Environmental and Social Reporting After Incidents

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Environmental and
Social Reporting After
Incidents

The effect of the Deepwater Horizon oil spill



Andrew Maarschalkerweerd

01
-
03
-
2012


Student nr: 315863am

Supervisor: Dr. K.E.H. Maas

Erasmus University Rotterdam

Erasmus School
of Economics

Master Thesis Accounting, Auditing and Control






1


Acknowledgements


This Master thesis is the conclusion of the Master degree Accounting, Auditing and Control at
Erasmus University Rotterdam.
By means
of this

acknowledgements page

I would like to thank those
who assisted me either personally or academically.


I would like to thank both supervisors that ass
isted me in the writing process:

From the Erasmus
School of Economics,
Dr
. Karen
Maas;

From PwC, Maarten Hoornweg RA. Both

supe
rvisors

gave me
good
feedback

and ideas
that I could use in my master thesis.

I also would like to thank PwC
Rotterdam
for offering me a place to write my thesis and a chance to
get an insight in
to

what they do.


I also would like to thank

Dr. C.D. Knoops
, who supervised me in the first part of the writing process
during the Seminar Advanced Financial Accounting.
I also

would like to thank my fell
ow students for
giving feedback
on my paper

during this seminar
.


I would like to thank my family and friends f
or supporting me during my studies.


A special thanks to

Professor

Colbert
,

one of my lecturers during my exchange at Trinity College
Dublin,

who inspired me to continue my studies in the field of accountancy.



Rotte
rdam,
01
-
03
-
2012

Andrew Maarschalkerwee
rd



2


Executive Summary


In th
e last couple of decades

there has

b
een a large increase in the voluntary disclosure of
environmental information by companies.
In this thesis I
specific
ally

look at these disclosures
surrounding

incidents and how companies change their disclosures.

The main question that is posed in this thesis is “
What are the reasons for voluntary disclosure and
how do companies respond to certain incidents?
”.

This main question is then split up in
to

sub
-
quest
ions and these are discussed in several chapters.


Firstly

the
theoretical fundament of this thesis is set out.
Several frameworks used for voluntary
disclosure are discussed. These help companies to disclose information in a structured manner. This
helps
several stakeholders by making the information more comparable. Also

theories are discussed
that can explain voluntary disclosures by companies, of which legitimacy theory and media agenda
setting theory are the most important for the study conducted later
.


Legitimacy theory predicts that companies
,

when they are threatened to breach their ‘social contract’
with society
,

will disclose more information. Patten (1992) takes this theory even further and test
s

whether companies in the same industry as a threat
ened company
,

will increase their disclosures.
This
is

specific
ally

done for companies in the oil sector after the Exxon Valdez oil spill relating to their
environmental
disclosures. He finds that companies, although unrelated in a business sense with
Exxo
n, increase their disclosures.

Also companies that are larger (measured
in log

revenues) show a larger increase in their scores than
smaller companies. Companies that

are

partly responsible for the slow clean
-
up response
also showed
a larger increase in

their scores.

Media agenda setting theory predicts
that media convey the concerns of the public but also influence
the pub
lic opinion on certain topics, e
specially if they are far away from the public. Therefore
managers are also influenced by topics that

are discussed in the media.


I replicate
Patten’s

study by examining the disclosures of companies in the oil sector after the BP oil
spill in the Gulf of Mexic
o
, to see whether the relation still holds
.

I quantify the disclosures by means
of an environmen
tal disclosure index model as developed in Aerts and Cormier (2009) for the years
2009 and 2010 (before and after the incident). Firstly, I test the hypothesis that the disclosures
significantly increase and secondly, whether there is a difference when com
panies are larger and
whether there is a difference for US companies opposed to non
-
US companies.

I find that companies still disclose significantly more after an incident,
even if

they are not
responsible
for the

incident (
the
only

relation being

that the
y operate in the same environmental sensitive
industry).

When this information is split
-
up into economic (reactive, related to litigation) disclosures
and social (soft claims) I find that both are significant.

I cannot find any evidence that larger compani
es also show a larger increase in the scores of both
years, as Patten found in his study. This might be explained by how companies deal with
environmental disclosures today compared with the end of the 1980’s or beginning of the 1990’s.

I cannot find any e
vidence that US companies increase their
disclosure
to a larger extent than non
-
US
companies.
A reason for this could be that

all companies are large listed companies in the US and that
their historic location has become irrelevant.






3


Table of Contents


Acknowledgements

................................
................................
................................
................................

1

Executive Summary

................................
................................
................................
..............................

2

Table of Co
ntents
................................
................................
................................
................................
...

3

1. Introduction

................................
................................
................................
................................
.......

5

1.1 Topic introduction

................................
................................
................................
.........................

5

1.2 Topic and research question

................................
................................
................................
..........

5

1.3 Structure

................................
................................
................................
................................
........

6

2. Theories and methods behind this research

................................
................................
....................

8

2.1 Introduction

................................
................................
................................
................................
...

8

2.2 Social and environmental disclosures

................................
................................
...........................

8

2.3 The Global Reporting Initiative

................................
................................
................................
...

11

2.3.1 Reporting principles for defining content

................................
................................
.............

12

2.3.2 Reporting principles for defining

quality

................................
................................
.............

12

2.3.3 Reporting guidance for boundary setting

................................
................................
.............

12

2.3.4 Standard disclosure

................................
................................
................................
...............

13

2.3.5 Oil & gas sector supplement

................................
................................
................................
.

14

2.3.6 The future

................................
................................
................................
.............................

14

2.4 Other standards

................................
................................
................................
............................

14

2.4.1 AccountAbility framework

................................
................................
................................
...

14

2.4.2 ISO 14001

................................
................................
................................
.............................

15

2.4.3 ISO 26000

................................
................................
................................
.............................

15

2.5 Theories

................................
................................
................................
................................
.......

15

2.5.1 Political economy theories

................................
................................
................................
...

15

2.5.2 Media agenda setting theory

................................
................................
................................
.

17

2.5.3 Voluntary disclosure theory

................................
................................
................................
.

17

2.6 Models

................................
................................
................................
................................
.........

18

2.6.1 Measuring the quality of voluntary disclosures

................................
................................
....

18

2.6.2 Limitations

................................
................................
................................
............................

18

2.7 Research in relation to the theories

................................
................................
.............................

19

2.8 Conclusion

................................
................................
................................
................................
...

19

3. Literature review

................................
................................
................................
.............................

21

3.1 Introduction

................................
................................
................................
................................
.

21

3.2 General literature

................................
................................
................................
.........................

21

3.2.1 Capital market reactions

................................
................................
................................
.......

21

3.2.2 Characteristics of firms and countries

................................
................................
..................

22

3.2.3 Mandatory reporting

................................
................................
................................
.............

23

3.2.4 Different disclosures

................................
................................
................................
.............

23

3.3 Specific incidents

................................
................................
................................
........................

