Review of Literature

Chapter II

2.1 Introduction The literature review is the critical appraisal of the existing research that is significant to the proposed research work. A literature review is a description of the existing literature relevant to a particular area of enquiry. It provides an overview of prevailing theories and hypotheses, methods and methodologies which are appropriate and useful for the research work taken. In fact, literature review tries to evaluate and establish relationships between different works so that key themes emerge. It may be purely descriptive or it may provide a critical assessment of the literature in a particular field, stating where the weaknesses and gaps are and contrasting the views of particular authors, or raising questions. The proposed study on environmental accounting and reporting has attracted attention of academicians and researchers who have written a number of articles and papers on several aspects on this important issue. But an in- depth and comprehensive study on the performance of Indian companies on this subject is found very limited. Most of the researches and articles are found stereotyped. Accordingly, an assessment has been made about research works conducted and articles written on different aspects of environmental accounting and reporting practices in the following paragraphs. 2.2 Literature Review For the benefit of discussion, the existing literature review has been made in two perspectives: I. Literature Review: Global Perspective II. Literature Review: Indian Perspective Research works already done in the field are the main source of Literature Review. Besides this, quite a good number of articles are found to have been written on various aspects of environmental issues by academicians, researchers and others. Some of these are purely theoretical based on text books and experience, and others are based on empirical studies and secondary data. Moreover, there are also some reports on this topic made by various recognized authority and agency which have been also taken into consideration. 2.2.1 Literature Review: Global Perspective The studies available in this respect have been divided into two groups according to their inherent nature. The first group is related to Social Accounting and Reporting and other is Environmental Accounting and Reporting which have been discussed in the following paragraphs. 2.2.1-1 Corporate Social Accounting and Reporting Corporate social responsibility (CSR) refers to the voluntary integration of social and environmental concerns in the business daily operations and their interaction with business stakeholders. The concept of corporate social responsibility is strongly connected with the ‘Triple Bottom Line’ approach advocated by John Elkinghon in 1997. ‘Triple Bottom Line’ is a frame work for measuring and reporting corporate performance against economic, social and environmental parameters. The idea behind this concept is that for an organization to be sustainable, it must financially secure, it must minimize

2 its negative environmental impact and it must act in conformity with social expectation. So it is clear that CSR is an integral part of sustainable development concept. In this context, it can be said that social responsibilities and environmental responsibilities are not separate thing, rather they are two sides of same coin, i, e, the responsible business. On this background social accounting and reporting has been taken to the purview of this particular literature survey. Though environmental accounting is of recent origin but Adam Smith first developed the concept of social accounting in 1876. Karl Marx and Frederic Engels in 1844 and Pigue in 1920 focused on the divergence of social and private costs. Joan Robinson in 1960 pointed out the social costs of industrial activities. Epstein and Elias (1975) analyzed social responsibility reporting aspect in their study in 47 corporations. They observed that environmental quality, product safety, educational aid, equal employment opportunity, charitable donation, employee benefits and various community support programme were the important areas which commonly appeared in the annual reports.

Epstein, Flamholtz and McDonough (1976) in their paper, synthesize the major approaches followed in the U.S.A. to measure and report the impact of an organization on society. The paper also highlighted future research needs in this subject. They found that accounting researchers, management consultants and corporate executives produced diverse views in the measurement models and reporting frameworks that have been developed for implementation and institutionalization of corporate social accounting.

Dierkes and Preston (1977) in their paper, viewed a number of attempts to develop formal corporate policy statements and accounting-reporting

3 procedures dealing with protection of the physical environment and abatement of specific pollution problems. The authors also presented and illustrated specific implementation proposal with the help of data obtained from several field studies conducted by them.

Ingram (1978) carried out a study on Fortune five hundred companies. He examined the information contents of voluntary social responsibility disclosure practices in the annual report of the companies under study. The study considered five significant variables for social information disclosure, namely, environmental, fair business practices, community involvement, personnel and product. He experienced that there was a wide variety across the firms regarding the information content of the voluntary social responsibility disclosure. Spicer (1978) conducted a study to examine whether there was any relationship between the size, profitability, risk, price-earning ratio of a company and its social performance. The study showed that moderate and strong association exists between the investment value of common shares of the company and its social performance. It was also interestingly observed that companies with higher profitability, larger size, lower total risk factor, lower systematic risk and higher price-earning ratio produced better pollution control record. Brockhoff (1979) analyzed the status of social reporting by major German companies in 1973. He reviewed stakeholder’s pressures for social reporting, variety of existing reporting mechanisms, extent of reporting on internal relations, research and development and external impacts. Schreuder (1979) in his paper outlined the developments in the area of corporate social reporting in Germany. In this paper, the author examined

4 various corporate social reports published up to date. The trade union reactions in this connection were also highlighted. Trotman (1979) also conducted a similar study on social responsibility disclosure practices of 100 largest listed Australian companies which were ranked according to their market capitalization. He had taken into account five major variables, namely, environment, energy, human resources, product and community involvement. He observed that Australian companies disclosed different types of social information along with ‘Social Accounts’ in their annual reports. Hein (1981) carried out a study in the Netherlands to probe her reactions of the employees towards the social reports published by the companies. The results were based on the analysis of 1347 completely posted questionnaires and 240 additional interviews with the employees of five corporations. The study revealed that respondents used the social reports more widely than that was expected. Coupland (2006) attempted to analyze web-based financial and CSR reports of five banking group namely Lloyds/TSB, the Royal Bank of Scotland, HSBC, Barclays and the Co-operative Bank. “It is argued that, rather than the production of stand-alone reports signaling the growing importance of CSR considerations, in this context they function to peripheralise the information. Although it is evident that organizations are beginning to articulate a stance with regard to CSR, as increasingly more attention is being paid to social and environmental issues, simple articulation is no longer sufficient”1. Kamla (2007) carried out a detailed study on social accounting and reporting practices in the Arab countries namely: Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, United Arab Emirates (UAE), Syria, Jordan and

5 Egypt of the Middle East. The study attempted to investigate critically the actuality and potentiality of social accounting and reporting practices in the Middle East from postcolonial view. The study concluded that "social accounting manifestations in the Arab Middle East are largely orientated towards repressive/counter radical positions of accounting”2.

