiss ETS in 2008, on a voluntary basis (International Carbon Action Partnership 2017c). The ETS became mandatory for large firms on February 28, 2013. Companies having an energy capacity above 20MW, or GHG emissions above 25000 tonnes per year, are required to participate in the Swiss ETS. Medium-sized companies can choose either to pay carbon tax or participate in ETS. If any medium-sized company receives exemption from carbon tax it, will be allocated free credit up to its level of emissions from its preceding year. Other credits are traded in auction. Large companies are allocated free credits up to a benchmark. The EU ETS benchmark is used for selecting the Swiss ETS benchmark.
Korea launched its ETS (KETS) program on January 1, 2015. This is the first cap- and-trade system implemented nationally in East Asia (International Carbon Action Partnership 2017b). This scheme covers around 525 largest emitters in the country, which accounts for 68% of national GHG emissions.
The Republic of Kazakhstan launched its national ETS (KAZ ETS) on January 2013 on a pilot project basis, and it rolled into full implementation in 2014 (International Carbon Action Partnership 2017a). This scheme covers manufacturing, mining, waste, agriculture, transport and energy sector companies which emit more than twenty thousand tonnes CO2 per year. The target of this scheme is to achieve a 5% reduction of GHG from the 1990 GHG level by 2020, and a 15%-25% reduction of GHG from the 1990 GHG level by 2030 (International Carbon Action Partnership 2017a).
2.4.3 Carbon pricing and reduction of emissions The report of Intergovernmental Panel on Climate Change (IPCC) (2014), signifies putting a price on carbon to help limit the increase in global mean temperature to a maximum of 2 degrees Celsius above pre-industrial levels.
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The reduction of emissions by EU countries makes clear the positive impact of carbon pricing to reduce the emissions, as EU ETS is the world‟s largest carbon pricing mechanism. In 2015 GHG emissions in EU countries were down by 22% compared to the 1990 level, which represents a reduction of 1265 million tonnes of
CO2 equivalents (Eurostat 2017). This emissions reduction trend put the EU‟s target on track to reduce the emissions by 20% by 2020 and 40% by 2030.
National greenhouse gas inventory data (see Table 2.2) for the period 1990–2014 by the United Nations Framework Convention on Climate Change (2016), reveals that carbon emissions by the different industrial sectors in most of the countries which have adopted a carbon pricing mechanism at the national level, have declined by significant percentages from 1990 to 2014, except for some countries like Cyprus,
Iceland, Japan etc. In some countries such as Bulgaria, Latvia, Lithuania and Romania, emissions declined even more than 50% compared to the 1990 level. All of these countries are from the EU where carbon pricing has acted as a driving force for the reduction of emissions (Eurostat 2017). Considering the effectiveness of carbon pricing, 74 countries as well as 23 substantial jurisdictions, and more than 1,000 companies along with the institutional investors, expressed their support for applying carbon pricing by governments at the UN Secretary-General‟s Climate Summit, 2014.
World Bank (2014a) stated, “Pricing carbon is inevitable if we are to produce a package of effective and cost-efficient policies to support scaled up mitigation”. Once the emissions are priced through an emissions trading scheme or carbon tax, the revenue collected is used for steps taken by the governments to reduce the emissions, such as introducing new technology that emits less GHG.
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Table 2.2 National greenhouse gas inventory data of selected carbon pricing countries [Source: United Nations Framework Convention on Climate Change (2016)]
kt CO2 equivalent
Country 1990 2000 2010 2013 2014 Change from 1990 to 2014 (%)
Austria 78845 80429 84946 80043 76333 –3.2
Belarus 133457 77960 91184 93037 91896 –31.1
Belgium 146021 149213 133258 119375 113867 –22.0
Bulgaria 114578 58265 59820 54946 57197 –50.1
Croatia 31205 25173 27280 23771 22899 –26.6
Cyprus 5638 8339 9521 7963 8394 48.9
Czech Republic 195345 147993 137687 128390 123651 –36.7
Denmark 70246 70131 62944 54984 50785 –27.7
Estonia 39965 17062 19912 21677 21059 –47.3
EU 28 countries 5656504 5161669 4775529 4463078 4278052 –24.4 altogether
Finland 71077 69855 75835 63197 59029 –17.0
France 549065 556461 518940 491159 464418 –15.4
Germany 1246101 1041064 939372 943520 900202 –27.8
Greece 104827 127688 118733 104669 101403 –3.3
Hungary 109636 73557 65524 57554 57225 –47.8
Iceland 3634 3963 4730 4535 4597 26.5
Ireland 56088 69251 62235 58482 58189 3.7
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Italy 521921 554479 508424 438887 418587 –19.8
Japan 1270743 1386714 1304903 1407883 1363862 7.3
Latvia 26256 10434 12362 11415 11353 –56.8
Lithuania 47209 18739 20163 19256 19139 –59.5
Luxembourg 12871 9743 12221 11207 10771 –16.3
Malta 2000 2626 3099 2954 2983 49.1
Netherlands 221516 219916 213523 194825 186845 –15.7
New Zealand 65828 76385 78942 80298 81104 23.2
Norway 51913 54869 55272 53552 53156 2.4
Poland 579869 392276 403599 393092 380038 –34.5
Portugal 60487 83798 70232 64751 64395 6.5
Romania 304651 142317 119056 111837 111507 –63.4
Russia 3940191 2432751 2772489 2815190 2812310 –28.6
Slovakia 74272 49712 46483 42792 40658 –45.3
Slovenia 20394 19126 19619 18314 16582 –18.7
Spain 285934 385119 360800 327447 328926 15.0
Sweden 71917 68869 64997 55940 54383 –24.4
Switzerland 53314 52314 54363 52508 48605 –8.8
United Kingdom 799838 717281 613863 569783 527203 –34.1
2.5 Carbon pricing and voluntary environmental reporting Contemporary stakeholders are much more aware of the operation of their organisations. They are not only concerned for the profit of business organisations but also concerned about the detrimental effect of operations of the organisations on
26 the environment. Carbon pricing mechanisms are an instrument that directly or indirectly instigates companies to limit their emissions. Carbon pricing is a mechanism imposed by governments with a view to reducing carbon emissions by companies. This mechanism binds the organisations to reduce emissions and report their level of emissions to the government. Reports regarding emissions to the other stakeholders are not mandatory in most of the countries around the world; instead, organisations voluntarily report their actions toward the protection of environment so that stakeholders can be informed about the level of emissions and actions taken to reduce the emissions. On the other hand, when regulations bind the organisations to disclose carbon emission to the government, and subsequently this information becomes public, organisations give more disclosures, although these disclosures are not required by the regulations (Liu et al. 2017). This study will be investigating how the decision of implementing carbon pricing by the government at the national level of any country would indirectly affect voluntary environmental disclosures of electricity generating companies of those respective countries.
2.6 Chapter conclusion The aim of this chapter was to provide evidence that emissions have become a global concern and that business organisations, specially electricity generating companies, are responsible to a great extent for these emissions through using fossil fuel such as coal, oil, gas etc. Governments of different countries are trying to curb emissions by introducing carbon emissions pricing at national levels. Some countries have already introduced carbon tax or ETS, and other countries are committed to introducing such measures in the near future. There is evidence that carbon pricing contributes to the redution of emissions. Thus, this chapter builds the platform for broader study to investigate the impact of carbon pricing mechanisms on the voluntary environmental disclosures of electricity generating companies. For this purpose we need to know how such organisations incorporate the concern for emissions in their discosures practices voluntarily. Chapter 3 will revisit the previous literature on environmental accounting and disclosure issues along with the relevant literature on the relationship of carbon regulations and reporting.
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Chapter Three: Literature Review
3.1 Introduction This chapter aims to give an overview of previous research in environmental reporting specifically relating to voluntary environmental disclosures (VED). The chapter begins with the introductory discussion about environmental accounting and the major segments of environmental accounting which are environmental management accounting and external environmental accounting and disclosures. “Environmental reporting and voluntary environmental disclosures” illustrates how the VED started in the arena of environmental reporting. The chapter then proceeds to prior research in the field of VED where findings (determinants of VED) by previous studies have been incorporated. This chapter then provides an overview of the influence of national and international environmental policies on VED, followed by the section “carbon pricing and reporting of the organisations”. This section gives an overview regarding how the specific carbon pricing policies adopted by the government at the national level impact the reporting practices of an organisation. A detailed overview of previous research on VED of electricity generating companies is provided. Lastly, the chapter summarises the contribution of this research to literature on the impact of policy adoption on voluntary environmental reporting.
3.2 Environmental accounting: An overview Environmental accounting is “the identification, measurement and allocation of environmental costs, the integration of these environmental costs into business decisions, and the subsequent communication of the information to a company‟s stakeholders‟‟ (Institute of Management Accountants 1996, p. 2). In the same way Steele and Powell (2002) define environmental accounting as the identification, allocation and analysis of material streams and their related money flows by using environmental accounting systems to provide insight into environmental impacts and associated financial effects. Company-related environmental impacts can be referred to as environmentally induced financial impacts of organisations on their economic system, and impacts of organisational operations on the environment (Burritt, Roger L, Hahn & Schaltegger 2002):
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This branch of accounting is concerned with identifying the effect of the operation of business organisations on the surrounding environment, and incorporating the costs within business considerations. According to Stanko, Brogan and Alexander (2006) environmental accounting helps business organisations identify, measure and allocate environmental costs, integrate those environmental costs into business decisions and communicate the information to the stakeholders of those organisations. Ever-increasing pressure from different stakeholders concerned about the impact of business operations on the environment is pushing management to engage with environmental issues (Dyllick 1988). The costs of environmental impacts have risen substantially, so that environmental information has increasingly become economically relevant for decision-making and accountability (Schaltegger & Burritt 2000). So, as a whole, incorporating environmental costs into business considerations helps both the internal decision-making processes by the management (internal stakeholders) of the organisations and external decision- making processes by different external stakeholders (Deegan 2003). Although the type and amount of information required for internal decision makers may differ significantly for financial disclosures and environmental or sustainability reports (Institute of Management Accountants 1996), as a whole, environmental accounting is of immense importance to both internal and external parties. According to Baldarelli, Del Baldo and Nesheva-Kiosseva (2017, pp. 40-41), the importance of environmental accounting can be inferred as:
i. Many costs associated with the environment can be significantly reduced or eliminated as a result of business solutions for environment-friendly production based investments in “green” technology in the production process, and adjustment or modification of processes and/or products. ii. There are potential cost savings that are neglected in cost management and are mainly expenses related to the environment. iii. Opportunities exist to generate revenue for the company, such as through the sale of waste by-products. iv. Through environmental accounting and reporting, competitive advantage can be achieved by greening design of manufactured goods, while greening manufacturing processes, products and services, which are increasingly preferred by customers.
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v. Accounting for costs associated with the environmental and natural line performance of the company can support its development and establish the functioning of a comprehensive system for environmental management, such as ISO 14001, EMAs and others; this can lead to significant benefits for human health. Therefore, environmental accounting is part of social accounting.
Environmental accounting has been defined from different perspectives, but most of the definitions identify issues such as environmental costs, environmental performance and communicating the information to the stakeholders through corporate disclosures. The International Federation of Accountants (IFAC) (1998) has defined the scope of environmental accounting which includes an entire domain of accounting for environment involving financial accounting, reporting and auditing of environmental issues and environmental management accounting. Broadly, environmental accounting can be classified into three categories: environmental management accounting, external environmental reporting and disclosures, and other aspects of environmental accounting (Bartolomeo 1997; Schaltegger & Burritt 2000; Schaltegger, Muller & Hindrichsen 1996).
3.2.1 Environmental management accounting Environmental management accounting is one of the major branches of accounting which deals with identification, measurement and management of environmental conversation cost and benefits derived from environmental conversation activities and sustainable internal decision making by the management (Burritt, Roger Leonard 2002; Burritt, Roger L, Hahn & Schaltegger 2002). According to the definition given by International Federation of Accountants (IFAC) (1998, p. 1), environmental management accounting is “the management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices. While this may include reporting and auditing in some companies, environmental management accounting typically involves life-cycle costing, full-cost accounting, benefits assessment, and strategic planning for environmental management.”
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3.2.2 External environmental reporting and disclosures External environmental reporting and disclosures is another dimension of environmental accounting that accounts for and reports the results of environmental conservation activities through which organisations influence the decision making of external stakeholders such as investors, consumers, regulators and other stakeholders (Schaltegger, Muller & Hindrichsen 1996). External environmental reporting is different from conventional financial accounting and corporate environmental accounting in that environmental reporting distinctively takes into consideration the environmental impact of business organisations (Burritt, Roger L, Hahn & Schaltegger 2002).
3.3 Environmental reporting and voluntary environmental disclosures Environmental reporting began in response to local and international community and NGO pressure on organisations to show a move towards greater environmental practice, and as means of discharging social responsibility. Initially corporate environmental reporting was introduced as a voluntary process, but from the mid- 1990s some countries initiated mandatory voluntary environmental reporting for some specific issues for specified industries. In 1996 Denmark was the first country to introduce mandatory corporate environmental reporting for some specific issues, followed by other countries such as Norway, Sweden and Netherland (Scott 2001b). In most countries environmental reporting is still done voluntarily to inform the stakeholders about the environmental performance of their organisations.
3.3.1 Prior research on voluntary environmental disclosures As environmental issues have become a major concern around the world, organisations have extended their disclosures on environmental issues voluntarily over the years, considering the destructive impact of pollution on the natural environment (Ashcroft 2012; Brammer & Pavelin 2006; Cho & Patten 2007; Gamble et al. 1995; Lamond et al. 2008; Patten, Dennis M. 2002). As a contemporary issue, corporate voluntary environmental disclosures (VED) is one of the important research issues in environmental accounting, playing a pivotal role to inform the stakeholders about different types of cost to the environment incurred by the organisations (Clarkson, Peter M et al. 2008). The reasons or motives for organisations to undertake VED have been examined by various prior literature that looks for the
31 significance of legal, strategic or financial factors (Braam et al. 2016; Brammer & Pavelin 2006; Evans & Sridhar 2002; Matsumura, Prakash & Vera-Muñoz 2011; Plumlee et al. 2015; Trueman 1997). Some other studies also tried to identify the determinants for VED around the world as illustrated in Table 3.1.
Table 3.1 Summary of prior literature on determinants for VED Literature Determinants for VED
Luo, Lan and Tang (2012); José-Manuel et al. Firm‟s size (2009); Stanny and Ely (2008) Borghei (2014); Deegan and Gordon (1996 )
Rahman, S and Anwar (2016); Reid and Toffel Shareholder activism (2009)
Kolk, Levy and Pinkse (2008) Institutional investors
Wahyuni, Rankin and Windsor (2009) Luo, Lan Industry specification and Tang (2010)
Freedman and Jaggi (2005) Location of the organisations
Matsumura, Prakash and Vera-Muñoz (2011) Practice of peer companies in an industry
Wahyuni, Rankin and Windsor (2009), Zhang et Existence of Environmental al. (2008) Management System
Borghei and Leung (2013) Foreign listing
Schultz and Williamson (2005), Brouhle and To gain competitiveness Harrington (2009), Kolk and Levy (2003), Kolk and Pinkse (2005)
Levy, David L and Kolk (2002) Institutional influence
VED are used as an important strategic tool which reduces the informational asymmetries between the internal agents (e.g. management) and external agents
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(e.g. stockholders) of the organisations (Brammer & Pavelin 2006). Stakeholders are interested in environmental disclosures because of the associated environmental cost and liabilities related to the operations of the organisations (Mastrandonas & Strife 1992) which are communicated through voluntary disclosures. In most countries environmental disclosures are not mandated by regulations, but are rather voluntary initiatives (Evangelinos, Nikolaou & Leal Filho 2015).