24

3.4 Environmental disclosure index models

................................
................................
......................

27

3.4.1 Financial disclosures

................................
................................
................................
............

27

3.4.2 Environmental disclosures

................................
................................
................................
....

27

3.4.3 Additional factors: litigation and monetary and non
-
monetary information

........................

30

3.4.4 Model for t
his study
................................
................................
................................
..............

30

3.5 Conclusion

................................
................................
................................
................................
...

31

4


4. The BP oil spill

................................
................................
................................
................................
.

32

4.1 Introduction

................................
................................
................................
................................
.

32

4.2 An overview

................................
................................
................................
................................

32

4.3 Responsibility

................................
................................
................................
..............................

34

4.4 Conclusion

................................
................................
................................
................................
...

34

5. Hypotheses development and research design

................................
................................
..............

36

5.1 Introduction

................................
................................
................................
................................
.

36

5.2 Hypotheses

................................
................................
................................
................................
..

36

5.3 Research and sample

................................
................................
................................
...................

37

5.4 Methodology

................................
................................
................................
...............................

38

5.5 Conclusion

................................
................................
................................
................................
...

38

6. Results and analysis

................................
................................
................................
.........................

39

6.1 Descriptive results

................................
................................
................................
.......................

39

6.2 Statistical results

................................
................................
................................
..........................

43

7. Conclusion

................................
................................
................................
................................
........

49

7.1 Summary and findings

................................
................................
................................
.................

49

7.2 Limitations and suggestions for future research

................................
................................
..........

51

7.3 Generalisability

................................
................................
................................
...........................

52

8.
Bibliography
................................
................................
................................
................................
.....

53

Appendix 1

................................
................................
................................
................................
...........

56

Appendix 2

................................
................................
................................
................................
...........

60

Appendix 3

................................
................................
................................
................................
...........

61

Appendix 4

................................
................................
................................
................................
...........

62

Appendix 5

................................
................................
................................
................................
...........

63




5


1. Introduction


1.1
Topic i
ntroduction

Companies have been present

for a very long time.
A main facet is reporting on the company
performance. Companies engage in this reporting to inform parties
that have provided them the
resources

or chance to come

to a certain performance
.

The focus of this reporting process used to be
relatively limited: Most of the attention of the reporting process was on showing how well the
company performed financially
, while

other

(non
-
financial)

f
actors were often
omitted
, although these
factors
are

often very important to those affected.

In the last decades a change has occurred in this reporting process. A change that
has

affected how
companies and other entities report their performance to
the
people affected (also known
as
s
takeholders
).
More and more
,

the focus of the reporting process has shifted

away

from only financial
reporting to a
broader form of reporting
.
This form of reporting would

general
ly

include how the
company
interacts

with soc
iety
as whole and other stakeholders

instead of only
internal

stakeholder
s

such as emplo
yees, lenders and shareholders. Issues such as the environment and the usage of labour
in developing countries are topics that increasingly can be found in disclosures
of companies.


The main article of reference within this thesis will be Patten (1992). Patten discusses the change in
disclosures after an incident in the oil sector. It was found that companies increased their disclosures
significantly after the
Exxon
Valdez oil spill.

This did not only hold for Exxon, but for companies
throughout the industry.

Approximately twenty years later we will try to assess whether this relation still holds in a world
where additional disclosure is becoming
common
.

This will be
done by replicating Patten’s study but
with an updated model and a new incident: The BP oil spill in the Gulf of Mexico in 2010.


1.2 Topic and research question

T
his
thesis

will look

into

the

disclosure
s

by

companies

and their place
with respect to

a bro
ader set of
stakeholders
.
S
everal theories that can explain why companies voluntar
ily
disclose information

are
discussed
.
Companies are more and more making additional disclosures
, although scholars still dispute
why a company would do so.

Next to that
,

I

will investigate the current literature on how companies deal with their disclosures
around incidents that might affect them.

This
thesis

will be structured into several
chapters

and in
these chapters
, each
(sub)
-
question will be answered.

The

main question

is
:
What are the reasons for voluntary disclosure and how do companies
respond

to
certain incidents?

The sub questions
to

be answered in
the

separate sections

are:

-

What are the theories behind voluntary

disclosure?

-

What does the literature say on voluntary disclosure and more specific
in response to
incidents?

-

What went wrong
at the time of

the BP oil spill?

-

How is this research on
environmental

disclosur
e
at the time of

the BP o
il spill
conducted?

-

Are there any chan
ges in the environmental disclosures of oil companies
since the

BP oil
spill?


This
thesis

gives

a
clear insight

to anyone
who
wants to investigate voluntary disclosure

practice.
Next
to that
,

the field of accountancy can see it as an addition to the increasing literature on voluntary
6


disclosure around incidents.
I
n general voluntary disclosure

ha
s

increased; therefore

it might be
relevant to see whether incidents still influence
a
compan
y’s re
porting behaviour
.


1.3 Structure

The structure of this
thesis

is

as follows: in the
second

chapter
,

theories

and methods of assessing

the
voluntary disclosure process

will be discussed
.

First a general assessment will be made of voluntary social and envi
ronmental disclosure. When did it
start?
This is
further explain
ed

by means of a four step framework.

Also the Global Reporting Initiative will be discussed. The GRI is one of the first real framework
s

that
gives
guidance
to

entities

on

how

to report on their non
-
financial performance. In this section the
guidelines of the framework will be discussed.

Next to the GRI, other frameworks are also reviewed


The

first

theories
that will be discussed are
:
legitimacy theory
,
stakeholder theory

and

institutional

theory
: Every theory
explains a different way in which companies respond

to the stakeholders around
them.

These
three

theories are embedded into the so called ‘Political economy theory’ (Gray, Owen
and Adams, 1996) that states that politics,

economics and society cannot be seen separate from each
other but have to be seen as overlapping concept
s

that will influence each other when one of the three
factors is changed. Therefore they should not be seen as competing but as complementary
explana
tions.

Next to these theories

(that all relate to the Political economy theory)
, the
media agenda setting theory

will
also
be discussed

briefly
. This theory
credits the media for bringing up many issues that are
subsequently taken over by companies

as imp
ortant issues
.


In the last part
the attention
shifts

to ho
w one can examine
environmental
disclosures.
This subject is
still at this moment open to debate since most of the social and environmental disclosures are all
qualitative instead of quant
it
ative.

This brings an extra difficulty to the research of the subject
,

as some
text cannot be compared with others.

Over the last thirty to forty years, academics came up with measures to solve this problem and
by that,
have made

voluntary

disclosures more comp
arable to each other: Some methods just count the number
of pages or sentences in which a company discloses their policies, while others are more sophisticated.


In the
third

chapter

of this
thesis
, the
current literature in the field of voluntary disclos
ure
s

is
discussed
. Why do companies
disclose voluntarily
? Do they benefit from this and are there
contradicting explanations for this behaviour?