2.2.1-2 Corporate Environmental Accounting and Reporting

There are so many international studies in this subject. Some of these studies have been discussed below:

Norman Pope(1971) conducted a study of reporting environmental information in annual reports. The study covered five heaviest polluting industries namely chemicals, energy, forestry packing materials and utilities. He analyzed 125 annual reports of 1969 and 136 reports of 1970. He observed that most of the companies disclosed information on ecology in the President’s letter to stockholders. However 18 companies (6.90%) disclosed this information in the financial statement or in the allied footnotes.

Niskala and Pretes (1995) analysed changes in corporate environmental reporting practices in Finland in the past five years. The study also tried to analyse the willingness of firms to disclose environmental information. They conducted the study on seventy-five largest Finnish firms in the most environmentally sensitive industries between 1987 and 1992. The study showed significant changes in environmental reporting practices between 1987 and 1992. In 1992, nearly fifty percent firms under study provided environmental information in their annual reports in comparison to a slightly more than 25% firms in 1987. Most of these disclosures were in qualitative rather than in quantitative or financial form. The authors observed a

6 significant environmentalism on corporate environmental accounting and reporting practices and policies.

Fekrat, Inclan and Petroni(1996) conducted a study on 168 companies in six industries of 18 countries to examine the scope and accuracy of environmental disclosures in corporate annual reports. They also tried to provide a modest test of the voluntary disclosure hypothesis in the context of environmental disclosures. The evaluation showed a significant variation in environmental disclosures making no clear support for the voluntary disclosure hypothesis. There was also no apparent relationship between environmental disclosure and environmental performance.

Gamble, Hsu, Jackson and Tollerson (1996) conducted a study on 276 companies from nine industries of 27 countries for the years 1989-1991 to investigate disclosures of environmental information in their annual reports. The study revealed that there was a statistically significant difference between the 1989 and 1990 in respect of individual and overall disclosures of environmental information. On the contrary, there was a statistically significant negative difference between the 1990 and 1991 in individual and overall disclosures. The study also revealed that among the countries United States provided the highest percentage of companies reporting environmental information. British-American accounting model is followed by most of the companies for environmental disclosure.

Jaggi and Zhao (1996) examined the perceptions of managers and professional accountants of Hong Kong about environmental performance and environmental disclosures. The study showed that though the manager respondent stressed importance on environmental protection but they were reluctant in actual environmental disclosures in their annual reports. So far

7 as professional accountants were concerned, they had no strong outlook for environmental disclosures. The authors concluded that “environmental disclosures on a voluntary basis have not encouraged managers to disclose voluntary information”.3

Bewley and Li (2000) studied the annual reports of manufacturing firms with the objective of examining the associated factors of environmental disclosures in Canada. The study examined the level to which voluntary disclosure theory could clarify the general and financial environmental information. The study revealed that firms with more news media coverage of their environmental exposure, higher pollution propensity, and more political exposure concentrated more on general environmental disclosure. Gray and Bebbington (2000) tried to present the current state of the art in environmental accounting research through the ‘managerialist’ lens and illustrated the essence of the problem through the reporting of a new analysis of data from an international study of accounting, sustainability and transnational corporations. The authors call for more explicit examination of the implicit assumptions held in accounting research generally and environmental accounting research in particular. According to them, accounting is contributing to environmental degradation rather than environmental protection. Hughes, Sander and Reier (2000) tried to find out whether there was any relationship between environmental disclosure and environmental performances. They selected twenty companies in U.S. for the purpose of study. Of them ten were leaders and ten were laggards in environmental performance as identified by Fortune. By comparing the disclosure of these two groups of companies the study revealed that laggards made significantly

8 more mandatory disclosures than leaders; however, there was little difference in the voluntary disclosures of the two groups. The disclosure of companies belongs to leaders group were positively correlated between the mandatory and voluntary sections; whereas almost no correlation was noticed within the laggards. On the basis of the environmental disclosures the companies could be properly classified into leaders and laggards Moneva and Llena (2000) examined the annual reports of seventy large environmentally sensitive Spanish companies operating in different industries to analyse the evolution of environmental reporting practices during 1992-1994 on the basis of stakeholder theory. The main conclusions of the study were as follows: “The environmental reporting of these sample companies have a fundamentally narrative character, although there has been an increase in both quantitative and financial reporting, as well as in the number of companies that are reporting. The factors analysed do not allow us to detect significant differences, except for whether the parent company is foreign-based. As a consequence, there is no significant evidence that during the period analyzed the environmental reporting behaviour of Spanish company management has tried to satisfy their stakeholders.”4

Epstein (2003) in his paper reviewed the progress of environmental and social aspect in both academic literatures and corporate practices over the last forty years. He found that although social and environmental reporting had been increased to a great extent but the quality of the disclosures had not been improved sufficiently. He also observed that integration of social and environmental impacts into management decisions was very negligible. The paper stressed the needs to increase the integration of social and environmental impacts into management decisions for the improvement of

9 both the internal reporting and external disclosures and accountability of companies.