Since there is a massive move around the world to protect the environment, there is a strong relationship between voluntary disclosures and organisations‟ financial consequences. If organisations fail to disclose their environmental performance voluntarily, investors may be reluctant to invest in such companies. Previous studies also indicate that investors are influenced by the environmental information of companies and such information impacts on their investment decisions (Deutsch 1998; Investors Chronicle 1998). Absence of environmental disclosure may lead to the assumption by stockholders that an organisation‟s environmental performance is much below standard, and they might bid down the stock price (Cormier & Magnan 2003).
These sorts of nondisclosures of environmental information by the organisations also catch the eye of regulators, as they also assess the environmental performance of organisations based on that information. So, to avoid the adverse reaction of stakeholders, organisations opt to provide voluntary disclosures in a strategic fashion (Li, Richardson & Thornton 1997). Organisations disclose strategically as external stakeholders lack information compared to the management; they supress bad information to avoid the negative reactions of stakeholders (Dye 1985). In addition, VED are costly due to the expense of measuring and reporting environmental costs along with the loss of strategic discretion of management associated with making public commitments to verifiable future actions (Admati & Pfleiderer 2000; Skinner 1994; Verrecchia 1983). So there are no conclusive findings regarding the reasons and extent of VED published by such companies (see for example: Cormier and Magnan (1999) Li, Richardson and Thornton (1997)).
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3.3.2 National or international environmental policy and voluntary environmental disclosures Organisations provide voluntary disclosures based on their discretion, but the industry in which the organisations operate, or the country where the organisations are located, might have an indirect impact on the voluntary disclosures. Government is the most powerful stakeholder of a country due to its authority to legislate and enforce the law, and any environmental policy of government affects the organisations of the society (Harvey & Schaefer 2001; Neville & Menguc 2006). When the government of any country adopts a policy for the public interest of any society, other organisations respond to that policy. This happens due to the legitimacy of the government that Weber (1947) defined as the authority to affect organisations. Based on institutional theory (DiMaggio & Powell 1983; Meyer & Rowan 1977) the government of any democratic country may be considered as the most legitimate due to its democratic institutionalization (details of institutional theory are discussed in the following chapter). This section will be investigating the influence of government policy or industry policy or any industry specific regulation on the Voluntary disclosures of organisations in the shade of previous literature. When the government or regulatory authority tries to mandate certain disclosures of organization then it is be termed as mandatory disclosures but there are some instances when there are no explicit bindings for reporting or disclosures but organisations do some reporting or provide with more disclosures voluntarily either to legitimize their actions or to avoid more regulations in future. There is ample evidence (Patten, Dennis M. 1991, 1992) that organisations respond voluntarily to public policy pressures in relation to their environmental responsibility by increasing their environmental disclosures.
When government tries to impose any public policy, organisations sometimes react to those policies, if there is any possibility that they will be affected by that policy either directly or indirectly. According to Parker (1986, p. 76) “companies can anticipate government intervention and provide social disclosure to improve the company's standing in the community.” If that policy raises some issues in society or increases some social expectations toward the business organisation, they constantly react and evolve to society‟s changing needs and expectations. When there are some changes in the public policy by the government or any other regulatory bodies regarding
34 environmental issues, organisations are also expected to participate and respond to the change of that public policy (Post & Preston 2012) because corporate organisations have enormous influence on the health of the environment and society as a whole (AICPA 1977).
How adopting a public policy – more specifically environmental policy – affects organisations in terms of their environmental performance or environmental decisions can be examined by looking at some prior literature. Anton, Deltas and Khanna (2004) investigated the newly introduced inspection policy on toxic emissions by US manufacturing plants but found no direct (rather indirect) effect on the adoption of environmental management practices of the polluting organisations. Zhu, Sarkis and Geng (2005) conducted a study on the automobile, power generating, chemical, electricity, steel and textile industries, based on their survey, and they found that Chinese enterprises were very responsive to the regulatory and marketing pressures and drivers.
A study by Ferraz and Motta (2002), conducted on 10,000 organisations in Brazil, reveals that regulatory policies, such as warnings, fines and deployment of environmental agency by the municipality, have a significantly positive effect on organisations‟ investment in “environmental” technologies. Haque and Deegan (2010) examined the climate change related corporate disclosures from the annual reports of five companies from 1992 to 2017 and found an increasing trend in climate change related disclosures over that period, attributable to increased global climate change related policies. So this reveals the fact of indirect impact of environmental policy change on the VED.
Another study by Henriques and Sadorsky (1996) investigated the existence and extent of external pressures in incorporating and formulating the environmental plan within the scope of business decisions of the management of 750 Canadian firms. It found government policy as a positive force for organisational environmental policy. A study was conducted by Levy, David L (1995) on transnational corporations – large producers of pollution due to their predominance in pollution-intensive industries such as petroleum, chemical and mineral extraction and processing. That study found insignificant impact of regulatory pressures on Toxic Releases inventory
35 emissions. In contrast, Freedman and Jaggi (2009) investigated the impact of government policy about ratifying the Kyoto Protocol on voluntary emissions disclosures and found significant impact on the disclosures of firms from countries ratifying the Kyoto protocol (e.g. European Countries) compared to the disclosures of firms from countries not ratifying the Kyoto protocol (e.g. United States).
Carbon pricing may be considered as soft law2 from an environmental disclosures perspective as this mechanism does not regulate environmental disclosures practices; rather it gives organisations freedom to exercise their discretion regarding environmental reporting and provides strategies for dealing with uncertainty (Abbott & Snidal 2000). Prior studies reveal that „regulation‟ as soft law is positively associated with accounting practice harmony and is one of the important factors that motivate a firm‟s voluntary disclosures level (Rahman, A, Perera & Ganesh 2002) where environmental disclosures are still voluntary in nature, in most cases (Jones & Ratnatunga 2012). Some previous studies find that steps taken to protect the environment act as an instigator for more VED. Those steps are not for the environmental disclosures but rather for environmental protection or emissions reduction purposes. Cowan and Deegan (2011) investigated the effect of implementing “National Pollutant Inventory (NPI)”, an Australian National Environment Protection Measure (NEPM) to be established by the National Environment Protection Council (NEPC), on 25 Australian firms from 1998 to 2000. They found that the establishment of NPI increased the level of voluntary emissions disclosures during that period
3.4 Carbon pricing and voluntary reporting of the organisations Worldwide acceptance of the climate change issue has triggered the need for the adoption of different policies at national or international levels. Carbon tax, emissions trading schemes and European Union emissions trading scheme (Chevallier 2009; Mookdee 2013), set specific product standards or even incentives for the investment in low-emitting technologies. These are some of the global climate change strategies by which governments of different countries try to control the behaviour of their
2 Soft law refers to international norms that are deliberately non-binding in character but still have legal relevance, located in the twilight between law and politics (Thurer 2000)
36 corporate organisations in terms of carbon or GHG emissions (Bebbington & Larrinaga-Gonzalez 2008).
Since climate change emerged as one of the most important business concerns in the past decade, organisations have indeed started to reconsider the issue of global warming as part of their strategic management for their success (Kolk & Pinkse 2005; Lash & Wellington 2007). Recently, scientific (Smith et al. 2009; Stocker 2014), economic (Garnaut 2008; Smith et al. 2009) and political (Gore 2006, 2009) evidence also highlights the increasing emphasis on the need to price carbon pollution (carbon pricing). Although carbon pricing has become a burning issue in the last few decades due to the concern for global warming, the concept of carbon pricing is very old. It was first introduced by Pigou (1978) in his book „The Economics of Welfare‟ where he suggests setting a charge for carbon to prevent emissions in the future. Sandmo (2011) also shows that pricing for carbon emission by corporations will help to protect the environment from disaster, shaping human behaviour in a systematic way.
The objectives of social and environmental accounting are to identify and measure the social and environmental cost caused by business organisations to society, and finally to communicate this information to the relevant stakeholders so that they can make their decisions, keeping those social costs in mind. Carbon pricing mechanisms such as carbon tax and ETS enable those objectives of social and environmental accounting to be realised, paving the way to identifying costs to the environment and instigating relevant reporting (Lodhia 2012).
As global anthropogenic emissions are a burning issue for the survival of the civilisation, and corporate organisations are responsible to a great extent, stakeholders such as individual investors, corporate investors, media, non- government organisations (NGO), government agencies, lenders and even consumers (in some instances) demand overall environmental disclosures (Gonzalez-Gonzalez & Zamora Ramírez 2016; Grecco et al. 2013). As argued by Unerman and O‟Dwyer (2007), enforcement mechanisms (such as carbon pricing) enable organisations to manage their long-term risks and portray to stakeholders their accountability over social and environmental issues. Stakeholders always seek for clear, consistent and transparent information on the carbon emissions, environmental performance and actions taken by organisations to reduce the impact
37 of their emissions, resulting in improvement of overall environmental performance (KPMG 2015).
3.4.1 Carbon pricing and voluntary environmental disclosures When the government of a country imposes a carbon price at the national level, or even for a single industry, it gives a signal to the other organisations that a carbon price might be imposed on their sector in future. So organisations also react proactively and the reasons can be inferred form Jones and Ratnatunga (2012, p. 2) as “…cost efficiencies associated with production process innovation, the creation of „green goodwill‟, the competitive advantages associated with raising rivals‟ costs, early mover advantages, and reduced risks of future environmental litigation and/or obligations to make future abatement expenditures”.
Some previous studies investigated the relationship between different carbon mitigation policies and reporting of the organisations and mostly investigated the impact of ETS on the emissions reporting practice of organisations (see for example: Bae Choi, Lee & Psaros 2013; Bebbington & Larrinaga-Gonzalez 2008; Kashyap 2016; Tang & Luo 2012). Introducing a carbon price in these cases was shown to have impact on environmental disclosures, as organisations operating under carbon emission trading laws or in countries with proposals to issue new emissions constraint laws have higher emissions disclosure levels than their counterparts from other countries (Reid & Toffel 2009). Sidaway and De Lange (2012) also found an industry-wide impact of National Greenhouse and Energy Reporting (NGER) Act on the disclosures pattern of organisations for which the act was not effective in deed. This knock-on effect of regulations of a specific industry influences other organisations publishing more VED to avoid further regulations or more strict regulations in future. Although, sometimes, this regulatory uncertainty can be a constraint for voluntary initiatives (includes voluntary disclosures) from the company‟s end as well (Bui & de Villiers 2017)
The impact of existing carbon pricing regulations on environmental disclosure can be examined by looking at the EU ETS, one of the major widely used carbon pricing mechanisms used by 31 European countries, as it requires organisations to report on verified carbon emissions from regulated installations on an annual basis (Hepburn
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(2007). Tang and Luo (2012, p. 16) also recognized the impact of ETS on the voluntary reporting consideration of organisations affected by EU ETS from the stakeholders‟ demand perspective as “stakeholders of these firms tend to demand more climate change information in order to incorporate ETS implications into their economic decisions. Thus, these firms are expected to produce more transparent carbon reports”. Applying Tobit regression, Guenther et al. (2016) found an association between carbon disclosure and various stakeholders, such as general public, employees, customers and media. Organisations let the stakeholders know about measures taken to prevent the environment pollution through VED, an important means of increasing transparency and keeping stakeholders informed about the company strategies and actions on climate change (Freedman & Jaggi 2009) ultimately contributing to a better forecast about the operation and financial result of the organisations (Cormier & Magnan 2015). These disclosures are an instrument for ensuring governance that helps to raise awareness regarding climate change, clean energy and energy efficiency (Knox-Hayes & Levy 2011).
A study by Alrazi, De Villiers and Van Staden (2016) reveals that companies operating in carbon emission emissions trading scheme disclose more comprehensive voluntary environmental disclosures. Liu et al. (2017) find that when regulations bind organisations to disclose carbon emissions (e.g. through carbon price, ETS or any other mechanism) to the government, and subsequently this information becomes public, organisations provide more disclosures although these disclosures are not required by the regulations. So, carbon pricing can be an instigator for VED.
When a country decides to enact or enforce any environmental law or introduce any carbon regulating provisions in the jurisdiction of law, these develop a more stringent environmental reporting environment and have an impact on the overall environmental disclosures (Tang & Luo 2012). When carbon pricing is imposed at a national level, which can be managed and implemented in numerous ways and vary from country to country based on their strategy, it promotes more a stringent environmental system, making the management of the organisations committed to more VED. Based on these previous research findings, this study will look for the impact of carbon pricing on the overall VED.
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3.5 Voluntary environmental disclosures by the electricity generating sector This study concentrates on only the electricity generation companies which comprise the most carbon emitting or polluting sector during the year 2016. Electricity generators stand first among others in terms of carbon emission compared to petroleum, the coal industry or the even gas industry (IEA 2016d). Most research works have been conducted on electricity industries to find the relationship between environmental performance and environmental disclosures (See for example: Freedman, Jaggi and Stagliano (2003) Freedman and Stagliano (2008), Silva‐Gao (2012)). Freedman, Jaggi and Stagliano (2003) investigated the effect of the 1990 Clean Air Act on the level of emissions and emission disclosures of 38 US electric utility companies. This study reveals a positive impact of this act on the level of emissions which reduced from 1990 to 1995; but there was a negative impact on the level of disclosures which decreased after the introduction of clean air act. In another study Freedman and Stagliano (2008) find environmental disclosures as a function of environmental performance, which contradicts to some extent the findings of a previous study by Freedman and Wasley (1990) that discovers an inconsistent relationship between environmental performance and environmental disclosures. Freedman and Jaggi (2004) find a positive relation between environmental disclosures and pollution emissions in a study on US electric utilities companies. A study on European electricity supply companies by Sullivan and Kozak (2006) reveals that most companies are aware of the environmental risk and have targets to reduce their carbon emission gradually; but which specific management structures were in place to handle issues related to climate change is very difficult to determine. Alrazi (2012) conducted a study on electricity companies across 35 countries in 2007 and found that the comprehensiveness of disclosure by electricity generating companies is relatively low. Alrazi, De Villiers and Van Staden (2016) found that electricity companies in countries with a high commitment to reduce emissions disclose more comprehensive environmental information. A summary of previous literature on the VED by electricity generating companies is depicted in Table 3.2.
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Table 3.2 Summary of prior literature on the VED of electricity generating companies
Literature Sample and Research Findings method Cormier and Sample: 3 Canadian electricity Ownership status and size influence Gordon utility firms environmental disclosures (2001) Data collected from the annual Environmental disclosure is related report to information cost and benefit Use of traditional efficiency measurement Freedman Sample: 66 US electricity utility Positive association between and Jaggi firms pollution emissions and disclosures. (2004) Data collection from US electricity firms did not provide Environmental Protection much information about carbon Agency (EPA) website emissions. Content analysis based on self-developed criteria 5 items Freedman Sample: 32 US companies More disclosures by poor and Stagliano Annual reports, sustainability environmental performers. (2008) reports and website Self-developed disclosure index- 8 items
Sullivan and Sample: 12 European Incomplete and obscure disclosures Kozak (2006) companies by the organisations. Different reporting media Unsystematic presentation. Four disclosure categories with pre-specified expectations Trucost Sample: 112 global electricity Low level of carbon disclosures (2006) companies EU ETS and size are important
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CDP report factors Self-developed questionnaire Hooks, Sample: 6 New Zealand Descriptive disclosures Kearins and companies Lack of comparability Blake (2004) Annual reports and standalone Increased comparability reports Freedman Sample: 120 companies from Legal system and regulatory and Jaggi 20 Kyoto Protocol ratifying enforcement level were insignificant (2005) countries for environmental disclosures GHG emissions disclosures Disclosure index (Alrazi 2012) Sample: 205 global Lower level of environmental companies disclosure Environmental disclosures in Limited use of standalone annual report, standalone sustainability report sustainability report and Use of disclosure medium is websites stakeholder focused. Disclosure index based on GRI 2006 and Greenhouse Gas protocol
3.6 Research contribution to literature In this chapter, an overview of VED, why the organisations go for VED, and the impact of government or public policy on VED have been provided. Previous literature gives a clear indication that there are lot of factors that influence VED. However, review of the previous literature identifies opportunities for further research: i. Review of prior literature reveals that there is scarcity of studies to show the indirect impact of carbon pricing on the voluntary environmental disclosures. Many previous studies investigated the impact of different industry-focused policy on environmental disclosures; but to date there is no study investigating the indirect impact of carbon pricing at a national level on the VED.