The first part provides

a general overview
of

the literature that relates to voluntary disclosures
,
environmen
tal reporting and

CSR
(Corporate Social Responsibility)
reporting. This is done by means
of several sub
-
chapters.


Next to the general literature in th
e field of voluntary disclosure,
an overview

is presented

of

a more
specific field.
T
he literature on vo
luntary disclosure around the occurrence of incidents

is looked at
.
One of the first scholars to study this field was Patten (1992). He examined the
e
ffect that the
Exxon

Valdez
o
il disaster had on the voluntary disclosur
e that the oil sector provided. He did not take Exxon
into account but still he found a significant increase in the disclosure of companies in the
o
il sector
after the incident happened.
An explanation is sought for

why this happens and why companies have
to do this. Even companies that are unrelated in a business sense to
Exxon, were found to increase
7


their disclosure
.

This was a major finding as
a narrow economic view

predict
s

that every company is
responsible for its own mistakes and that others will not

have to alter their behaviour.

It is found that many previous
studies used

models that were derived from one of the first
environmental disclosure index models from Wiseman (1982).


In the
fourth

chapter

an overview is presented on the Deep
water Horizon
oil spill in the G
ulf of
Mexico. Next to this,

a separate paragraph looks at who
could be held
responsible

for the oil spill.


In the
fifth

section of this
thesis

the research
that will be conducted is

introduced
.


The

hypothes
e
s

are

presented

on the change in voluntary disclosure after incidents.
The

research
design and methods will be
presented
.


In the
sixth

chapter the results and analysis are presented. Firstly,
the

descriptive statistics
from

the
sample are given and discussed. After this
, the results and outcomes of this

study are presented and
discussed.


In the
seventh

chapter this thesis is concluded. This is done by giving an overview of the chapters, the
outcomes of the study and listing the limitations of the study. Some suggestions

for future research
will be given and the contribution of this study will be discussed.




8


2. Theories and methods behind this research


2.1 Introduction

In this section of
this

thesis
, the
underlying theories of social and environmental
described
. Over t
he
last decades some theories have
been
defined
,

and

they

have in common that they try to explain why
companies provide voluntary disclosures on these topics.


In the
second

paragraph
,
social and
environmental

reporting

is reviewed
.

T
he history of the process
will be

discussed
and then
this is examined by

the
why
-
who
-
for what
-
how framework
set out by
Deegan
and Unerman (2006,
pp.
309
-
365)
.


In the
third

paragraph

the Global Reporting Initiative will be discussed. This is a way of report
ing for
companies: Not only on financial aspects, but also on environmental and social aspects.

In the fourth paragraph a
brief

overview is given of other frameworks used in environmental reporting.

In the
fifth

section
,
the

theories

that relate to

volunt
ary disclosures are discussed
.
The theories
described are
:

legitimacy theory, stakeholder

theory, institutional theory and media agenda setting
theory.


The methods that are used when studying disclosures will also be discussed.
Several options exist,
vary
ing from subjective to semi
-
objective.


2.2 Social and e
nvironmental disclosures

Although social and environmental reporting, next to financial reporting, is
common

for public listed
companies nowadays

(KPMG, 2005; KPMG, 2008;

KPMG
,

2011;

See Table 1
)
,

it only started to
become common in the last decade of the 20
th

century
. In the last two decades (since approximately
the 1990’s) more and more companies have focussed on
explaining to

the
ir

stakeholders what they do
with respect to the non
-
financial outc
omes of their business (ICAEW, 2004).


Year

1993

1996

1999

2002

2005

2008

2011

N100:
Percent of
Companies
with CR
report

12%

18%

24%

28%

41%

53%

64%

G250:
Percent of
companies
with CR
report

-

-

35%

45%

64%

83%

95%


Table 1, The rise of c
orporate
r
esponsibility
r
eporting

Source: (KPMG, 2005; KPMG, 2008
; KPMG
,

2011
)


I
n the research of Patten (1992)
one can see
that many companies used to
provide

a
dditional
inf
ormation

on their non
-
financial performance

in the annual reports but many
companies now a
lso
publish separate CSR
reports

next to the additional disclosures in their annual reports
.

Although

this sudden increase in additional voluntary disclosure has really taken off

in the last twenty
years
approximately
, some companies already provided info
rmation on their environmental
performance
.

In studies it was found that for example

US Steel already had social reporting practices
from the year

1905 (Hogner, 1982)
.
A
lso

some

others
companies reported on these matters
.

9



In the

why


section

in the fram
ework

of explaining environmental reporting

by

Deegan and Unerman
(2006,
pp.
315
-

335),

they consider why companies voluntary report envir
onmental and social
information
. Does the company have a responsibility? Are they accountable for their actions?

This
can be viewed from two sides: a narrow view and a broad view.


The
narrow

view would relate to the traditional capitalistic economic view: The only responsibility the
company has, is the

responsibility
to make a profit and outperform

the
ir

competitors.
Thi
s view is in
line with the

thoughts of the

free
-
market economist
s
.
This would increase the general
wealth

of each
and the profits could for example

be

used by individuals to spend on the environment.

One can reje
ct
this view by saying that the

main
focus

w
ould be on the owners of the company instead of the society
and stakeholders
as a whole
.

The second view is the
broad

view. This view does not focus on the financial side only but also
considers social and environmental issues. If these are systematically
ignored, it might result in the
company being excluded in some parts of society. This might increase the costs of capital for the
companies and subsequently result in lower return on investment.

Companies
that endorse

the broad
view

report and communicate

on the three factors (environmental, social and financial disclosures) by
for example employing techniques such as ‘triple bottom line’ and the ‘global reporting initiative’.
These will be examined later.


In the

who


section of the framework

by Deegan and Unerman

(
2006,
pp.
335
-
340
)
, the company
questions itself
as
to who it has to report their additional information
.

This section is to a great degree related to the ‘Stakeholder theory’ and the two different sides of this
theory. Should the ma
nagers only provide information to the owners or the providers of capital (debt
-
providers and shareholders) as considered in the managerial view or should it be a more
all
-
inclusive

disclosure process

as considered in the ethical view
? This can differ from

company to company
,

as
different
entities

have d
ifferent direct stakeholders. A large

oil company will for example have to
report more to the general public on their environmental policies than a
small

trading company.

In Figure 1
,

one can see how many s
takeholders a company
might have
.
This

does not
stop

at the
providers of capital and direct business relations.



Figure 1
,
St
akeholders and the organisation

Source:
Deegan and Unerman (2006,
p.
369)


10


Many companies will actually identify their main
stakeholders. Owen, Shaw and Cooper (2005)
, tried

to find out which stakeholder is in general considered to be the most important. In Figure 2 the results
of the study can be seen

(Owen, Shaw and Cooper 2005,
p.
39)
. O
ne can see that there is still a
diffe
rence in the importance of stakeholders. The study was conducted by issuing a survey to 40
managers in

the United Kingdom.
They had to rate the stakeholders based on a

L
ikert
-
scale


from 1
(not very important) to 5 (very important).