Holland and Foo (2003) made a comparative study of current corporate environmental annual reports of UK and US. The study revealed that environmental activities of companies depend on elements of the legal and regulatory framework of a country, which influence environmental performance and it’s reporting in annual reports. The authors examined theoretical considerations to establish whether the types of disclosure arising from regulatory pressures, demonstrate that accountability exists in the disclosure of environmental information, and to what extent the disclosure discharges the organisation's accountability to the users of such information.

Patten and Crampton (2003) examined the corporate web page environmental disclosure of U.S. firms which is considered as a potentially powerful tool for disclosing environmental information and increasing corporate accountability. The study showed that corporate web pages come out as additional and non-redundant environmental information beyond what is provided in the annual reports. The findings showed that “focus of Internet disclosure may be more on corporate attempts at legitimation than on moving toward greater corporate accountability".5

Siv Nyquist (2003) in his web paper has compared the legislations in Denmark, Norway and Sweden regarding statutory disclosure of environmental information. He has observed that these three countries have large similarities concerning accounting legislation and standards. However, Denmark prefers a different way to force firms to disclose their environmental performance in comparing with Norway and Sweden. Separate green accounts are maintained by Danish firms, while Norwegian

10 and Swedish firms are bound to disclose environmental information in their administrative report. The Norwegian and Swedish firms' information mainly deal with the financial consequences of environmental impact. On the other hand, Norwegian legislation is also found wider than the Swedish legislation. The Danish firms mainly address society in general. The comparison pointed out the needs for further analysis.

Campbell (2004) analyzed the annual reports of UK-based companies in five sectors between 1974 and 2000 to assess the volume of voluntary environmental disclosures. They observed an overall increase in disclosure volume over the period with a marked upturn in the late 1980s. He also discovered a positive association between environmental disclosure and the structural vulnerability of the five sectors to environmental liability and/or criticism.

Tuwaijri, Christensen, Hughes (2004) analyzed the interrelations among environmental disclosure, environmental performance and economic performance based on the argument that management's overall strategy affects each of these corporate responsibilities. The study revealed that good environmental performance was significantly associated with good economic performance and also with more extensive quantifiable environmental disclosures.

Walden and Stagliano (2004) studied 53 companies of four major industry groups in U.S. to give insight into environmental disclosure themes in the financial as well as non-financial parts of corporate annual reports. The study also tried to find out the relationship between these disclosure themes and environmental performance. The analysis revealed that only environmental expenditures and contingencies were the subject matter of the

11 disclosure in financial part of the annual report. On the other hand, non- financial part of the annual report contained mainly information about pollution abatement and various other environmental data. The study also showed that there was little relationship between environmental disclosures and environmental performance.

Epstein and Wisner (2005) examined the relationship between management control systems and structures with environmental compliance and applicability of management control theory in Mexican industry. This study also empirically tested the effectiveness of management control systems and structures in Mexican industry and focused on management control and strategy implementation in a developing economy like Mexico. The result indicated that “success in compliance with environmental regulations is significantly associated with degree of management commitment, planning, belief systems, measurement systems, and rewards.”6

Freedman and Jaggi (2005) studied disclosures on pollution and greenhouse gases emission by firms domiciled in countries that have ratify the Kyoto Protocol compared to others. The study covered the annual reports, environmental reports, and websites reports of 120 largest public firms from the chemical, oil and gas, energy, and motor vehicles and casualty insurance industries.

The study revealed:

(i) firms from countries that ratified the Protocol achieved higher disclosure indexes as compared to firms in other countries; (ii) larger firms disclosed more detailed pollution information.; (iii) multinational firms operated in countries that ratified the protocol but had their home offices in other countries that did not

12 ratify the protocol provided lower disclosures; (iv) lack of consistency in disclosure was not likely to be helpful in informing shareholders about the social responsibility of their investments. The study of Lee and Hutchison (2005) classified and presented the outcome of prior studies on disclosure of environmental information addressing the forces which affect the decision to disclose environmental information, and the need for future research. The categories used include: (1) laws and regulations, (2) legitimacy, public pressure, and publicity, (3) firm/industry characteristics, (4) rational cost-benefit analysis, and (5) cultural forces and attitudes. Bose (2006) examined the present environmental accounting and reporting practices of Petrobangla and its companies in Bangladesh. The study showed that during 1998-99 and 1999-2000 only 45.45% companies, during 2000-01, 63.63% companies and during 2001-02 and 2002-03, 81.81% of companies of Petrobangla disclosed environmental information. Thus the figures showed an upward trend in the disclosure of environmental information by Petrobangla Companies. The study also highlighted that Petrobangla companies disclosed only qualitative, descriptive and positive information without any quantification and negative information. Most of the Petrobangla companies recognized environmental issues regarding protection of the environment, pollution control, planting of trees and other matters. However, they did not give any importance regarding waste generation, conservation of energy, water wastage and recycling of waste etc. This study visualized that “the Petrobangla has already given much effort in the field of environmental protection. However, the current accounting system does not reflect such efforts for its stakeholders.”7

13 Brammer and Pavelin(2006) conducted a study on a sample of large UK companies to assess the patterns in voluntary environmental disclosures. The analysis differentiated between the decision regarding voluntary environmental disclosure and decisions relating to the quality of such disclosures. They also examined that how the above decisions were influenced by firm and industry characteristics. They observed that larger, less indebted companies with dispersed ownership characteristics would likely to give significantly more importance on voluntary environmental disclosures. The other important finding was that the quality of disclosures was positively associated with firm’s size and corporate environmental impact. They found significant cross-sector variation in the determinants of both the participation and quality decisions.

