Financial and Non-Financial Tools Useful for Exhaustive Corporate Environmental Disclosure and Practices
Abstract
This paper offers our insights concerning the issues raised by Prof. Charitou (2022) [Discussion of “The evolution of environmental reporting in Europe: The role of financial and non-financial regulation”. The International Journal of Accounting, 57, a–b] in commentaries on the article “The Evolution of Environmental Reporting in Europe: The Role of Financial and Non-Financial Regulation” [Barbu, E. M., Feleaga, L., & Ferrat, Y. (2022). The International Journal of Accounting, 57, c–d]. As suggested by Charitou (2022), we explain the pertinence of our financial environmental grid of 12 items based on IAS/IFRS, and we propose a complementary non-financial environmental grid of almost 100 elements useful to ensure an exhaustive analysis of corporate environmental disclosure and environmental governance. Furthermore, we analyzed the results through the influence of national regulation on environmental disclosure and practices, and we explain why it is important to work on the synergy among environmental, social, and economic pillars and with the Sustainable Development Goals (SDGs) to improve corporate social and environmental responsibility.
In Memory of Elena M. Barbu
1. Introduction
Barbu et al. (2022) present the evolution of the financial environmental reporting of European companies from 2002 to 2017 with a financial environmental grid based on IAS/IFRS. Our discussant identified several problems concerning the following:
| (1) | The pertinence of our financial environmental grid: We explain in this reply the content of several items considered important for an exhaustive financial environmental evaluation. | ||||
| (2) | The limitation on quantitative estimation of the environmental reporting using our environmental grid of 12 financial aspects from IAS/IFRS: We propose in this response a complementary grid of almost 100 environmental elements (Barbu & Boyer-Allirol, 2021) to observe qualitative non-financial reporting; this non-financial grid also integrates several environmental governance items, as suggested by Prof. Charitou. | ||||
| (3) | Insufficient analysis of the influence of European national regulation on environmental financial and non-financial disclosure and practices: We present in this reply a deeper analysis of these aspects. | ||||
| (4) | Discussion of the economic consequences of environmental disclosure: We explain here the importance of a synergy between environmental, social, and economic pillars with Sustainable Development Goals (SDGs) to improve corporate responsibility in general. | ||||
Each section of this response paper concerns our answer to these problems identified by Charitou (2022).
2. The Pertinence of Our Financial Environmental Grid: Only Environmental Items
Our environmental financial grid of 12 items based on IAS/IFRS/IFRIC, proposed in Barbu et al. (2014a) and used in Barbu et al. (2022), was considered by Charitou as follows: “A number of those items relate to environmental issues, such as emission rights and environmental provisions, but a number of items do not clearly relate to environmental disclosure, such as tangible assets, other intangible assets, and contingent liabilities.”
All elements used in the grid relate to environmental disclosure, as detailed in Barbu et al. (2014b). For example, contingent liabilities concern the liabilities generated by decommissioning and dismantling activities, such as the closure of a chemical plant, the restoration of sites after extractive activities, and the removal of heavy equipment (as explained in IFRIC 1), or liabilities arising from participating in a specific market, like waste electrical and electronic equipment (as presented in IFRIC 6). Other intangible assets concern environmental assets other than emission rights or the exploration of mineral resources, such as environmental development expenses either received as a subsidy or acquired from the market.
Tangible assets are environmental assets other than assets concerning the exploration of mineral resources having a specific item linked to IFRS 6. IAS 16 indicates that some tangible assets, such as property, plant, and equipment, may be acquired for safety or environmental reasons. The acquisition of these elements, even in the absence of future economic benefits, may be necessary for the uncompromised use of other operating assets. In this case, even if the acquisition of environmental assets is outside the scope of the general definition of an asset according to the conceptual framework, this element is considered an asset because the future economic benefits may be compromised in the absence of certain environmental assets. In conclusion, all items of our environmental financial grid relate to environmental disclosure.
3. A Complementary Non-financial Environmental Grid: A Tool for an Exhaustive Environmental Disclosure
Charitou (2022) states that “since Barbu et al. (2022) examined only the level of disclosure in their models, to further improve this study, we suggest a more in-depth investigation of both the level and quality of increased disclosure on social and environmental issues.”
We agree with our reviewer that this financial environmental grid based on IAS/IFRS is pertinent to observe the levels of corporate environmental disclosure, especially before and after the implementation of these standards. To have an exhaustive quantitative and qualitative evaluation of corporate environmental disclosure, it is suitable to use a complementary non-financial environmental grid, as proposed by Barbu and Boyer-Allirol (2021). This grid is based on non-financial standards, laws, or initiatives (e.g., 2014/95/EU Non-Financial Directive, GRI 4, Grenelle II Law, and ISO 26000) and is more useful especially for the periods before and after the implementation of the 2014/95/EU Non-Financial Directive, when extra-financial disclosure becomes mandatory in Europe.