Figure 2
,
I
mportance

of s
takeholders as
S
een
b
y managers in the UK

Source:
Owen, Shaw and Cooper (2005,
p.
39)


In the


for what


stage
, Deegan and Unerman (2006,
pp.
340
-
352),

the company has now
acknowledged that there is a demand for the social and environmental disclosures. In this stage it is
then necessary to find out what this demand consists of:
For what

kind of information is there this
demand?

When identifying what th
e needs of the users are
,

another problem arises: The problem of different
kind of stakeholders. Some stakeholders are close to the company (think of employees, suppliers,
creditors and providers of capital), while some stakeholders are not that close to t
he company (
e.g.

the
public, and even here one can differ between the public of developed nations and undeveloped
nations).
There are

five problems when wanting to ascertain what the different demands are from

the

different stakeholders (
Deegan and Unerman

2006,
p.
346)
.


1.

There are many different kind
s

of stakeholders.
Figure 1 illustrates the different types of
stakeholders. Each such group has different individuals that make up the group and all these
individuals might have different
requirements

of

inform
ation.

2.

The problem of being related (close) to the company or not that close to the company.
Stakeholders that are close to the company can express their views in a more direct manner
than stakeholders that are not that close
to the

company.

3.

Some stakehol
ders might feel reluctant to discuss their concerns with the company. While in
developed nations there might be many rules and regulations that govern the employee
-
employer relationship, in less developed nations these laws might be not that explicit. This

can

result in a fear
ful stakeholder: The stakeholder might not give his
true
opinion

(e.g. the fear of
losing
one
’s

occupation)

4.

Some companies, although they try, lack attention for

some stakeholders their needs.
Therefore the
ir

problems remain
unobserved
.

5.

The company cannot
always engage with their stakeholders (e.g.

the unborn and other living
animals and plants
)
. Although these groups might be affected by the current operations of the
firm, they cannot be consulted for their views.


11


When the company fin
ally obtains all the concerns and wishes from
the various

types of stakeholders
another problem arises: S
ome stakeholders might have different or even opposing views on certain
issues.


In the

how


sections of the framework two main methods are discussed:

the ‘
T
riple
B
ottom
L
ine’

(TBL)

and the ‘Global Reporting Initiative’ (GRI). These came into place as there were no rules and
regulations in the area of social and environmental reporting. The two try to make the reporting
initiatives undertaken by the com
panies more comparable. By making
the disclosures more
comparable, transparency increases and a better assessment can be made of the efforts

made

by the
different companies.


The TBL has tried to shift predominantly financial (bottom line) focus to a more

inclusive focus. The
triple referring to: financial, environmental and social.

The downside of this method is that it seems to
indicate that
it

is a numerical
measurement
. This is not the case: One can maximize the financial
factor, but the two other fact
ors cannot be measured as a single number. This
is then
very difficult to
capture the efforts put into
the environmental and social factors.
Compared to the GRI, this is not a
method that can be put into practice by means of a framework.


Next to the TBL m
ethod a company can also use the GRI method. This method is specifically
developed to increase the comparability of social and environmental reporting. In total the GRI
method has

79

indicators.
In the
next paragraph

an elaboration is given.


2.3 The
Global Reporting Initiative

The GRI is the first real framework that
entities can use

if they wish to report on their sustainability

practices
. As the organisation behind the GRI wants to include as many organisations as possible
they
specifically highligh
t
that the framework is based on
fundament

of

consensus
-
seeking and including as
many stakeholders as possible.

The whole project started in 1997/1998, where the idea of creating a disclosure framework was
first
conceived
. After this the first real GRI fra
mework was released in 2000 (G1). Subsequently the second
version of the framework was released in 2002 (G2) and the current version was released in 2006
(G3). The organisation constantly changes their framework and does not
simply
continue using

one
frame
work without taking the changing environment into account.


The GRI consists of three main parts that
cannot

always be
used together. The parts are: the
guidelines, the protocols and the
s
ector supplements.

The guidelines are the main part of the GRI
.

W
i
thin the guidelines
there is a difference

between the
definitions (this can be seen as a framework) and the standardized disclosures as propagated by the
GRI (these can be seen as the indicators).
Even before these two parts

are explained,

the GRI is
discu
ssed

and the GRI reporting framework is defined as

being “intended

to serve as a generally
accepted framework for reporting on an organization’s economic, environmental and social
performance”. It then goes on by stating that “it is designed for use by org
anizations of any size, sector
or location” (
Global Reporting Initiative, 2006
). This emphasizes that every entity can
use

sustainability re
porting and due to that
,

stakeholders can compare companies to each other
.

Next to
this purpose, two other main purp
oses are stated in the overview: benchmarking and demonstrating.


12


The guidelines start by defining what the report

its

content, quality and boundaries should be. This is
done by means of certain principles, which will be discussed here.

This way of building up the
framework is comparable to the way the conceptual framework builds up to IFRS.

2.3.1
Reporting
p
rinciples for
d
efining
c
ontent

T
he upcoming principles define what should be included in the content of a report

(Global Reporting

Initiative

2006,
pp.
7
-
13)
.

1.

Materiality
. Just as materiality in other accounting frameworks, it means that only items
should be reported to the stakeholders that report on significant effects

and

that would change
the opinion of users when these items are
not reported.

2.

Stakeholder
i
nclusiveness
. The company acknowledges that it does not have just one type of
stakeholders and by doing this makes their reports multi
-
purpose. They do this by identifying
their stakeholders and how they fulfil the information ne
eds of them.

3.

Sustainability
c
ontext
. The company should make clear that each report does not only
succeed the previous report with new individual numbers. The reporting process should be a
continuing effort exerted by the company to improve the
environment and social issues in a
more broad sense.

4.

Completeness
. The report should reflect every aspect of the
company’s

significant
environmental, social and economical outcomes.


2.3.2
Reporting
p
rinciples for
d
efining
q
uality

The upcoming principles,

when used, will ensure quality of the report given out by the company

(Global Reporting Initiative

2006,

pp.
13
-
17)
.

1.

Balance
. All parts of the
company’s

performance

should be reflected. Indifferent of whether
this is good or bad news. Otherwise the report
will function as a sort of advertisement.

2.

Comparability
. The same principle as the principle that is used in the conceptual framework
as presented by the IASB: Users of these reports should be able to compare information with
previous periods and other co
mpanies.

3.

Accuracy
. Information provided, indifferent
to

whether it is qualitative or quant
it
ative
information

should be accurate. Qual
it
ative information should be clear
, detailed and
balanced. Quant
it
ative information should be correctly measured and
presented.

4.

Timeliness
. Information provided should be on a regular scale and by this it informs users of
the information.

5.

Clarity
. Information should be clear to users that study the report diligently.

6.