Karim, Lacina and Rutledge (2006) have examined factors that are associated with the level of a firm's environmental disclosure in the footnotes of its annual report and its 10-K report filed with the Securities and Exchange Commission. The findings have pointed out that firm with higher foreign concentration are associated with less environmental disclosure because they are under higher vigilance from other countries and the international community. Moreover, to some extent, higher earnings volatility is also associated with less environmental disclosure. The firms with a more volatile earnings process are less willing to disclose potential environmental costs and obligations, because additional expenditures have an adverse impact during low-earnings periods. Clarkson, Li, Richardson and Vasvari (2007) reviewed the relationship between corporate environmental performance and the level of environmental disclosures. They revisited this relation by testing competing

14 predictions from economics based and socio-political theories of voluntary disclosure using a more precise research design. They conducted a study on a sample of 191 firms from the five most polluting industries in the US. The study revealed a positive association between environmental performance and the level of discretionary environmental disclosures. The result was also consistent with the predictions of the economics disclosure theory but inconsistent with the negative association predicted by socio-political theories.

Staden and Hooks (2007) in their research tried to determine whether there was an association between companies which were environmentally responsive according to an independent ranking and the quality and extent of their disclosures regarding their environmental impacts. They used proactive approach in achieving legitimacy to develop the expectation that legitimacy theory could be used to predict a positive association between environmental responsiveness and disclosure. They studied the quality and extent of what was being reported and then matched this assessment with an independent assessment of each company's environmental responsiveness. They found significant positive correlations between the independent ranking and the rankings based on the quality and extent of disclosure. The results imply that companies’ environmental disclosures would reflect their environmental responsiveness.

Sumiani, Haslinda and Lehman (2007) carried on a research work on the top 50 Malaysian public companies from various industries listed on the Bursa Malaysia in the financial year 2003. The study tried to highlight the current state of Malaysian environmental reporting practices. They evaluated corporate strategic practices about voluntary environmental reporting

15 systems of Malaysian corporations. The study revealed that the level of extent of environmental information in Malaysian corporate annual reports was rather low. They only reported environmental information either in general or in qualitative terms. In addition to that, the most reported information was the general statement of the existence of an environmental management system in their organization, while the most reported environmental disclosure was their environment policies that the organization had. This study also concluded that ISO certification had some level of influence towards voluntary environmental reporting. Moore (2008) examined the impact of public sector reforms on environmental accounting procedures. The study analyzed the different reforms in the 1980s and 1990s which influenced the accounting for environmental expenditure in the public sector. The analysis showed that a little benefit was notice from environmental accounting procedures in the company with efficiency being recognized as the main driver for accounting.

2.2.2 Literature Review: Indian Perspective In India, very few studies have been conducted in this specific area of social and environmental accounting and reporting practices so far. Some of the Indian studies have been presented below. 2.2.2-1 Corporate Social Accounting and Reporting Singh (1983) evaluated the extent of social responsibility disclosure practices in annual reports of public sector enterprises. He also tried to examine the relationship between various organizational correlates with disclosure of social responsibility. The correlates were age, total assets, net sales, rate of return, and earnings margin of the company and the nature of industry. He found that correlates like age and net sales had no significant

16 impact on social disclosure practices. But size of social assets had a strong positive impact on the disclosure of social responsibility information. On the other hand, rate of return had no such influence on social responsibility disclosure practices; however earnings margin had a significant impact on such disclosure. He also got a highly positive result in case of nature of industry. Chander (1989) undertook a study to analyze the quantum of social accounting disclosure in the annual reports of selected public as well as private sector companies. He also examined the extent of correlation between corporate social accounting and size of the company in terms of net tangible assets and sales. The study covered the annual reports of twenty- four private companies and twenty public sector companies for the year 1996-97. He observed that corporate social accounting by public sector companies was significantly better than private sector companies and the quantum of net tangible assets did have a significant impact on corporate social accounting disclosure. Porwal and Sharma (1991) conducted a study to analyze the status of social reporting practices in India. For the purpose of study, thirty public sector companies and one hundred forty seven private sector companies had been selected. They considered forty-seven items with assigned weights for measuring social responsibility of the companies according to their significance. These items were also grouped into five classes namely environment, community, energy, human resources and the product. Some important observations of the study were: (i) Almost half of the companies under study disclosed some sort of social responsibility disclosure in their annual reports.