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ii. Some previous studies show that the EU ETS influences the environmental performance of companies in respective areas. However, this is one of the very few studies that will be investigating the differences in VED affected by the two major types of carbon pricing mechanisms (carbon tax, ETS and both). This study will also be focusing on the VED practices of the companies which are not affected by carbon pricing policy till 2015. iii. In most of cases, studies have taken into consideration the world‟s large firms from developed countries like USA, UK, Australia or EU countries. But this is one of the very few studies to date that will gather information from other parts of the world like China, India, and Chile etc. iv. A review of previous literature related to the electricity companies reveals that in most cases, studies investigate the relationship between the firm‟s environmental performance and environmental disclosures and in some instances the extent of disclosures. This intensive study will be investigating the quantity and quality of VED by electricity generating companies worldwide using the population rather than sample from each country.
3.7 Chapter conclusion This chapter aims to see how existing literature identifies the impact of soft law (carbon pricing) on the VED of electricity generating companies. Review of prior literature, points out the gaps of existing VED literature. Keeping these gaps in mind, this chapter leads to an investigation of the impact of carbon price on VED in chapter 5. But before investigating the intended issue, it is very important to embrace the relevant theoretical perspective underpinning this study. Chapter 4 illustrates the theoretical framework which includes why the organisations go for VED and how indirect or informal pressure can influence these VED practices of organisations.
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Chapter Four: Theoretical Perspectives Underpinning the Research
4.1 Introduction As discussed in chapter 3, previous studies investigated VED by corporate organisations published in their annual reports, standalone sustainability reports or through other disclosures. VED has been increasing since the early 1960s; now it is a very common phenomenon for companies to publish VED (Dobbs & Staden 2016; Gray, Kouhy & Lavers 1995a; Guthrie & Parker 1989; Tinker & Neimark 1987; Trotman 1979; Verbeeten, Gamerschlag & Möller 2016). Why the VED is increasing with the passage of time has been examined and explained by different scholars from different theoretical perspectives.
Legitimacy theory, stakeholder‟s theory and institutional theory are some of the established theories that have been used in prior research to explain the role of information and disclosures in the relationships between organisations, the State, individuals and groups. These theories are system-based theories which are deployed not only to describe but also to explain social and environmental accounting reporting (Owen, 2008). These theories are derived from political economy theory and can be used to explain why an entity might elect to make particular voluntary disclosures (Deegan 2013). Guthrie and Parker (1990) first introduced and related environmental accounting disclosures with political economy theory where they defined political economy views on accounting disclosures as “corporate disclosure as a proactive process of information provided from management‟s perspective, designed to set and shape the agenda of debate and to mediate, suppress, mystify and transform social conflict”. This study applies legitimacy theory to explain how organisations seek to gain legitimacy from different societal groups, and institutional theory to assess the indirect impact of government policy regarding carbon pricing on VED.
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Figure 4.1 Broad classification of theoretical framework
Strategic legitimacy Legitimacy theory Institutional legitimacy
Polical Coercive Ecomomy isomorphism
Mimetic Isomorphism isomorphism Institutional theory Normative Decoupling isomorphism
4.2 Legitimacy theory This is one of the most prominent and dominant branches of theory that gives reasoning to VED. Legitimacy theory is a theory that is widely used in environmental accounting literature to explain corporate voluntary environmental disclosures policies (Deegan 2002).
It is argued that legitimacy theory is based on the notion of social contract between an organisation and its society. Shocker and Sethi (1973, p. 97) give a connotation regarding the type of social contract as “Any social institution – and business is no exception – operates in society via a social contract, expressed or implied, whereby its survival and growth are based on: 1) the delivery of some socially desirable ends to society in general, and 2) the distribution of economic, social, or political benefits to groups from which it derives its power.
In a dynamic society, neither the sources of institutional power nor the needs for its services are permanent. Therefore, an institution must constantly meet the twin tests
45 of legitimacy and relevance by demonstrating that society requires its services and that the group benefiting from its rewards has society's approval.”
According to Lindblom (1994, p. 2) legitimacy is “a condition or status which exists when an entity‟s value system is congruent with the value system of the larger social system of which the entity is a part. When a disparity actual or potential, exists between the two value systems, there is a threat to the entity‟s legitimacy”. Dowling and Pfeffer (1975, p. 122) also defined legitimacy as: “Congruence between the social values associated with or implied by their (organizations) activities and the norms of acceptable behaviour in the larger social system”.
According to legitimacy theory (Deegan 2002; Dowling & Pfeffer 1975; Suchman 1995) a company‟s operation or performance is judged as fair or regarded as legitimate when it is socially accepted. The question relates to its social acceptance which occurs when the value systems of society are congruent with the value systems of the respective organisations (Lindblom 1994; Suchman 1995). When there is a difference between the perceptions about and actual performance of organisations then the question of legitimacy arises (Lindblom 1994). To combat these situations organisations might adopt legitimation strategies either to gain, maintain or repair legitimacy (Suchman 1995). According to O‟Donovan (2002, p. 349): “Legitimation techniques/tactics chosen will differ depending upon whether the organization is trying to gain or extend legitimacy, maintain its current level of legitimacy, or to repair or to defend its lost or threatened legitimacy”.
Which techniques organisations use depends on the situation – whether they intend to gain, maintain or repair their legitimacy. Deegan (2009) mentions that gaining legitimacy occurs when organisations move into a completely new area of operations in which they have no past or established reputations. According to Ashforth and Gibbs (1990) it happens due to the organisations suffering from “liability of newness” which requires them to proactively engage in activities to develop positive public perception. On the other hand if organisations have a past reputation, they go for maintaining legitimacy, which is easier than gaining or repairing legitimacy (Ashforth & Gibbs 1990; O'Donovan 2002). In order to maintain their existing legitimacy
46 organisations have to understand the current perceptions of the society and forecast the changing perceptions. In the case of repairing legitimacy, organisations take initiatives after some legitimacy-threatening events occur, e.g. the Exxon Valdez oil spill in Alaska (see Patten, Dennis M. 1992).
Legitimacy theory can be broadly classified into institutional legitimacy and strategic legitimacy categories (Elsbach 1994; Oliver 1991; Suchman 1995), two perspectives of legitimacy theory.
4.2.1 Strategic legitimacy theory Scholars (Dowling & Pfeffer 1975; Elsbach & Sutton 1992; Pfeffer 1982; Suchman 1995) have defined and explained strategic legitimacy from the managerial perspective where management can employ some evocative symbols or gestures for organisational legitimacy. Suchman (1995) illustrated this viewpoint as managers looking “out” at what they believe it takes to legitimise the entity in the eyes of society. More precisely, strategic legitimacy holds to the notion that management can exercise high level of control over the organisational legitimation process, manipulating the perception of society by adopting some symbolic stand.
According to prior studies legitimacy is considered as an operational resource that organisations extract from their surrounding environment, or from society, that those organisations exploit in pursuit of their own goals (Ashforth & Gibbs 1990; O‟Donovan 2002). So, this form of legitimacy tactics is purposive and calculated to a great extent (Suchman 1995).
4.2.2 Institutional legitimacy theory Institutional legitimacy is another perspective to organisational legitimacy theory where scholars (e.g. DiMaggio & Powell 1991; Suchman 1995) portray institutional legitimacy as a set of constitutive beliefs of stakeholders. Suchman (1995, p. 576) mentions that “organizations do not simply extract legitimacy from the environment in a feat of cultural strip mining; rather, external institutions construct and interpenetrate the organization in every respect.” How the management will try to manage the legitimacy of its activities is determined by the cultural environment where the organizations operate. Institutional theorists adopt the viewpoint of society looking in
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(Suchman 1995), and legitimation is based on an understanding and appreciation of what society wants. Based on the perception of society, management just respond rather than control. So, according to this perspective of legitimacy theory, management plays a reactive role to societal demands and sometimes the reaction might be simply based on symbolism and is a manipulation of the legitimation process (Deegan & Rankin 1996; Meyer & Rowan 1977; Neu, Warsame & Pedwell 1998).
4.2.3 Legitimacy theory applied in environmental accounting/reporting literature There is plenty of evidence in previous studies to explain the VED of corporate organisations under the domain of legitimacy theory (see for example: Borghei 2014; Borghei & Leung 2013; Deegan 2002; Deegan & Gordon 1996; Deegan & Rankin 1996; Deegan, Rankin & Tobin 2002; Freedman & Jaggi 2005; Giannarakis & Konteos 2017; Hummel & Schlick 2016; Nurhayati et al. 2016; O‟Donovan 2002; Patten, Dennis M. 1991, 1992, 2002; Tilt 1994). Deegan, Rankin and Tobin (2002) conducted a study to test whether the social and environmental disclosures of BHP, one of the largest Australian companies, can be explained by legitimacy theory, and they found legitimation motives behind the voluntary social and environmental disclosures. However, Guthrie and Parker (1989) failed to confirm legitimacy theory as the motivation for such disclosures of the same organisation. Hogner (1982) also suggested that voluntary social disclosures were motivated by the urge to legitimise corporate activities. Environmental disclosures are associated with the broader aspect of social reporting, and major accounting bodies e. g. AAA (1975) or AICPA (1977) consider environmental reporting as social reporting (in Wiseman 1982, p. 53)]. Gray, Kouhy and Lavers (1995b) also argue for social and environmental disclosures as a response of management to legitimise their actions. Wilmshurst and Frost (2000) used legitimacy theory to explain the reasons for voluntary environmental disclosures of the top 500 listed Australian companies, and their findings support the notion of previous studies that companies made voluntary environmental disclosures to legitimise their actions. Another study by Alciatore and Callaway (2006) found that the level of voluntary environmental disclosures of selected sample companies increased in 1998 from 1989, and they argued that there was an institutional legitimacy aspect behind this increase of voluntary disclosures.
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Cho and Patten (2007) also found that organisations use voluntary environmental disclosures as a legitimacy tool when their actions need to be justified in the eyes of the society. Findings of prior studies (Bae Choi, Lee & Psaros 2013; Freedman & Jaggi 2011; Gallego‐Álvarez 2012; Peters & Romi 2009; Prado-Lorenzo et al. 2009; Stanny & Ely 2008) also reveal that organisations use VED to reassure or alter the existing perceptions of the public or even government in the process of legitimisation.
4.3 Institutional theory Institutional theory is another complementary perspective of legitimacy theory which considers organisations as part of the larger social structure (Deegan 2013). Bansal and Roth (2000) suggest that institutional perspective can provide a complementary perspective for an organisation‟s legitimation. Institutional theory is concerned with the relationship between organisations and their environment (or the institutions) (DiMaggio & Powell 1991) where actions of organisations are controlled by various external pressures extracted from powerful groups, with a view to maintaining their legitimacy (Pfeffer & Salancik 2003; Powell 1988). Deegan (2009) also argues that organisational practices and policies respond to institutional pressures in order to confirm prevailing societal expectations to gain maintain or repair legitimacy. Hughes (1936, p. 180) posits the general conception about “institutes” as “the only idea common to all usages of the term institution is that of some sort of establishment or relative permanence of a distinctly social sort”. A modern view of institutes can be inferred from Tang and Luo (2012) who mention that institutions refer to specific practices or mechanisms (laws or rules and regulations), any specific norms or ideas or cultural frameworks (e.g. neo-liberal economics) (Friedland & Alford 1991; Lounsbury & Crumley 2007) that have gained social permanency (Zucker 1987). Scott (2001a, p. 48) defines institutions as “social structures that have achieved a high degree of resilience”. He also argues that institutions consist of three elements: regulative, normative and cultural-cognitive. The regulative element comprises the existing laws and regulations that direct organisations to become legitimate. The normative component demonstrates the norms and values that are broadly shared by members of an institutional environment. The cultural cognitive component of the institutional environment refers to the schemas, frames and inferential sets in addition to the norms and values of the normative component.
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Hannan and Freeman (1977) investigated “Why are there so many kinds of organisations?” (in DiMaggio & Powell 1991). On the other hand, in relation to institutional theory, DiMaggio and Powell (1991, p. 64) argued “why there is such startling homogeneity of organizational forms and practices…”. Institutional theory explores why organisations behave in such a way, what they do, and why they tend to take on similar characteristics, form and processes, including similar reporting practices as well (Deegan 2009). This theory suggests that external forces drive an organisation‟s decision making in adopting similar practices (Clemens & Douglas 2006; Hirsch 1975; Sarkis, Zhu & Lai 2011).
Early literature which can be termed as old institutional theory was developed by Selznick (1949, 1957) who considers organisations as driven by local community environment. He argues that an organisation is adaptive in nature and responds to the external pressure from its surrounding local community environment. A modern view of institutional theory, or new institutional theory, was developed by Meyer and Rowan (1977), DiMaggio and Powell (1983, 1991), Scott (1987). New institutional theory views organisations as influenced by the wider environment, including professional bodies, industry practices, and government policies. Deegan (2009, p. 355) states that “institutional theory explores how – at a broader level – particular organizational forms might be adopted in order to bring legitimacy to an organization”. Organisations sometimes adopt some polices or practices to establish themselves as legitimate rather than to achieve efficiencies. This strategy is argued by theorists as the symbolic value of institutional theory (DiMaggio & Powell 1991; Meyer & Rowan 1977).
Many of the previous researchers (see for example: Haque & Deegan 2009; Luo, Lan & Tang 2012; Odera, Scott & Gow 2016; Rankin, Windsor & Wahyuni 2011; Welbeck 2017) used institutional theory for their studies in the arena of voluntary environmental reporting. Deegan (2009) explained the relevance of institutional theory to voluntary reporting as “… it provides a complementary perspective, to both stakeholder theory and legitimacy theory, in understanding how organizations understand and respond to changing social and institutional pressures and
50 expectations”. He also argues that „isomorphism‟ and „decoupling‟3, two major dimensions of institutional theory, have central relevance to voluntary corporate reporting practices.
4.3.1 Institutional isomorphism All organisations are socially constituted subject to institutional processes. This institutional process motivates organisations to become similar. Institutional isomorphism explains the reason why organisations become similar (DiMaggio & Powell 1983; Scott 2001a). Dillard, Rigsby and Goodman (2004, p. 509) defines the isomorphism as “…the adaption of institutional practice by an organization”. Hawley (1986) defines isomorphism as a “constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions” (in DiMaggio & Powell 1983). DiMaggio and Powell (1983) also state that if organisations are subject to the same environment, they resemble each other structurally or become „isomorphic‟ as a result of exposure to similar social and environmental pressures being exerted by powerful stakeholder groups (e. g. government in this study).
DiMaggio and Powell (1983) argue that other organisations are the major factors that an organisation must take into account when sharing the same operational environment, because organisations compete not only for the same set of resources and customers but also for institutional legitimacy, for economic and social rewards. They also state that organisations become gradually similar because the state (we argue the policies of state or government e. g. carbon price policy) or professions require such homogenisation.