Reliability
. Information that is provided by the comp
any should be reliable. This will ensure
that users can trust the information that they use.

2.3.3
Reporting
g
uidance for
b
oundary
s
etting

Next to defining and stipulating by means of principles what should be included in environmental and
social reports,
the gu
idelines also explain

what should
not
be included.
This is the so called boundary
of the report. The guidelines (Global Reporting Initiative, 20
06
, p.17
) stipulate: “The Sustainability
Report Boundary should include the entities over which the report
ing organization exercises control or
significant influence both in and through its relationships with various entities upstream (e.g. supply
chain) and downstream (e.g. distribution and customers)”.
In this definition an important part relies on
the terms

‘control’ and ‘significant influence

.

The definition of control: “the power to govern the financial and operating policies of an enterprise so
as to obtain benefits from its activities” (Global Reporting Initiative, 2006,
p.
17) and significant
13


influence
:


the power to participate in

the financial and operating policy decisions of the entity but not
the power to control those policies” (Global Reporting Initiative, 2006,
p.
17).

This can be seen in F
igure 3 (
Global Reporting Initiative
, 20
06
,
p.
18).


Figure 3
, Boundary of s
ustainability
r
eporting

Source:
(Global Reporting Initiative, 2006,
p.
18)


2.3.4 Standard disclosure

Next to the theoretical principles that
underlie

the GRI, there is also a chapter in the guidelines that
elaborates on the more prac
tical side of
using

environmental and social

reports.

In part
two

of the guid
elines information is given on s
trategy and profile, management approach and
performance indicators.

In the first section, strategy and profile, an overall profile of the company

is presented to the user. This
enables the user to get an impression of the company. It will give the reader an overview of the
company from above, so that together with the indicators
,

a full picture of the company is conveyed.

The management approach is

more related to the specific indicators. It
gives

the user information on
how the management interacts with the business that is related to the specific indicators. Therefore this
part is given before a company discusses the indicators.

The last section of the standard disclosure is the indicators: the practical points companies will have to
report on when they use the global reporting initiative. There are two main types of indicators: core
indicators and additional indicators. The core
indicators are mandatory to use when adopting GRI
reporting, while additional
indicators can be used by some companies but are often not material for all
companies. When core indicators do not align with the underlying principles given by the guidelines,
t
hese are also not applicable for the company.


14


Subsequently
,

the reporting indicators are split up in several categories: economic, environmental and
social. Social is then again split

up into four categories: L
abour, human rights, soci
ety and product
responsibility.

2.3.5 Oil & gas sector supplement

Next to the ‘normal’ GRI, the GRI organisation has been increasingly focussing on sectors. They bring
this into practice by developing and issuing sector supplements.
These sector supplements try to act
upo
n issues that apply for that specific sector. This, as sectors such as oil & gas and mining and metals
affect their environment
to a larger extent
than a simple trading industry.


Currently the sector supplement for the oil & gas industry is under construc
tion.
Issues that are taken
into account in the sector supplement are: emissions, water, bio fuels, health impact assessment, safety
processes and renewable energy. Next to these factors many others are accounted for.


The final version of the document is

expected to be published at the end of 2011. The project is
developed by an international working group. The working group consists of both companies

(e.g. BP
and Shell)

a
nd

other organisations in the oil sector
1
.

2.3.6 The f
uture

As more companies report

on their non
-
financial performance, the general trend of it being a side
-
report also decreases. One of the developments is so called
integrated reporting
.
Integrated reporting
is currently being developed by the International Integrated Reporting Committe
e (IIRC).

On their
own website they say that “The IIRC has been created to respond to the need for a concise, clear,
comprehensive and comparable integrated reporting framework structured around the organization’s
strategic objectives, its governance and b
usiness model and integrating both material financial and
non
-
financial information” (International Integrated Reporting Committee, 2011).


This form of reporting propagates the usage of one report instead of multiple reports.
KPMG (2010
, p.
3
) says “It se
ems time for a transformation in corporate reporting: from a focus
on

financial
information

to a concept where all types of relevant information

for assessing and evaluating a
company’s quality, performance, value and impact are reported in a comprehensiv
e way”.


As integrated reporting would increase the way companies report on their overall performance, the
Global Reporting Initiative

backs their efforts (KPMG 2010, p.2
).

2.4 Other standards

2.4.1
AccountAbility
f
ramework

A
f
ramework that assists companies to report in a sustainable
way

is the AccountAbility Framework.

As many other frameworks, the Acco
untAbility framework is set up by multiple stakeholders
:

This as
different stakeholder
s
, have

different views on sustainabilit
y.

Currently the AccountAbility AA1000 series are used. These consist of: AccountAbility principle
standard, Assurance standard and
the
Stakeholder engagement standard

(AccountAbility, 2011).


The first one can be used by companies that want to comply wi
th the Account
A
bility framework. It
defines three principles that need to be adhered. These principles are: inclusivity, materiality and



1

The list of companies and organizations that are a member of the international Working Group can be found at:

http://www.globalreporting.org/ReportingFramework/SectorSupplements/OilAndGas/

[Accessed: 29 June 2011]

15


responsiveness

(Account
A
bility

2008a

pp.9
-
16
)
.
The webpage of AccountAbility

says: “
The
principles have been used by le
ading companies since 2008 and are compatible with other sets of
principles in the marketplace, such as the UN Gl
obal Compact, GRI and ISO 26000” (AccountAbility,
2011).


The Assurance standard was created for a different group of stakeholders.

This stand
ard was made for
assurance providers
,

such as auditing firms. With the standard they can see whether companies adhere
to the AccountAbility Framework

(AccountAbility, 2008b).


The last standard was created for again another group of stakeholders. This time

the rest of the
stakeholders in the process were taken into account.
This as this makes the organisation perform better
and it gives a contribution to the licence to operate (AccountAbility, 2008c). The standard goes on
describing how to increase the qual
ity of stakeholder engagement.

2.4.2
ISO 14001

The I
nternati
onal Organization for S
tandardization (ISO) has their own standard on environmental
management within organisations. This standard is ISO 14001. It can be compared to the GRI as it
both has
requirements

(ISO 14001) and
guidelines

(ISO 14004) published as separate standards.


One of the main features of ISO 14001 is that it does not specify any level of performance that a
company has to reach. Instead, it is a “
framework for a holistic, strat
egic approach to the
organization's environm
ental policy, plans and actions” (ISO, 2011
a
). A reason for this flexibility is
that it is difficult to generate one standar
d for many different companies, this
as companies differ in
many aspects.


Other
standards within ISO 14001 elaborate on specific items such as: 14031 that gives guidance to
companies on how to evaluate their environmental performance, 14063 that gives guidance on how to
communicate the environmental performance and 14064 on how to acc
ount for greenhouse gas.

2.4.3 ISO 26000

Next to ISO standard 14001, the ISO also published a specific standard on social responsibility
as a
management system that can be used by companies
. This standard is not a certification standard such
as 14001, but
can be used voluntarily by companies that wish to do so.