17 (ii)Almost all the sample companies under public sector disclosed some disclosure regarding their social responsibility in their annual report in comparing with to thirty-five percent only of their private sector counterpart. (iii) The places wherein environmental disclosures were made were mainly directors’ report and notes/schedules in financial statement. (iv)Maximum numbers of companies disclosed information regarding human resource development. Only forty-six percent companies made disclosure regarding their community involvement. Whereas only eleven percent disclosed information relate to environmental protection. (v) The bigger the companies the larger the environmental information provided by them in their annual report irrespective of their belonging to private or public sector. Naser, Noor and Pramanik (2001) in their article focused the new areas of corporate social reporting which help in social welfare and improving effectiveness. They observed that the existing corporate social reporting practices were insufficient and much more development was needed. Verma, Saxena and Kaushik (2002) made a study for measuring social performance of nineteen public enterprises of India. They observed that public sector enterprises in oil and petroleum industry made an effective and sincere effort for appraisal of social performance. It has been also observed that Board of Directors carried on a significant responsibility to report social performance in annual reports. Most of the social performance reports were made annually. Director’s report and Chairman’s report had been taken as most popular and convenient medium for making disclosure on social activities and descriptive mode had been considered as popular mode. Agarwal (2003) has made a comparative study to evaluate the divergent social responsibility disclosure practices in both private as well as public

18 sector enterprises. In this respect, ten companies from each group which had been awarded for best-presented accounts by ICAI were taken into consideration. The study considered twenty-six significant variables for social information disclosure viz. energy conservation, environmental effects, industrial safety, community welfare scheme etc. In respect of environmental effects, the researcher found “information regarding environmental pollution, ecological disturbance to the nearly area, plantation and pollution (air, water) control techniques adopted were disclosed by public sector companies. Sixty percent of the companies have disclosed this information in the descriptive manner in their annual reports. One of the public sector companies has even disclosed the information with regard to the damage to the environment due to their industrial activities. There are only two companies in the private sector which disclosed much information in descriptive manner.”8 Dave(2003) carried out an analytical study on one hundred Indian public and private sector companies to find whether they were conducting social audit or not. He pointed out that there were the example that Tata Iron and Steel Company and Unit Trust in India who had conducted a social audit, but there was no example of Indian company who had conducted environment audit. Only a few maintained social accounting and environment accounting. However, moderate number of companies made social and environmental reporting in their annual reports. Reddy and Reddy (2003) conducted a case study on Chennai Petrolium Corporation Ltd. for measuring social performance. The main objective of the study was to measure the contribution of CPCL for social progress in terms of social benefits provided to the employees, community and the general public. The study revealed that the performance of CPCL in respect

19 of its social responsibility was notable as the value of social benefits to different stakeholders was increasing over the study period. Social benefits provided to the community in terms of environmental improvement were also continuously increasing over time period. Ghosh (2004) has described the need and objectives of social accounting and reporting techniques with special reference to Indian scenario. He has experienced that social accounting and reporting is still in a transitional stage and no standard norms are setup till now. Ghosh (2004) carried on a study on one hundred thirty-four corporations in India in order to find out the present status of social accounting for the year 1998-99.The study showed that the performance of Indian Corporation was very poor in respect of value added statement, environmental accounting and community development accounting. However, better performance was noted in the case of statutory reporting of employees’ remuneration as Part II of Schedule VI to the Companies Act, 1956. Particularly, the part of findings for which we are concerned in our study i.e. environmental accounting was very poor. One noticeable feature in this study was that the companies which were doing environmental accounting are all manufacturers except a hotel. It had used environmental friendly wind energy for its operation. Another distinctive outcome of the study was that the companies performing and reporting community development activities were mostly manufacturers. In one ward, the overall performance of the companies under the above mentioned study in regard to social accounting was not at all hopeful. Kumar, Kaur and Srivastava (2004) have conducted a case study to know the state of social reporting in NTPC. The study has revealed that NTPC serves the society very well. It gives great importance in discharging its overall social responsibilities to the community and the society at large.

20 They observed “It is suggested that more and more research should be undertaken to develop measurement techniques of environmental cost and benefits so that companies may account and report them more suitably. There is need for developing expertise in this area. A multidisciplinary team of experts should be formed to carry out environment audit thoroughly and properly.”9 Rao and Gupta (2004) in their attempt examined the present status of social responsibility disclosure practices in public sector enterprises in India. They also examined the extent of association of different company characters like age, turnover, and return on investment, total assets and capital employed with social responsibility disclosure index of public sector undertakings. They concluded that the social disclosure practices of public sector undertakings appeared to be fairly satisfactory. Size of the company which was measured by capital employed, total assets and turnover of the company was closely associated with disclosure. And maximum disclosure was statutory in nature. However, age and return on investment of company had not any significant impact on social disclosure practice in public sector undertakings. 2.2.2-2 Corporate Environmental Accounting and Reporting Several studies on Corporate Environmental Accounting and Reporting have been also conducted in India. Some of these have been presented below. Sengupta (1988) attempted to examine the current trend in pollution control information disclosure of Indian and foreign companies whose operations caused pollution. He found that the information regarding their pollution control measures reported in any one of the following six places of annual reports namely Chairman’s statement, President’s letter to stockholders, Director’s Report, notes to financial statements, social accounts and the

21 supplements to annual reports. The information disclosed in annual reports was mostly descriptive and quantitative in nature. The companies generally disclosed descriptive information in the Director’s report. Shankaranayana (1999) in his article, attempted to discuss the importance of eco-accounting for strategic managerial decision. In this respect, eco- accounting methodology for recording and reporting through Eco Balance Sheet has been discussed and how managerial decision may be based on eco-accounting has been presented. Mazi (2000) explained the hindrances to response to environmentalism. The mechanics of environmental reporting have also been discussed in his paper titled: Environmental Accounting and Reporting- An Emerging Issue. He commented “In the absence of specific guidelines regarding its accounting and reporting, some accounting approaches devised by the UN in the SEEA have been presented, and also the treatment of different elements of environmental costs in accounts is shown. Till now, in India, neither company law nor accounting standards prescribe any accounting and disclosure techniques for environmental matters in the corporate financial statements and as a result of this only a few companies have voluntary disclosed EI and that too only descriptive and positive information. The extent of such disclosure is not that encouraging,”10 Ansari (2001) analyzed the proper framework for appropriate norms of accounting and reporting about the environment. In this context, he discussed environmental costs and liabilities with its recognition and measurement in accounting briefly. International and Indian scene of environmental accounting and reporting had been also discussed in this article. The author concluded that the corporate environmental accounting and reporting was misleading in the absence of any International and/or