So, the fact of organisations becoming similar can be attributed to the following reasons: 1. they experience pressure from the state; 2. they experience pressure from peer organisations; 3. they experience pressure from professional bodies, establishing a cognitive base and legitimation for the autonomy of the industry. These facts can be categorised as coercive isomorphism, mimetic isomorphism and normative isomorphism that motivate organisations to incorporate institutional
3 When management adopt some policies due to the pressure of institutionalization but the actual practices can be different from the publicly announced processes.
51 practices within their decisions (DiMaggio & Powell 1983). Although these are the three types of isomorphism, it is not always feasible to distinguish empirically between these three types (Deegan 2009; DiMaggio & Powell 1983; Mizruchi & Fein 1999).
4.3.1.1 Coercive isomorphism Coercive isomorphism stems from political influence and legitimacy. DiMaggio and Powell (1983, p. 150) mention that “Coercive isomorphism results from both formal and informal pressures exerted on organizations by other organizations upon which they are dependent and by cultural expectations within which organizations function”. Coercive pressure is exerted on an organisation by different powerful and influential objects of the society within which that organisation operates. So, coercive isomorphism is a theoretical aspect which stems from the power of stakeholders to exert pressures on their organisations (Deegan 2009).
This coercive pressure results in the change of behaviour of organisations. In relation to the ability of different social objects to change at an organisational level (Tuttle & Dillard 2007, p. 393) state that “Change is imposed by an external source such as a powerful constituent (e.g., customer, supplier, competitor), government regulation, certification body, politically powerful referent groups, or a powerful stakeholder. The primary motivator is conformance to the demands of powerful constituents and stems from a desire for legitimacy as reflected in the political influences exerted by other members of the organisational field. These influences may be formal or informal (such as through soft law) and may include persuasion as well as invitations to collude. If the influencing group has sufficient power, change may be mandated”.
Organisations are coerced within themselves to change, to ensure their legitimacy from state or government bodies, which is a means of survival in society (Meyer & Rowan 1977). The greater the interdependence on another institutional identity, the more an organisation is likely to be influenced, resulting in similar behaviour, operations and reporting. This sort of coercive pressure arises from interdependencies stemming from organisation-to-organisation relations (DiMaggio & Powell 1991).
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So, coercive isomorphism primarily focuses on the organisation coerced by the influential institutions of the society upon which the organisation is dependent. As a result the organisation gradually becomes isomorphic with the practices of the dominant institutional identity, with a view to managing their legitimacy and survival at large.
4.3.1.2 Mimetic isomorphism Mimetic isomorphism is concerned with organisations seeking to copy other organisations‟ practices in order to achieve a competitive advantage in terms of legitimacy (Deegan 2009). In interpreting mimetic isomorphism, DiMaggio and Powell (1983, p. 151) mention that “uncertainty is a powerful force that encourages imitation. When organizational technologies are poorly understood, when goals are ambiguous, or when the environment creates symbolic uncertainty, organizations may model themselves on other organizations” (in Deegan 2009). Zucker (1987) also explains organisational transformation by the idea that individuals prefer to reduce uncertainty and that (mimetic) institutional processes do so.
Mimetic isomorphism implies that organisations mimic or improve upon the institutional practices of other organisations in their field that they perceive to be more legitimate or successful (DiMaggio & Powell 1983). Once any organisation becomes successful by following a policy, other organisations eventually intend to follow that practice as necessary (Tolbert & Zucker 1983). As a result of mimicking a particular practice by some organisations, social pressure mounts on others to do the same, resulting in the fostering of the development of similar practices in an industry and leading them to become institutionalised.
In recent years, there has been a growing demand for environmental information from different corners of society. So, if some organisations provide environmental information and others do not, the legitimacy of non-providers might be threatened. Unerman and Bennett (2004) explain that if any organisation fails to follow the practices of other established organisations in the same industry, it would risk losing legitimacy in relation to the rest of the sector.
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So, according to mimetic isomorphism, organisations adopt the practices of others already established in their respective fields, and following the practices of those organisations reduces uncertainty and enhances the legitimacy of their followers.
4.3.1.3 Normative isomorphism Normative isomorphism arises from the group norms to follow some particular institutional practices. Normative isomorphism is driven by the normative pressure exerted by persons of the same profession (e. g. chartered accountants), who abide by common standards of behaviour as a result of their common educational background, training and professional socialisation. The sources of normative pressure are professional networks that define and transmit the “normative rules about organizational and professional behaviour. Such mechanisms create a pool of almost interchangeable individuals who occupy similar positions across a range of organizations” (DiMaggio & Powell 1983, p. 152). Thus, normative isomorphic force occurs due to professional influences on the firm resulting from professional training and education, and influences from involvement with organisations such as professional associations outside the firm (DiMaggio & Powell 1983).
In case of voluntary environmental reporting, normative isomorphism may arise either from formal groups (e.g. accounting associations) or informal groups (e.g. working groups within which the report preparers work or are trained). Here the group norms form and they receive training, inherently pressurising them to adopt a similar type of practices for corporate voluntary reporting.
4.3.2 Institutional theory applied in environmental accounting/reporting literature The above-mentioned branches of institutional theory have been used by previous researchers to investigate the influence and pressure of institutional identities on environmental reporting (Duff 2016; Gallego-Álvarez et al. 2017; Rankin, Windsor & Wahyuni 2011; Sarkis, Zhu & Lai 2011; Tang & Luo 2012; Zeng et al. 2012). Gallego-Álvarez et al. (2017) find, in a study conducted on international companies, that organisational environmental reporting policies and patterns are influenced by the environment and institutional setting where it operates. A study conducted by Islam and Deegan (2008) reflects the application of institutional theory where they
54 find that an organisation‟s reporting activities are influenced by the expectations of the community in which it operates. Haque (2011) used institutional theory (along with stakeholders theory) to explain the climate change related corporate governance related disclosure practices of Australian companies. Rankin, Windsor and Wahyuni (2011) use institutional theory to explain the voluntary corporate greenhouse gas disclosures by Australian companies in the absence of climate change public policy. Their findings show that Australian companies proactively publish carbon disclosures though there is no direct pressure to do so.
4.4 Justification of the theories underpinning the current research To investigate the impact of carbon pricing on voluntary environmental disclosures, this study utilises two complementary branches of political economy theory, legitimacy theory and institutional theory, broadly considering carbon pricing as an institutional setting which raises the question of VED in different carbon pricing countries. Institutional legitimacy is basically a key concept of institutional theory. As institutional theory motivates an organisation‟s disclosure practice, this study adopts institutional theory to address the impact of state/government policy relating to carbon pricing on the VED of electricity generating companies. A rationalized state expands its dominance on its organisational structure (inclusive of reporting), which influences directly or indirectly the institutionalisation of the state-imposed policy within the operational jurisdiction of the management (Meyer & Rowan 1977).
This study argues that the state decision, regarding the introduction of carbon pricing at a national level in the form of soft law, has an influence on organisations which can be explained by institutional theory and, more precisely, the coercive isomorphism branch of institutional theory. According to Deegan (2009) coercive isomorphism explains the use of voluntary environmental reporting disclosures, addressing the environmental values of relevant stakeholders. On the other hand organisations operating under similar types of carbon pricing mechanisms (e.g. ETS or EU ETS) may have the same quantity or quality VED, which can be explained from the mimetic isomorphism point of view.
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Figure 4.2 Theoretical perspectives underpinning the current study
Coercive and Mimetic Institutional Legitimacy Impact of carbon pricing theory explains how isomorphism branch the organizations use of institutional theory explain the impact of VED to legitimize their Voluntary environmental actions and respond to disclosures carbon pricing and reasons of similar
Carbon pricing policy relates to carbon emissions not environmental disclosures. The existence of this environment affects many aspects of organisations (DiMaggio & Powell 1983) and environmental disclosures is one of the major aspects which is affected and through which organisations respond to the government policy in order to legitimise their actions regarding environment-related issues. This study adopts an institutional legitimacy position to explain the reasons for voluntary environmental disclosures. They are an outcome of indirect and informal pressures from the state to the organisations of the respective countries, as institutional factors (here, this study refers to carbon price mechanisms) of different countries affect the voluntary environmental disclosures of the respective organisations (Ball & Craig 2010).
The growing concern for the environment is mounting pressure on the legitimacy of organisations. Since the electricity generating sector is burdened with an enormous amount of emissions (Intergovernmental Panel on Climate Change (IPCC) 2014), according to legitimacy theory, the urge to prove electricity organisations‟ social acceptance should be more than any other sector. According to Dowling and Pfeffer (1975), When there are some indications about the harmful effect of the operations of organisations (threat to the legitimacy) then the organisations attempt to become identified with symbols or values through communication which imply legitimacy. When the legitimacy of an organisation is threatened, it is usually due to the negative perception of different groups of society, which can be referred to as public pressure (Patten, Dennis M. 1992; Preston & Post 2012). Organisations respond to this pressure to legitimise their actions via reporting – more specifically voluntary reporting or disclosures. As Deegan (2009, p. 324) states, “information disclosure is vital to establishing corporate legitimacy”. Patten, Dennis M. (1992) also mentions, in
56 relation to environmental disclosures, that threats to organisations‟ legitimacy do entice the organisations to include more disclosures in their reports. If the legitimacy of an organisation is threatened due to the change of social expectations, then organisations also adapt with the change and try to legitimise their actions with more voluntary disclosures (Clarkson, Peter M et al. 2008).
Finally, this study supports the view that coercive pressure from government (in the form of carbon pricing) leads organisations within a particular field to make voluntary environmental disclosures in order to enhance their legitimacy and chances of survival in the event of uncertainty (Deegan 2009; Scott 1987).
4.5 Conclusion This chapter has discussed the theoretical considerations underpinning this study. Although legitimacy theory and institutional theory are broadly the theoretical framework for this study, institutional legitimacy, coercive and mimetic isomorphism are the explanatory theoretical perspectives. Discussion on institutional legitimacy theory illustrates how the management of an organisation manages its legitimacy as determined by the wants of society. Institutional theory is a complementary perspective of legitimacy theory. The coercive branch of institutional theory suggests that organisations are coerced by influential stakeholders of the society that motivates similar types of VED within an institutional framework. In the same way, discussion on mimetic isomorphism dictates that organisations operating in a single institutional framework mimic others in reporting, to reduce uncertainty. This theoretical framework will guide the rest of this study in chapter 5.
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Chapter Five: Methodology of the study
5.1 Introduction The aim of this chapter is to illustrate the methodology of the current study. This is a quantitative study based on secondary data collected from annual reports or standalone environmental or sustainability reports published on websites of relevant organisations. Many previous researchers have worked on secondary data sources, ensuring the validity and reliability of data (Alrazi, Bahari & Husin 2016; Dragomir 2010; Mawih Al & Maha Al 2015; Rankin, Windsor & Wahyuni 2011). Data was collected from those reports adopting a content analysis approach. Content analysis was undertaken based on quantity disclosure and quality disclosure indices adopted from previous studies.
5.2 Related research and hypotheses development Differences in environmental reporting practices are attributed to different political and legal systems (Cormier & Magnan 2015; Holland & Foo 2003). Different political or legal decisions of government, an important stakeholder for companies operating in their respective countries (Córdoba‐Pachón, Garde‐Sánchez & Rodríguez‐Bolívar 2014), have significant impact on the VED of the companies. It is widely known that regulations mandating environmental disclosures have a positive impact on the disclosure pattern of organisations (Freedman & Park 2014); but there are very few studies that show the impact of government regulations for climate change strategy at a national level (macro level) on the VED of companies (micro level). Liu et al. (2017) conducted a study to oversee the regulatory impact on the voluntary climate change related disclosures of government-owned organisations in light of the National Greenhouse Energy Act 2007 and the Clean Energy Act 2011 of Australia and found a positive relationship between them. Many authors have conjectured that regulations might have an impact on corporate environmental disclosures (Bae Choi, Lee & Psaros 2013; Hrasky 2012; Janine & Sumit 2011; Lodhia 2012). Cowan and Deegan (2011) conducted a study, with a very similar objective, to see the reaction of corporate disclosures to the implementation of the National Pollutant Inventory (NPI) scheme. They found the disclosures reactive to the NPI scheme. When one country changes the climate change initiative, organisations also
58 operating in those countries become reactive to adopting climate change initiatives, and these affect the VED of such organisations (Bae Choi, Lee & Psaros 2013; de Aguiar, TRS & Bebbington 2014; Kim & Lyon 2011).
How the worldwide politics of environmental issues affect organisational reporting, can be exemplified by European countries. European companies are leading the way regarding the quality of communication and the level of maturity of sustainability reporting (KPMG 2011). The attitudes of European organisations are different from those of other countries (e. g. USA) because of the regional political culture. In Europe, much of the debate focused on the size of the emission reductions target that the EU would propose in terms of international climate negotiations (Pulver 2007), while the US administration continued to question the validity of climate science (Carlarne 2006b).
A study conducted by Pulver (2007) on the companies from US, China, Saudi Arabia, Iran, Venezuela, and Indonesia reveals that all of those companies adopted a negative stance regarding climate change, as opposed to the cooperative stance of European countries. Reporting strategies of the top ten oil companies in 1999 showed that the biggest companies in the US, China, Saudi Arabia, Iran, Venezuela, and Indonesia all adopted an adversarial stance on climate change. Meanwhile, European companies were in general cooperative. This finding also confirms the finding of the Pew Research Centre (2013) that concern for environment in Europe is high compared to in the USA.
It is apparent from the research by the Pew Research Centre (2013) that there is greater societal concern around this issue in Europe compared to in the USA, for example; therefore it is likely that companies located in geographical areas where concern is high, will also face more pressure from stakeholders to provide information. Based on the above discussion this study formulates the following hypotheses:
Hypothesis 1a: Organisations operating in carbon pricing countries have higher quantity VED than organisations in non-carbon pricing countries.
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Hypothesis 1b: Organisations operating in carbon pricing countries have higher quality VED than organisations in non-carbon pricing countries.
GRI guidelines are internationally accepted protocol for sustainability disclosures where the environmental disclosures section is one of the major parts. Previous studies show that adoption of GRI guidelines motivates organisations to publish environmental data in a more organised fashion. The objective of the Global Reporting Initiative is to enhance the quality of sustainability reporting worldwide (GRI 2006). Organisations around the world are following these guidelines voluntarily for its specific guidelines, and the number of companies following GRI guidelines is increasing day by day for its effectiveness in reporting (GRI 2008). In “Green Paper: Promoting a European framework for corporate social responsibility” (European Commission 2001) it was acknowledged that GRI Guidelines were seen as the best environmental reporting practice.
According to prior literature GRI is expected to be commonly adopted by organisations because of its global acceptance (Levy, David L., Szejnwald Brown & de Jong 2010; Marimon et al. 2012; Skouloudis, Evangelinos & Kourmousis 2009). So, GRI is the most widely used standard for sustainability reporting where environmental information is one of the most significant sections (Marimon et al. 2012; Prado‐lorenzo, Gallego-Álvarez & García-Sánchez 2009; Rasche 2009; Tsang, Welford & Brown 2009). Manetti (2011) and Grushina (2017) also found that GRI guidelines represent the best available option for presenting environmental information along with other sustainable information. It also ensures the usefulness and comparability of information across the different industries. Manetti (2011, p. 135) mentions that “the GRI framework provides the opportunity to compare information and conduct benchmarking among the different organizations involved”. Schadewitz and Niskala (2010) also state that the GRI is one of the most important communication tools for decreasing environmental information asymmetry between a firm, its investors and other stakeholders.