As with many frameworks
,

it is
made to be used by many different stakeholders: both private as public companies.


ISO 26000 provides guidance on: concepts, background and trends, principles and pract
ices, core
subjects and issue of social responsibility, integrating and implementing social responsible behaviour,
identifying and engaging with stakeholders and communicating commitment (ISO, 2011b).


2.5

Theories


2.5.1
Political economy t
heories

2.
5
.1
.
1

L
egitimacy theory

The first theory that can be considered to have an influence on the CSR
and additional disclosure
process is the legitimacy theory. It is defined

by Deegan and Unerman (2006,
p.
271) as the assertion

that organisations continually seek
to ensure that they are perceived as operating within the bounds
16


and norms of their respective societies, that is, they attempt to ensure that their activities are
perceived by outside parties as being ‘legitimate
’”.

This process is not a static one but c
hanges and companies will have to adjust to the current values
held by different societies at different times. The expectations that society has
,

are considered to be
included in a ‘social contract’ that the company has with society.

This social contract

i
s an
amalgamation of implicit

and explicit

(e.g. rules, regulations and laws)

expectations

of society with
respect to the conduct of the business.

The company will have to ensure that they stay aligned with
this contract. If not
,

it might
lo
s
e

its legitimacy to operate in society and by that

the chance to make
future profits.


The company in question will have to express their intentions with respect to the environment and
social

issues. This is usually done by expressing this in the annual acc
ounts or specific CSR reports.
This information is then available to the public.

2.
5
.1.2

Stakeholder theory

If compared to the legitimacy theory, stakeholder theory considers the different stakeholders as more
independent actors. Subsequently
,

with each of

these actors, the company will
have a

separate ‘social
contract’
.

Within s
takeholder theory, there are two
branches
: Each type
considering

a different relation between
the company and the stakeholders. The first branch is the ethical/moral (normative) typ
e of stakeholder
theory. The second branch is the managerial (positive) version of stakeholder theory.
O
f course there
are different relations between the different types of stakeholders and the company.
Shareholders will
have more interaction with the boa
rd (shareholder meetings) of the company than the general public or
environmental groups.


The ethical/moral (normative) view of the stakeholder theory
is defined
by Deegan and Unerman
(2006,
p.
286) as “
all stakeholders have the right to be treated fairly

by an organization, and that
issues of stakeholder power are not directly relevant
”. This view relates to the stakeholders having
some fundamental rights in their lives and these cannot be compromised by entities that are seeking
profit.


The managerial
(positive view of stakeholder theory actually differs from the normative view in the
power relation. This view is defined b
y Gray, Owen and Adams (1996,
p.
45) as
:


The stakeholders
are identified by the organisation of concern, by reference to the extent
to which the organisation
believes the interplay with each groups needs to be managed in order to further the interests of the
organisation
”, where
,

when the power of the stakeholder

increases
,

also the level of attention of the
company to the needs of the
se stakeholder increases. Usually the providers of capital are considered as
vital to the company, while secondary stakeholders are considered to be less important (see Figure 2).

2.
5
.
1.3

Institutional theory

Institutional theory is the third theory and o
verlaps (as all three do) the other two theories. Just as the
other theories
,

it tries to explain the way companies report their social and environmental disclosures.

Dillard,
Rigsby and

Goodman (2004,
p.
507) define it as: “
concerns the development of the
taken for
granted assumptions beliefs and values underlying organizational characteristics
... [
with the
accounting based studies] suggesting the importance of social culture and environment on the practice
of accounting; the use of accounting practices as
rationalizations in order to maintain appearances of
legitimacy
”.

In other words companies will try to adjust their way of reporting to what is expected
of

them to
remain a profitable company and remain legitimate.

17



Also in this theory there are some sub
branches: One can distinguish between isomorphism and
decoupling.

Isomorphism can be seen as the change that the adaption of the institutional practice brings along
(here: social and environmental reporting). This again can be divided into three sub categ
ories as done
by DiMaggio and Powell (1983):

1.

Coercive isomorphism. Organisations are influenced and will change their policies with
respect to
their non
-
financial performance

due to the influence of stakeholders. When
the
stakeholders

want to see changes,
the company will align themselves, as they are dependent
on these stakeholders.

2.

Mimetic isomorphism. As the word ‘mimetic’ suggests, a company will try to mime other
companies (in their industry) with respect to the social and environment disclosures.

3.

Nor
mative isomorphism.
As the word ‘normative’ suggest
s
, this category is influence by
norms and how one
should

act. Managers can be influenced

by their personal background but

also by groups

and organisations

they belong to. This creates a social force that influences
managers and the disclosure of the company they work for.


Next to isomorphism there is a second branch of institutional theory: decoupling. This is the actual
usage of social and environmental
reporting
,

while the company does not align with these stated
processes.

2.
5.2

Media agenda setting theory

As predicted by legitimacy theory, companies will have to be legitimate to operate. This legitimacy
is
often derived from the current

views from sta
keholders. In

turn, one can a
sk how the companies


managers


can derive these expectations.
Concerns are

often communicated by the media.

By means
of this same media, managers will inform themselves and try to react to certain issues that might cause
a t
hreat to the legitimacy of the company.


O
ne can

then

ask

how the opinions of the public are formed. Ader (1995,
p.
300) found that there is a
link between the level of media reporting and the public opinion. In this sense
,

the media sets the
agenda of what

is seen as important.
Ader (1995) finds that the effect of the media agenda setting
theory is higher when the event that is reported is relatively unknown to the media consumer, and
therefore needs the media to get information on the topic.


Capriotti (20
09) says that a company needs the media as part of being corporate visible. The more a
company is seen in the media, the more prominent the company becomes. Companies then can be
associated by consumers econo
mically and socially (Capriotti

2009, p.228). Th
e economic role relates
to the role the company has as a producer and the creation of profits. The social role relates to “respect
of human rights, care for the environment, and
make

an economic and social contributi
on to the
community” (Capriotti

2009, p.
228).

2.5.3 Voluntary disclosure theory

Clarkson et al. (2008) contrast the previous theories with the voluntary disclosure theory. This

economic
-
based

theory predicts that
companies that have good environmental performances tend to
disclose more environm
ental information than companies that do not.

This theory lies in line with the Principal
-
Agent theory. Better performing companies disclose more
information to signal they are performing better.

The information asymmetry between the company
and the stake
holders decreases.

This additional disclosure is something only good performing
18


companies can do. Companies that have worse performances cannot just copy this behaviour, so they
report less or even nothing.
Due to this

investors can distinguish

between

good environmental
performers
and

bad ones.


2.
6

Models

2.
6
.1 Measuring the quality of voluntary disclosures

An important issue is measuring the social and environmental disclosures made by companies.
The
main objective of analyzing
disclosures

is identifying the quality of the information provided.