Furthermore, Charitou (2022) observed the limits of an equal importance of each item in our environmental financial grid, so an importance scale is proposed in this non-financial grid for each item. The environmental disclosure grid presented in Table 1 includes 97 items evaluated independently according to the rating scale in order to obtain a score for each item. All the items’ scores are then summed to obtain a global disclosure score for each company. This global score reaches a maximum of 254 if all the 97 items obtain a maximum individual score (score of 4 for 32 items, 2 for 61 items, and 1 for 4 items).
| Disclosure Items | Scale | |
|---|---|---|
| Category A1: Governance structure and management systems | 0–20 | |
| A1.1 | Corporate profile linked to sustainable development and environmental performance | 0–2 |
| A1.2 | Responsibility for environmental protection in the governance structure | 0–2 |
| A1.3 | Environmental management system: structure, responsibilities, practices, and procedures for determining and implementing the environmental policy | 0–2 |
| A1.4 | Existence of an environmental and/or a public issues committee in the board | 0–2 |
| A1.5 | Existence of conditions applicable to suppliers regarding environmental practices | 0–2 |
| A1.6 | Identification of relevant stakeholders | 0–2 |
| A1.7 | Communication with stakeholders | 0–2 |
| A1.8 | Stakeholder involvement in setting corporate environmental policies | 0–2 |
| A1.9 | Implementation of global operating standards (EMAS or ISO 14001) | 0–2 |
| A1.10 | Executive compensation is linked to environmental performance | 0–2 |
| Category A2: Credibility | 0–22 | |
| A2.1 | Report design and accessibility: layout and readability | 0–2 |
| A2.2 | Adoption of GRI sustainability reporting guidelines | 0–1 |
| A2.3 | Report the “in accordance” option the organization has chosen | 0–1 |
| A2.4 | Independent verification/assurance about environmental information disclosed in the environmental report, annual report, or on the Web | 0–2 |
| A2.5 | Environmental audit | 0–2 |
| A2.6 | Certification of environmental programs by independent agencies | 0–2 |
| A2.7 | Product certification with respect to environmental impact | 0–2 |
| A2.8 | External environmental performance awards or inclusion in a sustainability index | 0–2 |
| A2.9 | Stakeholder involvement in the environmental disclosure process | 0–2 |
| A2.10 | Participation in voluntary environmental initiatives endorsed by recognized national organizations or Environment Ministry | 0–2 |
| A2.11 | Participation in industry-specific initiatives to improve environmental practices | 0–2 |
| A2.12 | Participation in other environmental organizations to improve environmental practices (if not awarded under A2.10 or A2.11) | 0–2 |
| Category A3: Environmental performance indicators (short presentation) | 0–146 | |
| A3.1 | Number of sites with ISO 14001 certification divided by the total number of sites | 0–2 |
| A3.2–3.4 | Materials (two items scored 0–4 and one item scored 0–2) | 0–10 |
| A3.5–3.12 | Energy (five items scored 0–4 and three items scored 0–2) | 0–26 |
| A3.13–3.16 | Water (three items scored 0–4 and one item scored 0–2) | 0–14 |
| A3.17–3.20 | Biodiversity (four items scored 0–4) | 0–16 |
| A3.21–3.27 | Emissions (seven items scored 0–4) | 0–28 |
| A3.28–3.33 | Effluents and waste (five items scored 0–4 and one item scored 0–2) | 0–22 |
| A3.34–3.38 | Products and services (three items scored 0–4 and two items scored 0–2) | 0–16 |
| A3.39 | Transport | 0–4 |
| A3.40–3.41 | Supplier environmental assessment (one item scored 0–4 and one item scored 0–2) | 0–6 |
| A3.42 | Environmental grievance mechanisms | 0–2 |
| Category A4: Environmental spending | 0–16 | |
| A4.1 | Environmental liabilities | 0–2 |
| A4.2 | Savings arising from firm’s environment initiatives | 0–2 |
| A4.3 | Amount spent on technologies, R&D or innovations to enhance environmental performance or efficiency | 0–4 |
| A4.4 | Expenditures in environmental protection: operating expenses regarding operations and remediation | 0–2 |
| A4.5 | Research investments on relevant ESG matters regarding the firm activity | 0–2 |
| A4.6 | R&D expenses in fuel efficiency and climate change mitigation (% of revenue) | 0–2 |
| A4.7 | Compliance: monetary value of significant fines and total number of non-monetary sanctions for non-compliance with environmental laws and regulations | 0–2 |
| Category A5: Vision and strategy claims | 0–16 | |
| A5.1 | Statement on realized or current environmental projects | 0–2 |
| A5.2 | CEO statement on environmental performance in letter to shareholders/stakeholders | 0–2 |
| A5.3 | A statement of corporate environmental policy, values and principles, and environmental codes of conduct | 0–2 |
