Advances in Environmental Accounting & Management: Volume 2

Since the publication of the first volume in this series in 2000, there have been advances as well as retreats in the areas of both environmental performance and environmental disclosures. The Kyoto Protocol will become reality if 55 nations and the industrialized nations that produce at least 55% of the world’s output of carbon dioxide ratify the treaty. With the European Union’s ratification in 2002 and with Russia and Canada poised to ratify the treaty, the Kyoto Protocol is expected to become effective shortly. Even without the treaty being in effect, the EU countries have instituted a carbon dioxide trading scheme to limit the emission of greenhouse gases. These endeavors constitute progress toward making the contents of the Kyoto Protocol effective. In the U.S., the Bush administration’s choice of ignoring Kyoto and relaxing the requirements of certain environmental laws, however, constitute steps backwards in the battle to keep the planet clean and safe for future generations.

This paper provides a review of the progress made in both academic literature and corporate practice over the last forty years. Although there has been an increase in the number of companies producing social and environmental reports, the quality of the disclosures has not increased. Further, there is little evidence of progress in the integration of social and environmental impacts into management decisions. The paper provides suggestions on research needs to increase the integration of social and environmental impacts into management decisions and improve both the internal reporting and external disclosures and accountability of corporations.

Internet usage has exploded over the past decade and the medium is now being suggested as a potentially powerful tool for disclosing environmental information and increasing corporate accountability. This study, grounded in legitimacy theory, argues that such a view may be overly optimistic. Results of an analysis of both annual report and corporate web page environmental disclosures for a sample of 62 U.S. firms do indicate that corporate web pages appear to be adding at least some additional, non-redundant environmental information beyond what is provided in the annual reports. However, the relative lack of negative environmental disclosure on the web pages, in conjunction with the finding that differences in the level of positive/neutral environmental disclosure are associated with legitimacy variables suggests that the focus of Internet disclosure may be more on corporate attempts at legitimation than on moving toward greater corporate accountability.

This study examines whether the 38 electric utility firms owning the 110 plants targeted by the 1990 Clean Air Act (CAA) made adequate pollution disclosures to inform the stakeholders whether they met the pollution emission requirements of the Act by the start of its first phase. First, it evaluates pollution emissions of the targeted plans at the start of the first phase of the Act, i.e. 1995. Then, it evaluates whether pollution disclosures of these firms improved leading up to the first phase of the Act. This evaluation is done by comparing pollution disclosures for the start of the first phase, i.e. 1995, with the year the CAA was enacted, i.e. 1990. Pollution emission data are obtained from the Department of Energy and from the Environmental Protection Agency (EPA), and pollution disclosure data for 1989, 1990 and 1995 are obtained from the annual reports and 10Ks. A specifically designed content analysis technique is used to categorize pollution disclosures.

The pollution emissions results indicate that 1995 emissions are significantly lower than 1990 emissions. On an individual plant basis, the results, however, indicated that some plants reduced emissions while others used the permit system. The pollution disclosures results indicate that the 1995 pollution disclosure are comparatively lower than 1990 disclosures. The reason for high disclosures for 1990 could have been to protect the firms against potential legal cases if the requirements were not met. Once the fears of legal actions subsided, pollution disclosures were probably reduced. Lack of consistency and adequacy in pollution disclosures, however, make it difficult for stakeholders to properly evaluate their future risks.

One question of interest to several different groups is whether capital markets value environmental information and, if so, to what extent this information is incorporated into security valuation models. This paper addresses these questions by reporting on a survey of financial analysts and other influential members of the financial community with respect to their knowledge of various types of environmental information and their use of this information in security analysis. The results, while exploratory in nature, indicate a surprising lack of knowledge among the respondents concerning various organizations and reporting initiatives that are well known in environmental circles. A pervasive theme running through the results suggests that while most analysts do not explicitly incorporate environmental variables into their evaluation models, for those that do, their focus is on downside risk rather than upside potential. The results suggest that the reluctance to make widespread use of environmental information is due, at least partly, to concern with the reliability of the available information. This suggests that more work needs to be done to communicate relevant and reliable environmental performance information to the investment community.

The article hypothesizes that the level of corporate social responsibility affects both the informativeness of earnings and the magnitude of discretionary accounting accrual adjustments. The hypothesis exploits: (1) the positive relationship between corporate social responsibility and firms’ risk-return profiles; and (2) managers’ incentives in using discretionary accounting accrual adjustments. Results show that corporate social responsibility is positively associated with earnings’ explanatory power for returns and related to the magnitude of accounting accrual adjustments.

An understanding of disclosure themes used in annual reports can provide a foundation for improving communication of environmental information. The objective of this study is to provide insight into environmental disclosure themes that are used to provide management communication in the financial and non-financial sections of corporate annual reports. The study also explores the relationship between these disclosure themes and environmental performance. Findings from a sample of 53 U.S. companies in four major industry groups suggest that environmental disclosures in the financial section of annual reports contain information focused on expenditures and contingencies. Environmental disclosures in the non-financial section of the annual report mostly contain information about pollution abatement and various other environmental data. The highest perceived quality of disclosure is associated with environmental expenditures and contingencies. Other environmental information and pollution abatement disclosures appear to be of lower quality. These findings support previous studies showing that there is little relationship between environmental disclosures and environmental performance.