When organisations adopt GRI, they are to maintain a checklist showing which information they have published and where it has been published. So it becomes difficult for organisations to hide any of their detrimental activities or to publish
60 randomly. Kolk and Levy (2003) mention that if any organisation follows GRI guidelines, it increases the level of disclosures at least to some extent. Prado- Lorenzo et al. (2009) also found that organisations following GRI guidelines for sustainability reporting disclose certain environmental information more than other organisations. Some researchers also argue regarding the quality of information disclosures according to the GRI guidelines, as some companies are reporting in a meaningless way, focusing on what they are doing rather than on what changes, damages or benefits impact communities (Tsang, Welford & Brown 2009). Moneva, Archel and Correa (2006) also argue that GRI-based reports could mislead readers or even camouflage corporate unsustainability. Based on the above discussion, the following hypotheses can be derived to analyse the impact of adopting GRI guidelines on quantity and quality of VED.
Hypothesis 2a: Organisations following GRI guidelines for reporting have a higher quantity of voluntary environmental disclosures. Hypothesis 2b: Organisations following GRI guidelines for reporting have a higher quality of voluntary environmental disclosures.
ISO 14001 is one of the most influential standards regarding the environmental responsibilities of an organisation (Berman et al. 2003) and is a widely accepted environmental management system (EMS) (ISO 2007, 2010; Marimon, Casadesus & Heras 2010; Marimon, Llach & Bernardo 2011). ISO 14001 also works as an information source for GRI (Mitchell & Hill 2009).
The objective of ISO 14001 is to provide a framework for a holistic, strategic approach to an organisation‟s environmental policy, plans and actions (ISO 2007). The promise of ISO 14001 is that, by certifying to this standard, organisations should have better control over environmental operations, thereby mitigating their environmental footprints. There are plenty of studies that show the impact of ISO 14001 on the environmental performance of organisations (Dahlström et al. 2003; Kang 2005; Potoski & Prakash 2005), but very few studies investigate the impact of ISO 14001 certification on voluntary disclosures.
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Guidance provided in ISO 14001 enhances the credibility and transparency of environmental performance, monitoring and reporting of organisations. Sumiani, Haslinda and Lehman (2007) conducted a study on Malaysian companies to oversee the relationship of ISO 14000 standards with environmental performance and reporting. They found ISO 14001 to be a strategic tool for the environmental reporting of Malaysian companies. Yin and Schmeidler (2009) find that organisations which integrate ISO 14001 standards into their operations are more likely to report environmental information including their environmental performance. When organisations certify to ISO 14001 standards, they are motivated to maintain communication with the stakeholders both internally and externally. Sumiani, Haslinda and Lehman (2007) found that external relationships with the relevant stakeholders can be maintained by providing disclosures using different media, including annual report and standalone sustainability reports (Whitelaw 2004). Patten, Dennis M and Crampton (2003) argue that organisations‟ involvement with ISO 14001 leads to higher levels of environmental disclosure. Rankin, Windsor and Wahyuni (2011) also find a positive relationship between the certification to ISO 14001 and the GHG disclosures of Australian companies. This study also formulates the following hypotheses to analyse the relationship between certification to ISO 14001 and the VED of electricity generating companies across the world:
Hypothesis 3a: Organisations with certification to ISO 14001 standards have higher quantity voluntary environmental disclosures. Hypothesis 3b: Organisations with certification to ISO 14001 standards have higher quality voluntary environmental disclosures.
5.3 Data collection and method With a view to collecting the data, this study first selected the list of the countries from which electricity generating companies were selected. After that list companies of each country were selected from the Market Line data base. Finally, a content analysis approach was applied to collect secondary data from reports published on the websites of respective organisations.
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5.3.1 Selection of countries To test the above hypotheses, annual reports and standalone environmental or sustainability reports were examined for the year 2015. This is the latest year which has been selected to avoid the time lag between the publication of G4 and the adoption of G4 by organisations. G4 was launched in May 2013 but it takes time for guidelines to be adopted voluntarily by organisations. This year selection has ensured more availability of data provided by the companies following G4 guidelines.
Companies were selected from countries falling into 2 categories: carbon pricing countries and non-carbon pricing countries. A list of carbon pricing countries was selected from the report, “State and trends of carbon pricing 2015”4 published by World Bank (2015). A total of 36 countries adopted carbon pricing at a national level, either in the form of carbon tax, emissions trading scheme, or both (see Table 5.1). All of these countries are broadly considered as carbon pricing countries.
There are many other countries which did not have carbon price at the national level but have already shown their interest for carbon pricing. Some of them have already started on pilot projects, and others have taken initiatives to implement carbon pricing in the next few years. A list of these countries was also derived from the report mentioned earlier. Those countries, which have shown their interest in applying carbon price but did not apply it by 2015, are broadly categorised as non- carbon pricing countries.
4 ‘State and trends of carbon pricing’ is a yearly publication by the World Bank. This report contains the updated information regarding the carbon pricing status of different countries, states and regions around the world.
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Table 5.1 List of carbon pricing and non-carbon pricing countries
Criteria Countries
Carbon pricing Total 36 countries: Portugal, Iceland, Mexico, Norway, countries Japan, Austria, Italy, Belgium, Latvia, Bulgaria, Lithuania, Croatia, Luxembourg, Cyprus, Malta, Czech Republic, Netherlands, Poland, Estonia, Romania, Slovakia, Germany, Slovenia, Greece, Spain, Hungary, New Zealand, Korea, Denmark, Finland, France, Sweden, Ireland, United Kingdom, Switzerland and Kazakhstan
Non-carbon pricing Total 17 countries: Brazil, China, Chile, Russia, Colombia, countries (will adopt Indonesia, India, Jordan, Morocco, Peru, South Africa, in future) Turkey, Ukraine, Vietnam, Thailand, Taiwan and Iran
Source: “State and Trends of Carbon Pricing 2015”- (World Bank 2015)
5.3.2 Selection of companies All electricity companies in “Market Line” database for the 2015 fiscal year make up the population. The current study worked on the population rather than a sample. Sustainability reports were also collected from the Global Reporting Initiative guidelines database (see for example: Alrazi 2012; Simnett, Vanstraelen & Wai Fong 2009). After selecting the companies, data was collected from the secondary sources e.g. annual report, standalone sustainability report or other reports published in English on their website (see for example: Alrazi 2012; Jose & Lee 2007; Junior, Best & Cotter 2014; Khan 2017). There are total of 170 companies in the market line data base which include 9 subsidiary companies. Published reports of 10 companies were not in English and another 2 companies‟ reports were not accessible. Finally data was collected from 158 companies (See Appendix A) from 53 countries.
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5.3.3 Method Content analysis, a technique for making replicable inferences, is the most widely used method in social and environmental disclosure literature, specifically for scoring the extent of disclosure in terms of quantity and quality (Guthrie & Mathews 1985; Guthrie & Parker 1990; Milne & Adler 1999; Roberts, J 1991). Many researchers (Brammer & Pavelin 2006; Campbell, Moore & Shrives 2006; Clarkson, Peter M et al. 2008; Deegan & Gordon 1996; Deegan, Rankin & Tobin 2002; Freedman & Jaggi 2011; Hackston & Milne 1996; Haniffa & Cooke 2005; Magness 2006; Sherman & Diguilio 2010) have used content analysis as the major research tool to measure the level of VED from time to time. Content analysis of annual reports and sustainability reports, as used here, has been widely employed in examining social and environmental reporting practice [see for example: Douglas, Doris and Johnson (2004) Guthrie and Parker (1989), Roberts, J (1991), Deegan and Gordon (1996)].
In order to examine the research questions, this study used content analysis (Guthrie & Farneti 2008; Krippendorff 2004) to investigate the VED in annual reports and sustainability reports of the organisations. To conduct the content analysis, with a view to measuring the quantity and quality, two separate disclosure indices have been used. Disclosure index is one of the recognized techniques to study the information provided by private and public organisations (Ortiz & Clavel 2006). Thus, the disclosure index paves the way to evaluate the information transparency of public and private institutions (Bonsón & Escobar 2004). For this study, environmental reporting occurrence was assessed using a disclosure index which involves measurement of whether specific issues on a predefined index were disclosed or not (Joseph & Taplin 2011).
There is no standard format for developing a disclosure index. The general practice is to identify a range of criteria by either conducting a literature review (Holland & Boon Foo, 2003; Wiseman, 1982), based on what is typically disclosed in voluntary reports, or by using criteria from reporting guidelines such as GRI or other industry specific guidelines (Dong & Burritt 2010; Guenther, Hoppe & Poser 2007; Morhardt, Baird & Freeman 2002; Skouloudis, Evangelinos & Kourmousis 2009).
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5.3.3.1 GRI framework- basis of the dependent variable This study used the G4 guidelines or Global reporting initiative (GRI) guidelines 2013 (GRI 2013) for the disclosure index purpose. GRI was introduced in 1997 as a joint initiative of the Coalition for Environmentally Responsible Economies, a US non- government organisation and United Nations Environmental Program to develop a globally accepted reporting framework to enhance the quality of sustainability reporting (GRI 2006). The overall goal of the initiative is to develop a globally accepted reporting framework to enhance the quality, rigor, and utility of sustainability reporting (GRI 2002). Companies around the world are increasingly adopting GRI (KPMG 2008, 2011) because of its proper guidelines. As mentioned earlier, GRI is the most extensively used voluntary sustainability reporting framework across the world (Manetti & Becatti 2009; Reynolds & Yuthas 2008). These guidelines intend to be globally applicable to organisations that wish to prepare voluntary sustainability or environmental reports, by proposing specific guidelines for reporting content (Reynolds & Yuthas 2008). The benefit of following the guidelines is that organisations which decide to follow any guideline are expected to report at least a minimum level of information voluntarily (Kolk & Levy 2003).
Because of its worldwide acceptance, GRI has been used by many studies (Clarkson, Peter M et al. 2008; Comyns 2016; de Villiers & Alexander 2014; Gallego- Álvarez, Lozano & Rodríguez-Rosa 2018; José-Manuel et al. 2009) to develop the disclosure index for the measurement of voluntary environmental disclosures. Frost et al. (2005) adopt the GRI sustainability reporting guidelines as a benchmarking tool to evaluate the nature and extent of sustainability reporting practice in the various reporting media (e.g. annual reports, websites, etc.) used by Australian companies listed on the Australian Stock Exchange. Clarkson, Peter M et al. (2008) conduct a study, using an index based on GRI sustainability reporting guidelines (2002), to assess the level of voluntary environmental disclosures in environmental and social responsibility reports, or similar disclosures provided published in the firm‟s web site. A list of prior studies which used global reporting initiative guidelines to develop their indices is presented in Table 5.2.
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Table 5.2: Prior studies which used global reporting initiative guidelines to develop indices
Literature GRI Description of the index Findings
José-Manuel et GRI 2006 They used five GRI- - Direct relationship of al. (2009) indicators related to the GRI indicators with GHG emissions and 14 corporate size and additional items. market capitalisation.
Comyns and GRI 2006 Disclosure index under- 7 - Quality of data was not Figge (2015) broad heads (Relevance, same for all seven Completeness, dimensions. consistency, Credibility, Timeliness, Transparency, Accuracy) where two measurement criteria (Timeliness and Accuracy) were selected from the GRI index 2013.
Comyns (2016) GRI Content analysis index- for - Organisations following 2000, measuring GHG reporting GRI guidelines for 2002 & quality based on different reporting have better 2006 and criteria including GRI quality and more other guidelines. extensive reporting. guidelines
Dragomir GRI 2006 Weighted disclosure index- - Bigger polluters (2010) consisting of 26 items. disclose more. - - No association between environmental performance and financial performance.
Gill, Dickinson GRI 2006 543 terms - of - Sustainability reporting
67 and Scharl environmental, economic on corporate websites is (2008) and social indicators of common across the GRI guidelines. three geographical regions, with North America being the most prevalent discloser and Asia lagging somewhat behind.
Clarkson, Peter GRI 2002 Seven broad categories- - Higher pollutants make M., Overell and consisting of 95 equally more voluntary Chapple (2011) weighted disclosure items. environmental disclosures.
Clarkson, Peter GRI 2002 Seven broad categories- - Positive association M et al. (2008) consisting of 95 equally between environmental weighted disclosure items. performance and the level of discretionary environmental disclosures.
5.4 Empirical models and variable definitions
In order to measure the quantity and quality of VED, two different linear regression models were developed for this study. Model 1 is for measuring the quantity of VED and Model 2 is for measuring the quality of VED. The same independent variables were used in both models where two were used as control variables.
Measurement of variables: Dependent variables Quantity of voluntary environmental disclosures: This study assessed the number of items (quantity) disclosed voluntarily in the environmental reports which were measured against the G4 guidelines. It is a common assumption that the significance of a disclosure can be meaningfully represented by the quantity of disclosures,
68 whatever the measure of quantity might be (Deegan & Gordon 1996; MacArthur 1988). The extent of quantity of VED was measured by a disclosure index (See Appendix B) based on the modification of Dragomir (2010) to align with G4 guidelines. It is very common for researchers to modify existing disclosure indices to meet up their own perceived needs (Marston & Shrives 1991). For example, Borghei and Leung (2013) modified the work of de Aguiar, TR and Fearfull (2010), and Patten, Dennis M. (2002) modified the work of Wiseman (1982) to construct a suitable index for their research questions.
This index is based on G4 guidelines as they are widely used for voluntary environmental reporting and have been used by many previous researchers to develop indices for their study purposes (Clarkson, Peter M et al. 2008; Dragomir 2010; Hooks, Kearins & Blake 2004).
Each disclosed item of the carbon disclosure index was analysed and scored for selected companies, based on zero for no disclosure and one for disclosure of the items. At the end of scoring, the total number of points a company secured denotes the level (quantity) of disclosures (Gary, Clare & Sidney 1995; Gul & Leung 2004). The range of unweighted raw score varies from 0 to 21. Similar to Botosan (1997) and Lan, Wang and Zhang (2013) this study used the disclosure score by a relative value which is the raw score of an individual organisation divided by the maximum raw score, as follows:
Quality of voluntary environmental disclosures: Extent of quality of voluntary environmental disclosures is measured by an index (See Appendix C ) different from the one used for quantity measurement which has been adopted from the (Hąbek & Wolniak 2016). This is an assessment questionnaire consisting of two different sections: relevance of information of the VED, and credibility of information. Relevance of information is measured against the assessment criteria which are sustainability strategy, key stakeholders, targets (future target along with the
69 achievement of the previous targets), trends over time, environmental performance, improvement actions, integration with business processes, and executive summary.
Credibility of information was measured against the sub assessment criteria such as readability of the information presented through use of graph and explanations, basic reporting principles which include the reporting period, scope and limitations of the report, quality of data of the report that describes the processes and procedures of data collection and aggregation along with the source of the data, stakeholders dialogues regarding sustainable development, feedback and independent verification of the sustainability report. For the assessment purpose, similar to Alrazi (2012), a different ordinal scale was applied for each assessment criteria. Zero points have been awarded when a report contains no mention of information concerning individual criteria, and maximum points have been given when all sections of each criteria item have been satisfied. The range of the raw score varies from 0 to 27. Similar to Botosan (1997) and Lan, Wang and Zhang (2013), this study uses the disclosure score by a relative value which is the raw score of an individual organisation divided by the maximum raw score, as follows:
Independent variables CPP: CPP is a dichotomous variable for the company belonging to carbon pricing countries or not. Whether an organisation is from countries of carbon pricing at the national level, in the form of carbon tax or carbon emissions trading scheme for the relevant industry, or no carbon pricing was identified from the list published by the World Bank (World Bank 2015). To identify this variable, the carbon pricing policy of individual country (Carlarne 2006a; Kolk, Levy & Pinkse 2008; Rowlands 2000) was taken into consideration.