22 Indian Accounting Standard on this issue and therefore an effective corporate environmental accounting and reporting system should be introduced. Ghosh(2001) in a case study, attempted to focus on disclosure requirements and disclosure practices of environmental information in corporate annual reports in India. She observed that the sample companies were complying with the requirements of regulatory disclosure together with voluntary environmental information in number of cases. Banerjee (2002) in his paper, dealt with issues like environmental management, its contribution to profitable operation of a firm and its competitive advantage. Baura and Gautam (2002) carried out a study on environmental accounting and disclosure practices of twenty-five companies for the period 2001-02. The analysis showed that only forty-eight percent companies provided information concerning environment in their annual report. The study also showed the that forty percent companies gave information for pollution control, twenty percent for environmental hazards, twelve percent for raw material conservation, sixteen percent for waste management of water and its disposal, and all the companies under study disclosed information for energy conservation and protection of surroundings in their annual reports. Padhan and Bal (2002) conducted a study on eighty executives of different industries to know their opinion regarding environmental reporting under the provisions of various legislation in India. The study showed that the corporate world was fully aware about the environmental issues and the requirements of environmental reporting. The corporate executives also expressed their positive attitude regarding environmental reporting. However, this view did not reflected in their annual reports. And most of the

23 reporting was very poor having a little information about environmental impact. Sanjeevaiah (2002) in his paper, tried to draw attention on some specific issues on environmental accounting. He concluded “Environmental accounting would receive a substantial boost if an international consensus could be reached on methodology”.11 In the study of Shankaranayana and Upadhyay (2002), it was noted that all the companies under study were complying with the requirements of various acts such as submitting environmental statements, and information regarding pollution control and environmental conservation, but they rarely appeared in their annual reports. Verma (2002) conducted a study on six companies, namely, Gujrat Ambuja Cement, Hindustan Lever Ltd., Dr. Rrddy’s Lab, Ranbaxy laboratories, Balsmapur Chini Mills and Shaw Wallace Group for the year 2001-2002. The study revealed that all the companies made policy statement in Director’s report only, they seldom gave any quantitative information on expenditures incurred on target set and attained in respect of natural resource. Patra (2003) tried to examine environmental accounting and reporting practices by Indian corporate sector as a tool of environmental management with a special reference to a case study of TISCO. The author observed “Most of the companies are not still aware of environmental issues and found proper place in the Directors’ Report for providing environmental information to their stakeholders as there is no compulsion for it.”12 Cheema and Singh (2004) in their study, attempted to examine stakeholder’s influence on the status of environmental disclosure in the Indian companies.

24 The specific objectives of the study conducted by Cheema and Singh were: i) To study how far the status of environmental disclosure is associated with company size. ii) To study the creditors’ influence on the status of environmental disclosure. iii) To study the foreign influence on the above status. The findings of their study were: i) Big size companies for having more stakeholders’ environmental accommodation and reporting practices are much better than the small size companies. ii) Companies for having foreign customers are more conscious about environmental disclosure than others. iii) Creditors have no influence on corporate environmental disclosure. The above researchers pointed out the followings: (i)The big companies for having huge pressure from their large size of stakeholders are much more responsible in regard to environmental performance. (ii)The companies for having foreign customers who are more environmental conscious are more concern about their environmentally disclosure. (iii)Indian creditors are more concern about economic performance than environmental performance of companies. Eilbert and Parker (1973), Spicer (1978), Watts and Simmerman (1978) Trotman and Bradley (1981), Deegan and Gordon (1996) also argued that the corporate environmental reporting is highly correlated with the company size.

25 Garg and Sinha (2004) in their article mentioned the importance of environmental disclosure for better environmental performance. They also pointed out the growth in environmental reporting in last two decades which was not satisfactory in terms of quality and quantity. They concluded with some proposed framework for corporate level environmental reporting in India. They observed that corporate environmental reporting practices were still at initial stage. They significantly noted that “Companies in the developed countries do not want stringent environmental disclosure norms in place of developing countries. This is because a stringent norm may affect their business.”13 Oza (2004) made an attempt “(i) to emphasize the need to be environmentally concerned by corporate citizens for sustainable development of economy and business firms (ii) the present status in terms of legal requirements for environmental accounting and practices, and (iii) highlight the potential of management accounting to play positive role for sustainable development” in his work. He concluded, “Environmental accountability by corporate citizens needs change in mindset of people within the organization- the top management, the key managers, the supervisory staff, front line and floor people. It needs to be proactive rather than reactive in fulfilling the environmental accountability to attain the ultimate aim of sustainable development.”14 Deo (2005) in her article examined the relationship of environmental and economic performance of enterprises for adopting the environmental management system. She tried to explain how environmental accounting could be integrated into business decision making like cost allocation, capital budgeting, and product design. She concluded that “the green accounting though helps in many managerial decision makings for a