This
can be done is several ways as identified by Beattie

et al.
(2004).
Here one can distinguish between
the
so named ‘subjective ratings’ and the ‘semi
-
objective’

ratings. The semi
-
objective ratin
g again
consists of two subcategories
:

‘disclosure index studies’ and ‘textual analyses’.

Subjective ratings

look at several ratings that are given to companies based on their voluntary
disclosure. These ratings are often provided by users of financial sta
tements (
e.g.

financial analyst
s

that would normally analyse the statements on a daily basis
)
. Although they are acquainted with the
statements, this is still quite subjective
,

as two individuals could rank the same disclosure
completely

different
ly
.

In th
e past there was a well
-
known American subjective rating that was
assigned to companies on a
yearly basis
. This was given out by the Association of Investment
Management and Research (AIMR),
h
owever they stopped with this rating system

in

1997. Next to thi
s better
-
known
rating
,

there are many
other

assessments published.


Another method of rating the quality of
disclosures

is

the disclosure index studies within the semi
-
objective ratings. This model looks at the quantity of disclosures that are given within disclosures
provided
by

the company and this is seen as the indicator of the quality of disclosure.

These models are usua
lly based on some specified questions and subsequently a score is given when
the text complies with certain conditions. These conditions

together and the points assigned

form the
total score
.

Several models can be made
,

based on different facts:

1.

Binary (0

or 1, present or non
-
present) or an ordinal measure (e.g. 0 for not disclosed, 1 for
qualitative disclosure and 2 for quantitative disclosure).

This
was

used by Botosan (1997).

2.

Weighted or unweighted model. More weight can be given to certain terms when
they are
considered to be more important than items that are
deemed
to be unimportant.

This is usually
done by surveying users of specific information.

3.

Grouping of items into hierarchical categories.


The last method is the textual method
,

also within the

sem
i
-
objective rating.

This method will in
general look at the readability, the thematic content and linguistic

side of the disclosures.
I will not
further elaborate on these topics as these will not be used in this thesis.


2.
6
.2 Limitations

A
s both the
subjective
,

as the semi
-
objective method
,

classify texts based on eith
er the text or the
context, thes
e

ratings

are no
t really

‘hard figures’.


For the semi
-
objective disclosure index models, the quality of the text is measured by the quantity of
the text.

This is a major limitation because companies could increase the quantity of their disclosures
,
to appear better in several index studies.

For subjective models, the limitations are even larger as individuals perceive different elements as
having a differe
nt importance to the text. This decreases the

comparability of the outcome.

19



2.7
Research in relation to the theories

In
this chapter

several theories have been discussed. The research t
hat will be done in this thesis
derives its fundament

from these theor
ies.

In chapter
6
hypotheses are tested that relate to

increase of

environmental reporting in relation to
incidents.
The hypotheses are based implicitly on the theories that are discussed in this chapter.

Therefore a link is established between the theorie
s discussed and the hypotheses tested later in this
thesis.

Two theories are especially used: legitimacy theory and media agenda setting theory.


In specific legitimacy theory can be seen as
a

fundament: This as this

theory explains why companies
would
rep
ort after

an

incident to a general set of stakeholders.

Legitimacy theory says there is a
dynamic ‘social contract’ between the company and society. As this is a dynamic and not a static
contract it changes all the time. Therefore other expectations arise
after a negative incident, such as the
Deepwater Horizon oil spill.

To regain the perception of being a legitimate company within society
companies might alter their way of reporting.

In this thesis the Deepwater Horizon oil spill is
investigated and the e
ffects it had on
voluntary disclosure
of the companies within the 2911 SIC code

(Standard Industrial Classification)
.

It can be expected that companies will increase their
environmental disclosures to signal that they are a legitimate company within the in
dustry.


The second theory that influences the hypotheses is the media agenda setting theory
:
As can be seen in
c
hapter
s 4 and

5, the media reported relatively a lot on the deepwater horizon oil spill. This could have
influenced the opinion of the general
public and indirectly could have set the agenda for the
companies. Media agenda setting theory is in line with legitimacy theory and therefore could have
influenced the ‘social contract’ of the company with the general public.

This in turn could i
ndirectly

influence the reporting from the companies towards the stakeholders.


Both hypotheses then investigate whether the incident influenced the reporting after th
e oil spill
towards the general
stakeholders.


2.
8

Conclusion

In this chapter
,

theories
,

methods

and frameworks

are considered

that are
used in

research currently
conducted
on

voluntary disclosure of environmental and
social

information.

In the first section,
a general introduction to social and environmental reporting

was given
.
It was
found

that t
he first forms already started at the
beginning

of the
20
th

century although it was not that
common
. It only started to grow quickly in the 1990’s. Currently one could not imagine a business
community without any social and environmental reporting.



Afte
r
this general introduction,

the
social and environmental
reporting

framework by

Deegan and
Unerman

(2006) was discussed
. They examined it by using the why
-
who
-
for what
-
how framework. In
the

why


section
,

two views

were investigated
: O
ne can have a narrow (short
-
term, self
-
interested)
view or a broad (longer
-
term, more considering)
view. In

the ‘who’ section
it was found
that
,

in line
with the managerial side of stakeholder theory
,

some difference
s
still
exist

between the importance of
different stakeholders as considered by managers, with the shareholders being considered most
important and the suppliers least. In the ‘for what’

part
, it was found

that when the company wants to
identify the needs of stakeholders there are some difficult
ies.
Five general difficulties are considered.
In the last section, the ‘how’ part
,

two methods are discussed that can be used to report to several
20


stakeholders: The TBL and GRI methods. The first still has some practical difficulties and the second
is bei
ng used more and more.


It was

found that the GRI consists of a
framework and a set of indicators that can be used in
communication to stakeholders
. The
indicators are

more concrete and practical.
Also a specific sector
supplement is under construction tha
t will improve the factors on which companies within the oil &
gas sector can report.


Next to
the
GRI, a
limited

overview was given on other frameworks.
The AccountAbility framework
and two ISO standards were examined.


The first of the
three political ec
onomy

theories is the l
egitimacy theory.
C
ompanies have an explicit
and implicit ‘social contract’ with society and when this

contract

is breached their legitimacy to
operate might fall away.

The second theory is the stakeholder theory. This theory has two

branches. The first branch, the
ethical/moral (normative) theory states that all stakeholders should be treated in an equal manner. The
second theory is the managerial (positive) branch and predicts that more influential stakeholders
would be heard more
t
han less influential stakeholders.

The
third

theory, the institutional theory, considers that companies are forced to disclose
environmental and societal information. Also in this theory two branches exist: Isomorphism, which
considers forces that actuall
y changes the company, while the second branch, decoupling, says that
companies might
be
force
d

to disclose information but in reality they would not change any policies.


Next to this, two other

theories

are

investigated
: T
he

media agenda setting theory

and the voluntary
disclosure theory
.
The first

theory explains that some concerns that are conveyed by the public to
companies are actually instigated by media coverage.