GRI: GRI is a dichotomous variable for the companies following GRI guidelines for the presenting environmental information or not. Whether the organisation uses the GRI guidelines for the preparation of sustainability report or presentation of environmental information was identified from the sustainability report or annual
70 report of that organisation (See for example: Chen, Feldmann & Tang 2015; Nikolaeva & Bicho 2011; Rankin, Windsor & Wahyuni 2011).
ISO: ISO is a dichotomous variable for the companies certifying to ISO 14001 or not. Certification to ISO 14001 is a significant step toward the sustainable strategy (Heras-Saizarbitoria 2018; Rankin, Windsor & Wahyuni 2011; Welch, Mori & Aoyagi‐ Usui 2002). Whether the organisation certifies to ISO 14001 was identified from the annual report or sustainability report (Prado‐lorenzo, Gallego-Álvarez & García- Sánchez 2009; Rankin, Windsor & Wahyuni 2011).
Control Variables Size: As many previous studies (Amran, Periasamy & Zulkafli 2014; Gray et al. 2001; José-Manuel et al. 2009) find company size to be a key determinant for voluntary environmental disclosures, it has been identified as a control variable for this study. The natural logarithm of an organisation‟s total assets has been treated as the proxy of company size (Comyns 2016; Kuzey, Uyar & Delen 2014; Mawih Al & Maha Al 2015; Sanan 2016).
Leverage: Leverage has been considered to control in the likelihood that organisations with high leverage provide higher voluntary disclosures (Clarkson, Peter M et al. 2008) so that they can manage the impression of creditors (Roberts, RW 1992), an important stakeholder for the organisations. Alciatore and Callaway Dee (2006) also find a positive relationship between high leverage organisations and higher levels of voluntary environmental disclosures.
The models:
The current study uses the following regression models to test the relationships among dependant and independent variables hypothesised above. Accordingly, this study will present two models. Model 1 measures the extent of quantity of the voluntary environmental disclosures of organisations and tests hypotheses 1a, 2a, 3a, 4a and 5a developed in the previous section.
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Model 1:
Variables and measurement:
= extent of quantity of VED = constant term = dummy variable of carbon policy of individual country which = 1 if the organisation is from a carbon pricing country and 0 otherwise. = dummy variable of ISO which = 1 if the organisation certifies to ISO 14001 and 0 otherwise. = dummy variable for GRI which = 1 if the organisation follows GRI for preparing the sustainability report, 0 otherwise. = natural logarithm of value of total net assets of the organisation = leverage is measured as the ratio of total debt divided by the total assets at the end of the fiscal year. = error term
Model 2 measures the quality of voluntary environmental disclosures and tests hypotheses 1b, 2b, 3b, 4b and 5b developed in the previous section
Model 2:
Variables and Measurement:
= quality of VED
= constant term = dummy variable of carbon policy of individual country which = 1 if the organization is from a carbon pricing country and 0 otherwise. = dummy variable of ISO which = 1 if the organisation certifies to ISO 14001 and 0 otherwise. = dummy variable for GRI which = 1 if the organisation follows GRI for preparing the sustainability report, 0 otherwise
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= natural logarithm of value of total net assets of the organisation = leverage is measured as the ratio of total debt divided by the total assets at the end of the fiscal year. = error term
5.5 Chapter Conclusion This chapter discussed the methodological aspect of this study which includes hypothesis development, data collection method and models along with the definition of the variables. This study uses two different linear modes, one for quantity and one for quality. The same independent variables are used to check their impact on two different models. How these independent variables influence the dependent variables will be discussed in the following chapter based on the findings of statistical results derived from operations in the Statistical Package for the Social Sciences (SPSS).
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Chapter Six: Carbon Pricing Mechanism – Impact on Quantity and Quality of VED: Analysis and Findings
6.1 Introduction The aim of this study is to examine the impact of carbon pricing on the voluntary environmental disclosures of electricity generating companies. This chapter seeks the result of this study‟s research questions regarding whether there is any impact of carbon price on the quantity and quality of VED. This chapter presents the descriptive statistics and multiple regression results derived from the statistical analysis using SPSS software.
6.2. Descriptive statistics
Table 6.1 shows the descriptive statistics of the dependent variables (VED_Quantity & VED_Quality and The raw_score_VED_Quantity & raw_score_VED_Quantity) in this study. The raw_score_VED_Quantity ranges from 0 to 21 and the range of relative value of VED_Quan varies from 0 to 1. The overall scoring mean for VED_Quantity is .3671 and the median value is .3333, whereas the overall scoring mean for Raw_score_VED_Quantity is 7.71 and the median value is 7.00. This result implies that organisations disclosed almost 8 items out of 21 criteria set out for VED quantity measurement index (See Appendix B). According to the summary statistics, maximum score for Raw_score_VED_Quantity is 20 which is almost 100% of total score and minimum score is 0.
The Raw_Score_VED_Quality ranges from 0 to 27, and the range of relative value of VED_Quality varies from 0 to 27. Table 6.1 shows that the mean score for VED_Quality is .4119 and the median is .3704, whereas the overall mean score for Raw_Score_VED_Quality is 11.1203 and the median is 10. This result implies that almost 12-point score was secured by each company out of a 27 score set out in the VED quality measurement index. So, it means that almost 44% quality of reporting against our total weight (12 out of 27) is ensured by the selected companies. All other descriptive statistics for other variables (CPP, GRE, ISO, ln_netassets, leverage) are as already illustrated.
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Table 6.2 presents the descriptive statistics of independent continuous variables (ln_netassets and leverage) which show the mean, median, maximum, minimum and standard deviation. The mean of ln_netassets is 22.2163 and the mean leverage is .5289. Standard deviation of ln_netassets and leverage are 2.799 and .263 subsequently.
Table 6.3 presents the summary statistics of independent dichotomous variables (CPP, GRI and ISO). The result shows that, out of total 158 companies, 100 companies belong to carbon pricing countries, which contain 63.3% of the total population. On the other hand 58 companies belong to non-carbon pricing countries, which contain 36.7%. Descriptive statistics also show that 66 companies adopted GRI for their reporting purpose and this accounts for 41.8% of our population. In case of certification to ISO 14001, this study finds that 70 companies certified to ISO 14001 which is 44.3% of the total population.
Table 6.1: Summary statistics for dependent variables
Variable Mean Median Maximum Minimum Standard deviation
Descriptive Statistics, N = 158
VED_Quantity .3671 .3333 .95 .00 .27512
VED_Quality .4119 .3704 .96 .00 .27949
Raw_score_VED_Quantity 7.71 7.00 20.00 0.00 5.778
Raw_score_VED_Quality 11.1203 10.00 26.00 0.00 7.54634
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Table 6.2: Summary statistics for continuous independent variables
Variable Mean Median Maximum Minimum Standard deviation
Descriptive Statistics, N = 158 ln_netassets 22.2163 22.0620 29.92 13.32 2.79978
Leverage .5289 .5710 0.99 .01 .26276
Table 6.3: Summary statistics for dichotomous variables Mean Standard Variable Criteria Frequency Percent Deviation No carbon pricing country 58 36.7 .633 .4835 CPP Carbon pricing country 100 63.3 No adoption of GRI 92 58.2 .42 .495 GRI Adoption of GRI 66 41.8 No certification to ISO 14001 88 55.7 .44 .498 ISO Certification to ISO 14001 70 44.3
6.3 Results – quantity of voluntary environmental disclosures
With a view to measuring the impact of carbon pricing, GRI, ISO, ln_neassets and leverage on the quantity of VED (VED_Quantity), this study first tests the assumptions of linear regression analysis, then checks the correlations between the dependent variable and independent variables, and finally runs the regression analysis on the linear model 1.
6.3.1 Testing assumptions of linear regression analysis
This study uses multiple linear regression models to analyse the data upon testing the assumption of linear regression analysis using SPSS software. Before applying linear regression to the data set, underlying assumptions of linear regression analysis were checked. With a view to checking the assumptions of the data set for
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Model 1 (Quantity of VED), the following assumptions of linear regression analysis were used: assumptions of normality and linearity, homoscedasticity and absence of multicollinearity (Gujarati & Porter 2009; Osborne 2011).
This study finds that residuals of the regression follow a normal distribution and they conform to the diagonal normality line indicated in the plot (See Graph 6.1). After checking the linearity of the data, this study also checked the homoscedasticity of the data and found it to be homoscedastic (see Graph 6.2). Last of all, multicollinearity assumption was checked to oversee the correlation among the independent variables and found no multicollinearity among the variables (See Table 6.4). Collenearity statistics shows that VIF = 1.049 value for CPP, VIF = 1.370 for GRI, VIF = 1.333 for ISO, VIF = 1.063 ln_netassetsis and VIF = 1.064 for leverage. So, all the VIF values are not greater than 10, which dictates no multicollinearity among the independent variables (Mason, Gunst & Hess 2003; Neter, Wasserman & Kutner 1983).
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Table 6.4 Results of multicollinearity Test Collinearity Statistics Tolerance VIF CPP .953 1.049 GRI .730 1.370 ISO .750 1.333 ln_netassets .941 1.063 Leverage .940 1.064
6.3.2 Correlation statistics
Table 6.5 provides the result of correlation statistics. This is a two-tailed test of significance. This table also presents that the coefficient signs between the dependent variable and independent variables are positive and statistically significant except for leverage in Pearson correlation analysis. A negative sign is inconsistent with the findings of previous studies that organisations having more
78 leverage are likely to provide more discretionary disclosures (Borghei & Leung 2013; Clarkson, Peter M et al. 2008; Xiao, Yang & Chow 2004) although this relation is not statistically significant.
Correlation between quantity of VED (VED_Quantity) and CPP is positive, which suggests a positive relation. This supports the initial prediction that if the country implements carbon pricing policy at the national level its organisations also publish more disclosures voluntarily as a response to the demands of society (See for example: Bae Choi, Lee & Psaros 2013; Tang & Luo 2012). There is also a positive relation between quantity of VED (VED_Quantity) and adoption of GRI. This suggests that as non-government guidance, GRI has a positive impact on the level of VED of the organisations (Comyns 2016; Islam, Jain & Thomson 2016; Morrow & Rondinelli 2002). Positive relationship between ISO and quantity of VED implies that certification to ISO 14001 instigates the organisation to produce more VED (Burström von Malmborg 2002). Correlation results also show that there is a positive relationship between size of the organization (ln_netassets) and quantity of VED.
Table 6.5: Correlation statistics for dependent and independent variables
VED_Quantity CPP GRI ISO ln_netassets Leverage VED_Quantity 1 .130* .693** .463** .206** -.044 CPP .130* 1 .033 .018 -.130 .182* GRI .693** .033 1 .485** .141 .076 ISO .463** .018 .485** 1 -.009 -.047 ln_netassets .206** -.130 .141 -.009 1 -.117 Leverage -.044 .182* .076 -.047 -.117 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
6.3.3 Multiple linear regression analysis
Table 6.6 presents the regression results of Model 1 (Quantity measurement model). This table summarises regression results of unstandardised coefficients, std. error of the estimate, R square and F statistics along with the p value (two tailed). One-tailed
79 tests are appropriate to examine directional hypothesis (Field 2009; Vaus & Silva 2003).
Table 6.6: Regression results
Variable Expected sign Regression
Constant -0.099 (0.135)
CPP + .080**
(.032)
GRI + 0.331**
(.036)
ISO + .093**
(.035) ln_netassets + .013**
(.006)
Leverage + -0.096
(0.059)
Adjusted R-square 0.526
Model F stat 35.787 P value 0.000
** Statistically significant at the 0.01 level.
* Statistically significant at the 0.05 level.
Results show that all the variables are in the predicted direction, except leverage. Here, CPP, GRI, ISO and ln_netassets are statistically significant but leverage is not. The adjusted R-square value is 0.526 which implies that a 52.6% variation of quantity of VED can be explained by the independent variables of this model. Based on the F stat values, this study finds that the regression model statistically significantly predicts the dependent variable, VED quantity.
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Overall, the results portrayed in Table 6.6 provide strong evidence that carbon pricing policy has an impact on the quantity of voluntary environmental disclosures. So, this finding supports our hypothesis that organisations operating in carbon pricing countries have a higher quantity of VED than organisations in non-carbon pricing countries. This study also finds that if the organisations adopt GRI guidelines for their reporting purpose, they enhance the quantity of VED, which supports the hypothesis of this study that organisations following GRI guidelines for reporting have a higher quantity of voluntary environmental disclosures. According to the regression analysis, it can be argued that if the organisations certify to ISO 14001 for a better environmental management system, the result is more voluntary environmental disclosures. So, this finding also supports the hypothesis of this study that organisations having certification to ISO 14001 standards have higher quantity voluntary environmental disclosures. It is also evident from this study that size of the organisations (here, in terms of asset size) has an impact on the quantity of VED. But this study does not find any positive impacts, rather negative impact of leverage on VED quantity which is not statistically significant.
6.4 Results – quality of voluntary environmental disclosures
With a view to measuring the impact of CPP, GRI, ISO, ln_neassets and leverage on the quality of VED (VED_Quality), this study first tests the assumptions of linear regression analysis, then checks the correlations between the dependent variable and independent variables, and finally runs the regression analysis on the linear Model 2.
6.4.1 Testing assumptions of linear regression analysis
As already mentioned, this study uses the multiple linear regression models to analyse the data. Before applying linear regression to the data set, underlying assumptions of linear regression analysis were checked. With a view to checking the assumptions of the data set for Model 2 (Quality of VED), assumptions of normality and linearity, homoscedasticity and absence of multicollinearity (Gujarati & Porter 2009; Osborne 2011) were checked. This study finds that residuals of the regression follow a normal distribution and they conform to the diagonal normality line indicated
81 in the plot (See Graph 6.3). This study also finds the data to be homoscedastic (See graph 6.4).
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Last of all, multicollinearity assumption was checked to oversee the correlation among the independent variables; no multicollinearity was found among the variables already discussed. As already mentioned, collenearity statistics show VIF = 1.049 value for CPP, VIF = 1.370 for GRI, VIF = 1.333 for ISO, VIF = 1.063 ln_netassets and VIF = 1.064 for leverage which shows that all VIF values are not greater than 10, dictating no multicollinearity among the independent variables (Mason, Gunst & Hess 2003; Neter, Wasserman & Kutner 1983).
6.4.2 Correlation statistics Table 6.7 presents the results of correlation statistics between the dependent variable (VED_Quality) and independent variables (CPP, GRI, ISO, ln_netassets, leverage). This is a two-tailed test of significance. Correlation results show that all the coefficient signs are positive, which dictates a positive relation between dependent and independent variables. Results are statistically significant except leverage.
Table 6.7: Correlation statistics for dependent and independent variables
VED_Quality CPP GRI ISO ln_netassts Leverage VED_Quality 1 .129 .614** .453** .156* .019 CPP .129* 1 .033 .018 -.130 .182* GRI .614** .033 1 .485** .141 .076 ISO .453** .018 .485** 1 -.009 -.047 ln_netassets .156* -.130 .141 -.009 1 -.117 Leverage .019 .182* .076 -.047 -.117 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
Correlation between quality of VED (VED_Quality) and CPP is positive, which supports the initial expectation that introducing a carbon pricing mechanism at the national level motivates organisations to produce more quality VED (See for example: Alrazi 2012; Rankin, Windsor & Wahyuni 2011; Tang & Luo 2012). Non- government guidance, such as GRI and ISO, also has a positive relation to the quality of voluntary environmental disclosures This result implies that if the organisation voluntarily adopts GRI guidelines for reporting purpose it enhances the quality of VED (Comyns 2016; Rankin, Windsor & Wahyuni 2011). In the same way,
83 if the organisation certifies to ISO 14001, it contributes towards increasing the quality of VED (Comyns 2016; Prado‐lorenzo, Gallego-Álvarez & García-Sánchez 2009). Correlation results also reveal that size of the organization is positively related to the VED_Quality. If the organisation grows in size daily, the quality of VED should be increased as well. In case of the relation between VED_Quality and leverage this study does not find any statistically significant relation.