26 sustainable survival, growth and prosperity still it faces lots of problems like lack of support information, specialized personnel and absence of professional accounting model.”15 Oza (2005) in their paper discussed the needs for consciousness of corporate citizens in respect of environmental imbalances, how environmental accounting could help environmental accountability, the present status of environment allied information and practices, and what to be done for log term profitability after facing the challenges of environmental accountability. They observed, “environmental accountability by corporate citizens needs change in mindset of people within the organization, the top management, the key managers, the supervisory staff and front line and floor people. It needs to be proactive rather than reactive in fulfilling the environmental accountability to attain the ultimate aim of sustainable development.”16 Munipalle (2005) intended to judge the types of costs that were incurred for environmental matters and the accounting and reporting practices followed by the corporate sector. The main objective of the study was to examine the use of economic instruments for environmental protection and provided an alternative model in place of existing command and control instrument being followed in India. She also scrutinized the existing policy support, institutional and infrastructural facilities to combat pollution. She observed, “…….environmental taxes are more effective than environmental accounting in terms of governance……..We advocate a mix of instruments in the form of legislation, regulation, incentives, voluntary agreements, educational programmes and awareness campaigns. The use of economic instruments especially environmental taxes seems to be the preferred choice among several countries across the globe especially over the past decades.”17

27 Shukla (2005) in his study on the disclosure of environmental information of ninety-two private sector companies showed that only thirty-seven percent of the companies reported environmental information in their annual reports. Among the companies petro products, fertilizers, engineering and pharmaceuticals were relatively more responsive with environmental reporting. Another interesting feature which cropped up from the study was that the medium size companies were more liable for environmental reporting than small as well as large size companies. As far as reporting mode was concerned descriptive statement in directors’ report was the most common mode of the environmental reporting. Singh (2005) in his study tried to examine the status of voluntary environmental disclosure of top 200 Indian companies. The main objectives of the study were to: (i) study the level of voluntary environmental disclosure on twenty environmental disclosure variables of Indian companies. (ii) study the length of environmental disclosure. (iii) study the place of such disclosure. The findings of the study were: i) The level of disclosure in respect of those variables which may have adverse impact on the goodwill of the companies was very poor. But in case of other disclosure variables the disclosure status of companies is more or less satisfactory. ii) The company wise status of voluntary disclosure was very discouraging. iii) Highly polluting industries were more responsible in disclosing environmental information than low polluting industries. On the whole the voluntary environmental disclosure in Indian companies was very poor, inaccurate and was not self explanatory.

28 Singh pointed out some reasons behind the poor environmental disclosure practices: Firstly, disclosure practices in India are mainly voluntary in nature. Secondly, this is a costly affair Thirdly, lack of awareness and commitment is noticed in case of Indian companies about social responsibility of the business. Fourthly, the environmental performance of the Indian companies is very poor. And lastly, enforcement of the environmental protection law is also very poor. Chauhan(2006) in his article attempted to describe the issue of environmental indicators which could be used by the corporate sector to judge the sustainable management of environment for better disclosure of facts related to environment. Mohanty (2006) in his article portrayed some important issues of environmental accounting like international environment movement, framework for thinking about the natural environment, social cost and benefit analysis methodology, shadow pricing, the greening of organization, scope of environmental accounting, its advantages and steps taken by Government of India etc. Parkash (2006) conducted a study of eighty-five Indian companies which showed that environmental accounting of Indian companies had been made mainly on a voluntary basis with a positive manner. As far as industry wise disclosure was concerned the oil and petroleum sector and steel and engineering sector both had ranked highest in environmental reporting i.e. 60% followed by cement 57%, fertilizers, chemicals and pharmaceuticals 50% and consumer products 37%, whereas textile 29%, power and

29 electricity 25% and shipping and airways 20%. No environmental reporting was found in case of health sector. She observed, “In India, there is no legal compulsion on the corporate’s part to account and report for the environmental issues that’s why companies are disclosing environmental matters on a voluntary basis with in a positive manner only. Thus, there is need to popularize the benefits of environmental reporting among the industrial’s community.”18 Murthy and Abeysekera (2008) studied the social and environmental reporting practices of Indian software companies through the eye of legitimacy theory. They conducted their study against the backdrop of India’s economic transformation since independence. They focused on corporate social reporting (CSR) of Indian software firms relating to the complex issues of human resources and community development and found support for legitimisation motives for CSR by Indian software firms. 2.2.2-3 Other Environmental Related Literatures Loli and Gahi (2002) focused on auditor’s role in corporate environmental audit and disclosure in India in their article. They noted that environmental reporting in India was still in childhood stage. In most of the annual reports at least a brief statement in this regard in Director”s Report was also absent. Banerjee(2002-2004) in his paper, emphasized the need for introducing a scientific environmental management system. The author suggested an Integrated Environmental Management Approach for the corporate citizens for sustainable economic development. Chatterjee (2002-2004) conducted a study on environmental management and people’s perception about the pollution control measures taken by the industries. The study covered ten factories in Kolkata Metropolitan area. From the study the author opined that the existing pollution control