The second
, voluntary disclosure theory,

contrasts with the previous theories by say
ing that companies
that perform better environmentally, will disclose more.


In t
he last section of this chapter,
different methods

were considered
that can be used for the
measurement of th
e

quality of voluntary disclosures. In the paper of Beat
tie

et al.

(2004)
, two general
methods are considered: the subjective method which is based on subjective ratings given by a certain
group of stakeholders. The second method is the semi
-
objective method. This method can be divided
into the disclosure index model and

the textual method.

After this, the limitations of the semi
-
objective and subjective methods were discussed
.



21


3. Literature review


3.1 Introduction


In this chapter
, the
most important literature
in the field of

social and environmental
reporting

is
presented
.
I
investigate

why
additional

information

is so

often voluntary disclosed and
what several
studies find on voluntary social and environmental information
.

The studies have been selected
on
subject

relevance.


In the
second

paragraph

a broader

and more general

literature
overview
relating

to social and
environmental disclosure

is given
.

In the

third

paragraph
,
a more specific
part

of the literature

will be
discussed. In this section,
articles that
explore

voluntary social and environmental
disc
losures/reporting after certain
incidents

will be discussed
.

In the fourth paragraph

multiple studies are listed that
use

models to classify disclosures. First
,

one of
the first disclosure index model
studies

will be d
iscussed.
Secondly
, several

studies a
re listed that use
environmental disclosure index models. From these models
,

a model is derived that
will be used in

the
empirical part of
this thesis.

In Appendix 1

an overview o
f the dis
cussed papers is given.

3.2 General literature

3.2.1 Capital market
reactions

Anderson and Frankle (1980)
make

a link between the voluntary disclosure of social information and
the effects on the capital market.
They define social reporting as “
the communication and reporting of
information concerning a firm’s community in
volvement, human resources, environmental impact and
products/service contributions
”.

The authors look
ed

at the voluntary social disclosures of Fortune 500
firms that were listed at the New York Stock exchange in 1972.
Subsequently they divided the
compani
es into two groups: one group with voluntary social disclosures and one without these
disclosures. As theoretical basis they used the capital asset pricing model (CAPM). Everything else
being equal
,

one
could

expect that the return on investment should be
the same between the two
groups.


An interesting
point

of the research is that the authors define two different (competing) hypotheses
next to the 0 hypothesis. The
first expects

that firms that
do not

engage in voluntary social reporting
have a higher re
turn on investment. This as the extra costs

that
are made

by these firms would not be
profitable. The second
expects

that the firms that
do

engage in voluntary social reporting have a higher
return on
investment
. This

can be explained

as shareholders are w
illing to pay a
premium for

companies that operate ethically.


The
results

of the study
show

that all firms that
voluntary

disclose

information

have in general a
higher return on investment
compared to

firms that do not

disclose voluntary information
.
For
portfolio
s that had a Beta of 0.8 and 1.2 this was significant on a 5% level. For the portfolio Beta=1.0,
this was higher but not significant.

A general conclusion can be drawn that the market favours companies that disclose social information

to companies

that do not.


A more recent study is from

Botosan (1997)
. She

investigated the relation between the

disclosures
made by companies and

the
cost of capital.
This was done by investigating the annual reports and the
disclosures made in them.
In
her

researc
h, the first hypothesis investigate
d

whether there was a
22


negative association between the
disclosures of a company

and
the cost of capital
. The second
hypothesis examined whether this association is
stronger

for smaller companies than for larger
companies.

This, as smaller companies have less disclosures and the annual report plays a bigger role
in their reporting process.


The sample consisted

of

122 manufacturing firms. One industry was chosen by Botosan
while

different industries show different character
istics and this could influence the outcome of the study.

A

disclosure index model is
created

to assess the level of voluntary disclosure. 0 point
s

were awarded for
no disclosure, 1 point for qualitative disclosure and 2 points

for quant
it
ative disclosure
as “
precise
information is more useful and may enhance management’s reporting reputa
tion and credibility”,
(Botosan
1997,
p.
334).


Sh
e found that

companies with a lower analyst
-
following could significantly decrease their cost of
capital as they would
report more. Especially when they reported on forecast information and
important non
-
financial statistics.

3.2.2
C
haracteristics

of firms and countries

Kolk et al.
(2001)

examine
d

the largest 250 firms from

the F
ortune 500
. The authors look
ed

at their
envi
ronmental reporting

and how this differs with some firm specific characteristics.
These
characteristics
are

‘sector’ and ‘nationality’.


In the first section they looked at
additional disclosures in reports

in general. They showed that
,

based
on the repor
ting year 1999
,

there are some differences in reporting between sectors. They divided the
reports into: Environmental reports,
e
nvironmental information (less than the first category), no
environmental information and non
-
response. Although 30% of the glob
al 250 consists of financial
firms, only 14.9% had environmental reports. 44.6% of the financial firms fell into the category: no
environmental information.

In general around 67% had some kind of environmental information.

They first look at the link betwe
en nationality and
additional disclosures
. They find that in a country
such as the Netherlands, where some environmental reporting is required there is a higher level than
when this choice is voluntary. Also the UK and Germany score high in this index. The

UK can be
explained by the pressure exerted by the investment community, while

in

Germany the governments
support the European Eco
-
Management and Audit Scheme (EMAS).


Then the authors shifted their attention to the different kinds of sectors.

The trend
is that sectors that
clearly have an influence on society and the
environment

are more likely to issue some kind of
environmental report. This can be seen in the pharmaceutical and chemical sectors. Here a score of
100%
environmental

reporting is reached.
This is in line with legitimacy theory, which can explain the
level of reporting.
This contrasts

with
,

for example
,

the insurance sector where still many companies
do not report on their
environmental

behaviour. The authors expect that due to more standards (
e.g.
GRI) a second wave of environmental reporting will start.


Although

by this time there is more and more emphasis on cor
porate environmental disclosure, there
are

still companies not adhering to this demand. Solomon and Lewis (2002) investigate this paradox.
They
attempt

to identify why companies would or would not disclose
additional

information and what
the incentives or disincentives are.

They start by identify
ing four sectors that can explain
incentives
in
additional disclosures
. These are:
market, political, social and accountability incentives. When looking at market incentives, the best
known is the incentive
to reduce the

cost of capital. Entities that oper
ate in an ethical manner might
23


have less difficulties attracting capital than companies that do not.
Subsequently they discuss the other
incentives.
Disincentives mentioned in the paper are the lack of demand for environmental reporting
and then cost of
ad
ditional disclosures

outweigh the benefits.

To further examine this, the authors distributed a survey under 625 persons. Further there were 3
subgroups formed: users (normative users and interested groups) and providers. With the normative
group being a gr
oup with strong views although probably a lack of use (
e.g.
academics, government
officials) and examples of users of the interested group are financial analyst