6.4.3 Multiple linear regression analysis
Table 6.8 presents the regression results of Model 2 (Quality measurement model). This table summarises regression results of unstandardized coefficients, std. error of the estimate, R square and F statistics along with the p value (two tailed). One-tailed tests are appropriate to examine directional hypothesis (Field 2009; Vaus & Silva 2003).
The result shows that all the variables are in the predicted direction. CPP, GRI, ISO, ln_netassets are statistically significant but leverage is not statistically significant. Adjusted R-square value is 0.413 which implies that a 41.3% variation in quality of VED can be explained by the independent variables of this model. Based on the F stat values, this study finds that the regression model statistically significantly predicts the dependent variable, VED quality.
Overall, the result portrayed in the Table 6.8 provides statistical evidence that carbon pricing policy has an impact on the quality of VED, which supports our hypothesis that organisations operating in carbon pricing countries have higher quality VED than organisations in non-carbon pricing countries. Results also show that organisations adopting GRI guidelines for reporting have higher quality VED compared to the organisations which do not adopt GRI guidelines. So, the hypothesis of this study, that organisations following GRI guidelines for reporting have higher quality of voluntary environmental disclosures, is also supported. If the organisations certify to ISO 14001, it also enhances the quality of VED, which also supports the hypothesis of this study that organisations having certification to ISO 14001 standards have higher quality voluntary environmental disclosures. Size of the organisations is also a determinant for VED. The negative coefficient of leverage reveals that there is an
84 inverse relation between leverage and quality of VED, but leverage is not statistically significant in this model.
Table 6.8 Regression results
Variable Expected sign Regression
Constant -0.019 (0.152)
CPP + 0.073*
(0.036)
GRI + 0.280**
(0.040)
ISO + 0.118**
(0.040) ln_netassets + 0.010*
(0.006)
Leverage + -0.021
(0.067)
Adjusted R-square 0.413
Model F stat 23.076 P value 0.000
** Statistically significant at the 0.01 level.
* Statistically significant at the 0.05 level.
6.5 Conclusion After conducting the statistical analysis, this study finds that there is a positive relationship between quantity of VED and CPP, GRI, ISO and ln_netassets, but this study finds no significant relationship of leverage with VED_Quantity. On the other hand this study also finds positive impact of CPP, GRI, CPP and ln_netassets on the quality of VED. This study finds no statistical significant relationship of leverage with
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VED_Quality. The discussion on the analysis and findings of these statistical results will be discussed on the following chapter.
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Chapter Seven: Discussion and Conclusion
7.1 Introduction The purpose of the study was to investigate whether there is any indirect impact or informal impact or pressure of carbon pricing at the national level on the voluntary environmental disclosures of electricity generating companies. This study also investigated the impact of non-government guidance on the VED of selected companies. This chapter provides a discussion on the findings derived from the statistical results of previous chapter along with the implication of this study for the existing theoretical domain and voluntary environmental disclosures. Research limitations are then presented followed by the directions for further potential research in this area.
7.2 Discussion In the previous chapter this study examined the factors influencing the quantity and quality of voluntary environmental disclosures of electricity generating companies around the world. Drawing upon the isomorphism branch of institutional theory, it is argued that electricity companies operating in carbon pricing countries produce more voluntary environmental disclosures in terms of quantity and quality. Here carbon pricing mechanism is considered as an institutional setting. This study also included some other non-government guidance such as GRI or ISO to oversee the influence of these factors on the VED of those companies. Various company specific factors, such as leverage or size of the organisations, were also considered to identify the VED practices of selected companies. Some were found as significant and some were found as not significant enough to influence the VED.
Carbon pricing mechanism is an environmental policy recognised internationally. Currently there is very limited information exposing the relation between carbon pricing mechanisms and VED (Bae Choi, Lee & Psaros 2013; Tang & Luo 2012). In most cases, previous researchers focused on the companies from emissions trading scheme (ETS) and more specifically EU countries. This study has considered the impact of carbon pricing (carbon tax and ETS) on VED. As such, this study also broadens the scope of research in the VED arena in the light of two key and
87 renowned theoretical perspectives underpinning this research: the isomorphism branch of institutional theory and institutional legitimacy theory.
As an environmental policy, carbon pricing mechanisms have a positive impact on voluntary environmental disclosures. Tang and Luo (2012) find that any changes in the environmental policy by the government of a country influences the overall environmental disclosure practices of companies of that country. This influence can be explained from the perspective of institutional theory, as environmental policy- related changes by the government shape management decision, as an outcome of social pressure (Bebbington & Larrinaga-Gonzalez 2008). On the other hand organisations discharge these pressures through voluntary disclosures, to legitimise their actions. So, here an institutional perspective of carbon price and VED provides complementary explanations for organisations‟ legitimation (Bansal & Roth 2000) .
According to the correlation statistics, this study finds that both quantity of VED and quality of VED are positively correlated with the CPP policy. This implies that companies from carbon pricing countries are not only providing more environmental information but also more quality information. A study by Comyns (2016) conducted on global oil and gas companies reveals that the EU emissions trading scheme leads to a better quality of environmental reporting. Alrazi (2012) also suggests that companies operating in countries committed toward environmental protection (e. g. carbon pricing or ETS-applying countries) disclose higher quality environmental information voluntarily. When the government imposes a price on carbon emissions (either in the form of carbon tax on the carbon content, e.g. tax on fossil fuel, or as an emissions trading scheme), it reduces the carbon emissions at least to some extent. Sterner (2007) finds that although fuel demand is growing, it would have been much higher in the absence of fuel taxes (or carbon tax). So it actually contributes to better environmental performance, and there is plenty of evidence that better environment performers disclose more information voluntarily (Al-Tuwaijri, Christensen & Hughes 2004; Borghei, Leung & Guthrie 2016; Braam et al. 2016; Clarkson, Peter M et al. 2008; Deswanto & Siregar 2018; Giannarakis, Zafeiriou & Sariannidis 2017; Silva‐Gao 2012), although this logical deduction is not conclusive. There are some other studies that find an inverse relation or insignificant relation between environment performance and VED (Brammer & Pavelin 2008; Dobbs & Staden 2016; Dragomir 2010; Freedman & Jaggi 2004). Moreover, according to the
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Carbon Pricing Leadership Coalition (2016, p. 01) “Pricing carbon is one of the most powerful and efficient strategies that governments and businesses are using to respond to climate change. The principle is simple: put a price on carbon pollution to account for the impacts of greenhouse gas (GHG) emissions that stem from the economic choices made by both producers and consumers. An accurate price signal for carbon will spur businesses, investors and individual consumers to switch their preferences from emissions-intensive industries, processes and practices to low- carbon, climate resilient alternatives.” So, carbon price creates an awareness among the stakeholders of society, which may lead to better environmental disclosures (Gallego-Álvarez et al. 2017).
Carbon price puts an indirect pressure, as soft law, on the management of the organisation to disclose information voluntarily. Here government policy acts as a direct pressure for carbon emissions but an indirect pressure for disclosures. In the light of the EU ETS scheme, Comyns (2016) shows that institutional pressure influences carbon GHG reporting practices; this institutional pressure is an indirect pressure from the state. As Meyer and Rowan (1977) described, a rationalised state expands its dominance on organisational structure (inclusive of reporting), which influences directly or indirectly the institutionalisation of state-imposed policy within the operational jurisdiction of the management. Through this VED, organisations always try to gain/repair their organizational legitimacy (Deegan 2009).
According to institutional legitimacy theory, a carbon pricing mechanism (or broadly the government of a relevant country) puts pressure on organisation to reduce their emissions; subsequently organisations respond to this pressure through VED. These VED act as a means for organisations to reassure or alter the perceptions of public or governments (Berthelot & Robert 2011; Gonzalez-Gonzalez & Zamora Ramírez 2016; Peng, Sun & Luo 2015). Here, this study finds a positive impact of carbon pricing on the overall VED rather than merely on the emissions disclosures, as argued by the findings of Tang and Luo (2012). They also find that government carbon regulation policies have an impact on the overall environmental disclosures of companies.
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Consistent with the findings of Islam, Jain and Thomson (2016), Rankin, Windsor and Wahyuni (2011) and Comyns (2016) who found a positive association between GRI and VED, this study also finds that electricity generating companies which adopt GRI guidelines have more detailed environmental reporting. Organisations around the world are following the global reporting initiative (GRI) guidelines voluntarily for its specific guidelines, and the number of companies following GRI guidelines is increasing day by day, as there is a perception that GRI reporting is effective (GRI 2008, 2017). If organisations prepare reports according to the GRI guidelines, a separate disclosure index is attached at the end of the report, which makes information more specific and easy to find for the users. Since electricity generating companies represent a sensitive industry, due to the nature of its business which is always under public scrutiny, GRI guidelines help more companies to present their information in a more organised fashion. Many previous studies have assessed the effectiveness of GRI guidelines for reporting, and they find GRI to be effective and more commonly applied guidelines for sustainability reporting (Brown, de Jong & Levy 2009; Chen, Tang & Feldmann 2015; Marimon et al. 2012).
This study also finds that the adoption of GRI ensures different types of information (e.g. emissions, waste management or even energy intensity etc.) along with quality of information (e. g. what was the target for reduction of energy or carbon intensity and how much that target was achieved or not). Comyns (2016) found significant influence of GRI adoption on the quantity of GHG reporting, using a content analysis based on word count. Kolk (2003) also mentioned that if organisations use GRI guidelines as a basis of reporting, organisations are expected to publish at least some information of a higher quality.
The reason behind the increased quantity or quality of VED due to the adoption of GRI can be explained within the institutional theoretical framework. Research based on the neo-institutional theory place emphasis on the isomorphic forces that lead organisations to adopt similar policies for reporting (Maguire, Hardy & Lawrence 2004). As a non-government guidance providing body, GRI always put normative pressure on organisations (Perez-Batres, Miller & Pisani 2010). Because of this normative pressure stemming from the voluntary reporting guidelines of GRI, organisations increase the quantity and quality of VED worldwide in the same way,
90 or in an isomorphic manner. This institutionalisation process of GRI guidelines contributes to legitimacy for organisations, which is more imperative for such an environment-sensitive industry, namely the electricity generating sector. Sometimes organisations also use GRI guidelines as a means of symbolic legitimacy (Hahn & Lülfs 2014) where some studies also find the GRI to be a tool for combatting reputational risks of management, and for achieving institutional legitimacy (Gherardi, Guthrie & Farneti 2014; Legendre & Coderre 2013).
ISO is another form of non-government guidance for voluntary environmental reporting. Drawing on institutional theory, as in previous studies (King, Lenox & Terlaak 2005; Prakash 1999), this study finds a positive association between VED and ISO 14001, which is based on the institutional theory as well. Although ISO 14001 is a framework for the Environmental Management system (EMS), this study suggests that certification to ISO 14001 not only guides for effective EMS but also facilitates external voluntary environmental reporting (See for example: Burström von Malmborg 2002; Patten, Dennis M. & Crampton 2004). Furthermore, certification to ISO 14001 works as a source of information for GRI reporting (Mitchell & Hill 2009). Once the ISO standards are institutionalised within an organisation either, as result of external pressure or voluntarily, they strengthen the organisational governance system. Since information on external reports is prepared by the internal parties (e.g. management), if there is no proper internal organisational system, it may affect the credibility or reliability of the information (Rankin, Windsor & Wahyuni 2011). This may hang a huge question mark on the quality of the disclosures.
The ISO-certified EMS of an organisation enhances the stakeholders‟ confidence in the information provided voluntarily, which also shapes the public perception toward the organisational efforts to strengthen environmental protection. As a result, certification to ISO 14001 increases the legitimacy of organisational activities (Bansal & Hunter 2003; Iatridis & Kesidou 2018). Although there is worldwide acceptance of ISO, this study finds that only 55.7% of selected companies certify to ISO 14001. So, almost 45% companies do not have an ISO-certified EMS. These organisations seem not to be concerned with enhancing legitimacy through ISO 14001. Treacy et al. (2016) also argued that organisations may not certify to ISO 14001 in order to enhance legitimacy.
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Findings of this study also suggest that size of the organisation matters for the quantity and quality of VED, which is consistent with the domain of previous studies (Bae Choi, Lee & Psaros 2013; Clarkson, Peter M et al. 2008; Ieng Chu, Chatterjee & Brown 2012; Liu et al. 2017; Peng, Sun & Luo 2015; Qiu, Shaukat & Tharyan 2016; Reid & Toffel 2009). Rankin, Windsor and Wahyuni (2011) mention that large organisations are always under scrutiny from different financial or other regulatory stakeholders. Such scrutiny instigates the organisations to disclose more environmental information voluntarily. In most cases, large organisations are also more visible politically, which also puts pressure on the organisations to produce more quality VED (Prado‐lorenzo, Gallego-Álvarez & García-Sánchez 2009). Above all, large organisations have more economic resources to manage everything, which is also an important factor in more information disclosure.
This study does not find any significant impact of leverage on the quality of VED, which is consistent with Oyelere, Laswad and Fisher (2003), Gul and Leung (2004), Prado-Lorenzo et al. (2009), Rankin, Windsor and Wahyuni (2011), Stanny and Ely (2008). On the other hand, Jong-Seo (1999), Xiao, Yang and Chow (2004), Jaggi and Lee (2002), Borghei and Leung (2013) and Clarkson, Peter M et al. (2008) identify a significant positive relationship with voluntary disclosures. Alciatore and Dee (2006) also support the relationship between high leverage firms and higher levels of environmental disclosures.
7.3 Conclusion The electricity generating sector has been under intense observation by different stakeholders of society, due to its nature of operations. There is a growing trend of renewable energy or solar energy worldwide, but still, most electricity companies rely on fossil fuel as a source of energy. Due to the destructive nature of fossil fuel such studies face a lot of pressure from regulatory bodies as well as environmentalists. As a result, this sector is moving slowly toward renewable energy, but fossil fuel still comprises the major portion of the fuel mix.
Carbon pricing mechanisms are a direct regulation for carbon emissions, but this study finds that if organisations operate in a carbon pricing regions, these carbon pricing mechanisms affect the voluntary environmental reporting of the
92 organisations. So, there is an indirect impact of a country‟s carbon pricing strategy on voluntary environmental disclosures, which is defined as the informal pressure of institutions (as already mentioned earlier, carbon pricing exists in institutional setting). Due to this indirect institutional pressure, VED tend to be similar in terms of quantity and quality according to the isomorphism branch of institutional theory. So, this carbon pricing strategy already adopted by different countries, cities or regions, also helps the different stakeholders by making more environmental information available. Now, reporting is not only a mechanism of discharging accountability but also a tool for managing impressions and maintaining a relationship with the stakeholders, because they not only require access to financial information but also to environmental information for their decision making (Skouloudis, Evangelinos & Kourmousis 2009). On the way to managing impressions and relationships with the stakeholders, VED acts as tool for gaining, maintaining or retaining an organisation‟s legitimacy (Deegan 2009) where the urge for this institutional legitimacy comes from the influence of government carbon pricing policy.