30 measures were not sufficient, other alternatives would be considered. The industries should change their existing technology and use cleaner one. The role of community regarding pollution control is also very important. They can perform a major role in this respect if they are equipped with proper education and involvement. Debnath (2003) has pointed out how environmental pollution leads to social degradation and to cope up with this problem. He advocated some specific duties to be performed. He noted “the antipollution acts such as Air Protection Act, Water Protection Act, etc. are not sufficient to cope up with the problems of environmental pollution.”19 Ghosh and Chakroborty (2005) in their article have attempted to draw attention of the alarming situation of environmental degradation which is the result of growing hazardous industrialization which threatens the sustainability of future generation. The different methodological approach of environmental accounting, which is the means of measuring and reporting the economic impact of environmental pollution in different levels, has been discussed. The author cited “sustainability can only be measured if all assets are included. Including material capital as part of country’s wealth is an important step toward better measure of sustainability.”20 Sarkar(2005) in his article, depicted to highlight the effect of green house gas emission on environment and focused on economic implication in the perspective of global emission level. He also observed the international agreements on green house gas regulation as well as valuation approaches in the perspective of global climate change as environmental threats. He concluded “Since developed countries have economic, technical and institutional capacity to cope with the problem, involving developing countries in reduction of emissions level on more regular and automatic

31 basis is much desirable for controlling future green house gas emissions in the atmosphere.”21 Aramvalarthan and Sarkar (2006) have described in his article what Carbon Emission Trading is and how India could capitalize this opportunity which ultimately helps environmental management. 2.2.3. Reports and Guidelines on Environmental Accounting and Reporting Besides the above studies, there are a number of reports and guidelines by different agencies and regulatory bodies which are relevant and very useful for our study. “Various professional accounting bodies and/ or standard setting authorities have come up, requiring corporations to implement environmental management system including its verification provision together with the evaluation of reporting provisions. Some of these are Eco- Management and Audit Scheme (EMAS, 1995); the International Organization for Standardization (ISO 14000, 1996); the Social Accountability Standard (SA 8000, 1998) issued by the Council of Economic Priorities Accreditation Agency (CEPAA); THE Copenhagen Charter’ (CC, 1999); the Institute of Social and Ethical Accountability ‘AA1000’ social accounting standard (ISEA, 1999); and the Global Reporting Initiative ‘Sustainability Repotting Guidelines’ (GRI, 2000)." 22 Some of these reports have been considered in the following discussion. National Association of Accountants(USA) Committee on accounting for corporate social performance in its report(1974) has described the different aspect of social performance and identified four major areas of social performance namely (i) Community development, (ii) Human resources, (iii) Physical resources and environmental contributions, (iv) Product or service contribution.

32 Govt. of India formed Sacher Committee (1978) to consider and report on the changes those were necessary in the form of structure of Companies Act and MRTP Act. Committee observed that, “the company must behave and function as a responsible member of the society just like any other individual. It cannot shun moral values nor can it ignore actual compulsion. The real need is for some focus of the accountability on the part of management not being limited to shareholder only, proper utilization of resources for the benefit of others also take care of profit is necessary, but is not primary objective……….the company must accepts its obligations to be socially responsible and to for the larger benefit of he community.”23 The committee has suggested adequate disclosure regarding social activities of the companies for the shareholders and other interested parties.

In December 1993, the UN statistical office, which was working on the project in collaboration with Carsten Stahmer, issued a handbook on integrated environmental and economic accounting providing detailed guidelines under the title, ‘The Handbook of Integrated Environmental Economic Accounting’. This has been subsequently named System of Integrated Environmental and Economic Accounting (SEEA).24 This handbook was the outcome of the discussion on environmental- economic accounting in international workshops organized by UNEP and the World Bank. This discussion on concepts and methods of environmental-economic accounting did not able to come any final conclusion and the handbook was issued as an interim report.

In 2001, UNSD and UNEP published the Handbook of National Accounting: Integrated Environmental and Economic Accounting - An Operational Manual. This handbook reflected the on-going discussion on

33 environmental accounting since the publication of the SEEA in 1993 and the experiences in developed and developing countries. It provides a step-by- step guidance on how to implement the more practical modules of the SEEA and elaborates the uses of integrated environmental and economic accounting in policy-making.

In 2002 (first published in 1998), UNCTAD made a revise guidance manual with the help of ISAR, CICA, ACCA and World Bank on ‘Accounting and Financial Reporting for Environmental Cost and Liabilities’ to inform or give guidance on environmental accounting issues and identify best practices that may be considered by national standard setters in the development of their own accounting standards, rules and regulations. In 2004, UNCTAD and ISAR published ‘A Manual for the Preparers and Users of Eco-efficiency Indicator’ with the objective to describe the method that enterprises can use to provide environmental performance as well as financial performance in systematic and consistent manner. The manual helped enterprises to give information on their Eco-efficiency Performance for the five generic environmental issues namely water use, energy use, global worming contributions, ozone depleting substances and waste.

In 1997, the Statistical Commission requested the London Group on Environmental Accounting to undertake a revision of SEEA. In 2003, the United Nations, the European Commission, the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD) and the World Bank issued, on the recommendation of the Statistical Commission, the final draft of Integrated Environmental and Economic Accounting 2003 (SEEA- 2003). It was recognized in the report that although the substantial

34 development in the area of environmental accounting presented in the revised SEEA, still there has been a wide scope of methodological and practical work in this field. The London Group opined that sharing country experience would continue to be a valuable way to advance theory and practice of environmental accounting.

2.3. Research Gap

From the preceding literature review made, it is evident that in the last decade, pressure from environmentalists, social groups and scientists compelled the corporate world to realize that that they had a role to play to save the mother earth. The role of business in society is shifting dramatically. Corporate social responsibility and corporate environmental responsibility became two major decision areas of corporate management. Various frameworks of environmental management and reporting emerged in different corners of the world. But till today corporate environmental performance in a comprehensive form has not been dealt with seriously. Considering this research gap, an attempt has been made in this study to evaluate environmental performance of Indian companies on a total comprehensive basis.

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