According to this study, carbon pricing instigates management to publish more VED on one hand. On the other hand, due to voluntary environmental disclosures, stakeholders have more access to the information on impacts of the organisations on the environment and society as a whole. So, it serves the purpose of both internal and external stakeholders. As non-government guidance: GRI and ISO also affect organisational VED positively, and these mechanisms are also adopted voluntarily, although the GRI consists of reporting guidelines and ISO 14001 is concerned with EMS.
So based on the findings, this study suggests that world politicians should be more proactive regarding the enactment of carbon pricing on those countries which have not implemented carbon pricing mechanisms at the national level. This will rein in environmental pollutions by corporate citizens and improve their VED practices as well. At the same time, organisations may incorporate into their overall considerations the voluntary measures of environmental reporting or environmental performance, such as GRI or ISO, which indeed have a positive impact on organisations.
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Last of all, this study provides us with a comprehensive rather than exhaustive picture of the impact of carbon pricing on voluntary environmental disclosures, along with the impact of other two non-government guides: GRI and ISO.
7.4 Contributions of the research This thesis offers several contributions to the literature on voluntary environmental disclosures and theoretical perspectives underpinning this research. In relation to the theoretical implication, this study shows the indirect impact of institutional theory on voluntary environmental disclosures. Most previous researchers showed the direct impact of societal institutions on the information provided by organisations (Duff 2016; Gallego-Álvarez et al. 2017; Haque & Deegan 2009; Luo, Lan & Tang 2012; Odera, Scott & Gow 2016; Rankin, Windsor & Wahyuni 2011; Sarkis, Zhu & Lai 2011; Tang & Luo 2012; Welbeck 2017; Zeng et al. 2012). Considering organisations as part of a larger social context, previous studies revealed how institutional bodies or environmental policies of countries directly affect an organisation‟s managerial decisions (Alberici & Querci 2016; Gallego-Álvarez et al. 2017; Haque & Deegan 2009). But this study investigated the indirect or informal impact of a country‟s institutional setting on its voluntary environmental disclosures.
Scott (1987, p. 499) mentioned that “…institutional theory tends to shift attention away from such environmental elements as the market, the location of resources and customers, and the number and power of competitors, in order to call attention to the role of other types of actors, such as the state and professional associations, that shape organisational life both directly by imposing constraints and requirements and indirectly by creating and promulgating new rational myths.” In respect to the coercive isomorphism branch of institutional theory, institutional pressures may be exerted on organisations either formally or informally (DiMaggio & Powell 1983). This study is examines the practical implication of the indirect rational impact of government environmental policy on the VED of the electricity companies, as carbon pricing is a regulation for the carbon emissions of individual companies. This study investigated how this policy for carbon emissions affects overall voluntary environmental disclosures of a particular industry.
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Moreover, this study shows how legitimacy theory can be applied as an extension of institutional theory in VED literature. Most prior studies used solely legitimacy theory to explain the motives of voluntary environmental disclosures (Deegan 2009; Deegan & Blomquist 2006; Gray, Kouhy & Lavers 1995b; Guthrie & Parker 1989; Hahn & Lülfs 2014; Nurhayati et al. 2016). When organisational voluntary environmental reporting policy is influenced by government policy for carbon emissions, organisations discharge their responsibility by publishing more voluntary disclosures to legitimise their actions. So, this study shows how institutional legitimacy can be an extension of the coercive isomorphism branch of institutional theory in voluntary environmental disclosure literature.
Another contribution of this study to the existing literature of VED is that this study, to the best knowledge of the researcher, is the first to investigate the impact of carbon pricing on the VED of electricity generating companies from multiple countries. Previous literature mainly investigated the voluntary emissions reporting practice of companies from ETS countries, mostly focusing on the EU ETS scheme (Alrazi, De Villiers & Van Staden 2016; Bae Choi, Lee & Psaros 2013; Bebbington & Larrinaga- Gonzalez 2008; Kashyap 2016; Tang & Luo 2012). But this study covers not only ETS but also another major form of carbon pricing mechanism: carbon tax.
This study also contributes to the existing VED literature in that this study examines the impact of carbon pricing on the overall environmental disclosures rather than on the emissions disclosures. The argument is that state carbon mitigation policies have an impact on the overall environmental disclosures of companies (Tang & Luo 2012), as they increase social and environmental awareness among the various stakeholders of society.
7.5 Research limitations Like other research studies, this study has limitations. It is a multi-country analysis which includes electricity generating companies from selected countries. This study analysed the reports available in English on the websites of respective companies. This study finds some reports in different languages other than English, mostly for companies from Eastern European countries. Most of the countries are carbon
95 pricing countries. As a result, the score for companies from carbon pricing countries lacks completeness as this study targets the whole population.
This study focuses on a single year. The results reported in this study may not portray a true picture, or may not be representative of other years. During the data collection this study also observes that there are some companies which publish standalone sustainability reports irregularly or bi-annually. If the standalone reports are published other than for the year 2015, say 2014 or 2016, a company may disclose less information in the annual report for 2015 compared to those for 2014 or 2016. Ultimately, information derived from the report of 2015 may be unrepresentative. Finally, the interpretation of a company motive for environmental reporting (institutional influence or legitimisation) is merely based on disclosures. This may not reflect the true picture. According to prior literature there are other factors that motivate an organisation to provide VED. Moreover, this analysis is based on data availability, which is always an inherent limitation of disclosure literature as it does not reflect the true picture portrayed by statistical findings.
7.6 Suggestions for future research Limitations discussed above give a direction for future research. Studies can be undertaken for multiple industries. Samples can be segregated into carbon tax countries, ETS countries, or both carbon tax and ETS countries. Another major scope for researchers is to conduct a longitudinal study, taking multiple years‟ data so that the trend of disclosures can be analysed.
Finally, this study has found a positive impact of carbon pricing, GRI adoption and ISO 14001 standards adoption on the quantity and quality of VED of electricity generating companies around the world. Legitimacy and institutional theoretical lenses have been used to provide a comprehensive multi-country understanding of the state of the electricity generating sector's voluntary environmental reporting and related factors.
96
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Appendix A (List of Companies) 41. Electricity Generating Public Company 1. 4 Energy Invest S.A. Limited 2. A2A Company 42. Electricity Of Việt Nam 3. Acciona S.A. 43. Electricity Supply Board (ESB) 4. Adria Wind Power 44. Electrocentrale Bucuresti S.A. 5. AES Eletropuro 45. Electroperu S.A. 6. Akershus Energi 46. Elektrik Üretim S.A. 7. Al Samra Power Generating Company 47. En+ Group Ltd. Limited 48. ENBW Plc 8. Alpiq AG. 49. Endesa S.A. 9. Alupar Investimento S.A. 50. Enea S.A. 10. Arendals Fossekompani 51. Eneco Holding NV 11. Arise 52. Enel Generación Perú 12. Axpo Holding AG. 53. Enel Russia 13. Azienda Elettrica Ticinese 54. Enel Spa 14. Banpu Public Company Limited 55. Enemalta Plc 15. BKW Energie AG 56. Energias De Portugal 16. BLCP Power Limited 57. ENERGO-PRO 17. Centrais Elétricas De Santa Catarina 58. Energy Company Of Ukraine S.A. 59. Enersis Chile 18. Central Electricity Generating Company 60. Eneva S.A. 19. Centrica Plc 61. Engie 20. CEZ Group 62. Engie Energia Chile S.A. 21. China Datang Corporation (CDT) 63. ENKA İnşaat Ve Sanayi Ş.A. 22. China Shenhua Energy Company 64. Enovos Luxembourg S.A. Limited 65. Eskom 23. Chubu Electric Power Co.,Inc. 66. Etrion S.A. 24. Cogenpower PLC 67. EVN 25. Colbún S.A. 68. Federal Electricity Commission 26. Companhia Energética De Minas 69. Fortum Gerais S.A. 70. Galp Energia 27. Companhia Energética De São Paulo 71. Genesis Energy 28. Companhia Paranaense De Energia 72. Gita Renewable Energy Limited 29. Compañia General De Electricidad S.A. 73. Greentech Energy Systems S.A. 30. CPFL Energia S.A. 74. Guernsey Electricity Limited 31. Dolomiti Energia 75. Gujarat Industries Power Co. Ltd. 32. Donbasenergo 76. Haugaland Kraft 33. Dong Energy 77. Hera Spa 34. Drax Group PLC 78. Hidroelectrica 35. DTEK Group 79. Hokkaido Electric Power Co.,Inc. 36. E.ON SE 80. Holding Slovenske Elektrarne 37. EDF Energy 81. Hrvatska Elektroprivreda 38. Eesti Energia 82. Huadian Power International Inc. 39. Electracia S.A. 83. Huaneng Power International Inc. 40. Electricity Authority Cyprus 84. Iberdrola, S.A. 85. Indonesia Power Company
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86. Inter RAO UES 130. Scatec Solar 87. J Power 131. Sepco Electric Power Company 88. Jersey Electricity Company 132. Shenzhen Energy Co., Ltd. 89. Kazakhstan Electricity Grid Operating 133. Shikoku Electric Power Co.,Inc. Company 134. Slovenské Elektrárne 90. Korea Electric Power Corporation 135. SSE PLC 91. Korea Hydro & Nuclear Power 136. Statkraft 92. Kraftwerke Oberhasli AG 137. Stredoslovenska Energetika 93. Kyūshū Electric Power Company 138. T Plus 94. Latvenergo 139. Taiwan Power Company 95. Lenhydroproject Inc. 140. TAQA Morocco S.A. 96. Lietuvos Energija 141. Tauron Group 97. Light S.A. 142. Tavanir Company 98. Manaus Energia 143. Tekfen Holding 99. Memorias Emgesa Inglés 144. TGK-3 100. Mercury Mighty River 145. The Chugoku Electric Power Co., Inc. 101. Meridian Energy 146. The Japan Atomic Power Co., Inc. 102. MVM Group 147. The Kansai Electric Power Co., Inc. 103. Narvik Energi 148. The Okinawa Electric Power Co., Inc. 104. National Electric Power Company 149. The China Three Gorges Corporation 105. Natsionalna Elektricheska Kompania 150. Tohoku Electric Power Co., Inc. 106. NHPC Limited 151. Tokyo Electric Power Co., Inc. 107. NLC India Limited 152. Unipro PJSC 108. Nord-Trøndelag Elektrisitetsverk 153. Vardar AS 109. North Eastern Electric Power Corp. 154. Vattenfall Ltd. 155. Verbund AG 110. NTPC Limited 156. Viridian Group 111. OGK-2 157. Votorantim Energia 112. OJSC Novosibirskenergo 158. YU Energy 113. On Power Co. 114. OPGC Limited 115. PGE Polska Energetyczna S.A. 116. PJB Company 117. PLN Company 118. Pohjolan Voima 119. Posco Energy Co. Ltd. 120. Public Power Corporation 121. Repower AG 122. Rurelec PLC Ltd 123. Rushydro 124. RUSHYDRO PJSC 125. RWE AG 126. Sahacogen Public Company Ltd. 127. Salten Kraftsamband AS 128. Santee Cooper 129. Saras S.P.A
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Appendix B
Structure of assessment tool for VED quantity measurement Assessment criteria Score range Materials Max. 2 Q1 Materials used by weight or volume 0-1 Q2 Percentage of materials used that are recycled input materials 0-1 Energy Max. 5 Q3 Energy consumption within the organisation 0-1 Q4 Energy consumption outside of the organisation 0-1 Q5 Energy intensity 0-1 Q6 Reduction of energy consumption 0-1 Q7 Reductions in energy requirements of products and services 0-1 Water Max. 3 Q8 Total water withdrawal by source 0-1 Q9 Water sources significantly affected by withdrawal of water 0-1 Q10 Percentage and total volume of water recycled and reused 0-1 Biodiversity Max. 2 Q11 Operational sites owned, leased, managed in, or adjacent to 0-1 protected areas and areas of high biodiversity value outside protected areas Q12 Description of significant impacts of activities, products, and 0-1 services on biodiversity in protected areas and areas of high biodiversity value outside protected areas Emissions Max. 6 Q13 Direct greenhouse gas (GHG) emissions 0-1 Q14 Energy indirect greenhouse gas (GHG) emissions 0-1 Q15 Greenhouse gas (GHG) emissions intensity 0-1 Q16 Reduction of greenhouse gas (GHG) emissions 0-1 Q17 Emissions of ozone-depleting substances (ODS) 0-1
Q18 NOX, SOX, and other significant air 0-1 Effluents and Waste Max. 3 Q19 Total water discharge by quality and destination 0-1
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Q20 Total weight of waste by type and disposal method 0-1 Q21 Total number and volume of significant spills 0-1
Appendix C
Structure of assessment tool for VED quality measurement Assessment criteria Score range Relevance of information R1 Sustainability The report presents the business strategy which 0-1 strategy relates to the aspects of sustainable development (Score “0” for non-disclosure and “1” for disclosure) R2 Key The report contains: 0-3 stakeholders - identification of organisation’s stakeholders, - their expectations and - a way of engagement with individual groups (Score “0” for non-disclosure of any item, “1” for any one item and “2” for any two items and “3” for disclosure of all items) R3 Targets The report presents: 0-3 - targets for the future - targets set in the previous reporting period - the level of their achievements (Score “0” for non-disclosure of any item, “1” for any one item and “2” for any two items and “3” for disclosure of all items) R4 Trends over The report contains indicators shown over several 0-2 time reporting periods indicating: - the way direction of change and - ensuring their comparability (Score “0” for non-disclosure of any item, “1” for any one item and “2” for disclosure of all items)
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R5 Environment The report contains quantitative information 0-1 al concerning organization’s environmental performance Performance achieved (Score “0” for non-disclosure and “1” for disclosure) R9 Improvement The report describes improvement activities 0-2 actions undertaken by the organisation to meet the objectives of sustainable development: - programs to increase resource efficiency and - reduction of emission (Score “0” for non-disclosure of any item, “1” for any one item and “2” for disclosure of all items) R10 Integration The report contains information confirming that the 0-1 with business aspects of sustainable development are included in processes the decision making process and implemented in the basic processes (purchasing/ sales/ marketing/ production) (Score “0” for non-disclosure and “1” for disclosure) R11 Executive The report provides a concise and balanced overview 0-1 summary of key information and indicators from the reporting period. (Score “0” for non-disclosure and “1” for disclosure) Credibility of information C1 Readability The report has a logical structure, uses a graphical 0-1 presentation of the data, drawings, and explanations where required or uses other tools to help navigate through the document. (Score “0” for non-disclosure and “1” for disclosure) C2 Basic Report mentions: 0-4 reporting - The reporting period principles - Scope and limitations of the report - entity is defined in the report - target audience (Score “0” for non-disclosure of any item , “1” for
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any one item, “2” for any two items and “3” for any three items and “4” for disclosure of all items) C3 Quality of The report describes: 0-4 data - the processes procedures of collection - aggregation of data - transformation of data and - determines the source of the data (Score “0” for non-disclosure of any item , “1” for any one item, “2” for any two items and “3” for any three items and “4” for disclosure of all items) C4 Stakeholder The report contains a description of: 0-2 dialogue - the stakeholders’ dialogue outcomes - the results of this dialogue in relation to aspects of sustainable development (surveys, consultations, focus groups, round tables, programs, engagement) (Score “0” for non-disclosure of any item, “1” for any one item and “2” for disclosure of all items) C5 Feedback The report contains a mechanism that allows 0-1 feedback process (contact point for suggestions or questions, hotline, e-mail, reply card, questionnaire) (Score “0” for non-disclosure and “1” for disclosure) C6 Independent The report contains a statement of independent body 0-1 verification attesting the authenticity of data presented in the report as well as proposals for future improvements (Score “0” for non-disclosure and “1” for disclosure) *** Items are separated by “-” sign (if any).
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