| A5.4 | Provide a description of key impacts, risks, and opportunities at environmental level, particularly with stakeholders and firm (financial performance) | 0–2 |
| A5.5 | A statement about formal management systems regarding environmental risk and performance | 0–2 |
| A5.6 | A statement that the firm undertakes periodic reviews and evaluations of its environmental performance | 0–2 |
| A5.7 | A statement of measurable goals in terms of future environmental performance | 0–2 |
| A5.8 | A statement about specific environmental innovations and/or new technologies | 0–2 |
| Category A6: Environmental profile | 0–14 | |
| A6.1 | A statement about the firm’s compliance with specific environmental standards | 0–2 |
| A6.2 | Financial implications and other risks and opportunities for the organization’s activities due to climate change | 0–2 |
| A6.3 | An overview of environmental impact of the industry | 0–1 |
| A6.4 | An overview of how the business operations and/or products and services impact the environment | 0–2 |
| A6.5 | An overview of environmental corporate environmental performance relative to industry peers | 0–1 |
| A6.6 | Environmental objectives/targets: specific aims to address the impacts of processes, products, or services | 0–2 |
| A6.7 | Performance measured against previous year’s targets | 0–2 |
| A6.8 | Covers full ecological footprint: eco-efficiency and measures | 0–2 |
| Category A7: Environmental initiatives | 0–20 | |
| A7.1 | A substantive description of employee training in environmental management | 0–2 |
| A7.2 | Employee environmental program: program of awareness-raising and education | 0–2 |
| A7.3 | Report whether and how the precautionary approach is addressed by the firm | 0–2 |
| A7.4 | Existence of response plans in case of environmental accidents | 0–2 |
| A7.5 | Internal environmental awards | 0–2 |
| A7.6 | Internal environmental audits (if not awarded under A3.40 or A3.41) | 0–2 |
| A7.7 | Internal certification of environmental programs (if not awarded under A1 and A2) | 0–2 |
| A7.8 | Community involvement and/or donations related to environment | 0–2 |
| A7.9 | List externally developed economic, environmental, and social charters, principles, or other initiatives to which the organization subscribes | 0–2 |
| A7.10 | Operations with implemented local community engagement, impact assessments, and development programs | 0–2 |
| Score Maximum | 254 | |
The financial grid proposed in Barbu et al. (2014a) and used in Barbu et al. (2022), based on the IAS/IFRS/IFRIC to measure the level of environmental disclosure, does not observe the governance and other characteristics of the non-financial information. As suggested by Charitou (2022), the mechanisms of environmental governance should be considered. This non-financial grid proposed by Barbu and Boyer-Allirol (2021) presents a first category, A1, with 10 environmental governance items.
By using this non-financial grid, a deeper analysis could be realized in future research for the periods before and after the implementation of the 2014/95/EU Non-Financial Directive (years 2012–2017 in our study). At the same time, our regression model from the main article should be improved to observe the presence of a CSR committee in the boards of analyzed companies as control variable, and thus to observe the influence of a stronger CSR governance on the level of environmental reporting.
We present in Table 2 the complementarity of this future study to our main article.
| Elements | Barbu et al. (2022) | Future Research |
|---|---|---|
| Sample | Companies listed on Euronext 100 index as of March 2014 | The same sample or a European sample formed by companies from countries with various national regulations |
| Sources of hand-collected data | Annual reports, Financial reports | Annual reports, non-financial reports, environmental and sustainable development reports, CSR reports, and companies’ websites |
| Grid used for data collection | Financial environmental grid of 12 items (Barbu et al., 2014a) | Non-financial environmental grid of 97 items (Barbu & Boyer-Allirol, 2021) |
| Analyzed years | 2002, 2007, 2012, and 2017 | 2012 and 2017 (before and after the implementation of the 2014/95/EU Non-Financial Directive) |
| Determinants | Company size, industry sector, and profitability | Company size, industry sector, profitability, and corporate governance mechanisms |
In future research, we will analyze the same companies from Barbu et al. (2022), but the hand-collected data will be realized with the non-financial grid of 97 items. In order to have an exhaustive quantitative and qualitative evaluation of environmental disclosure, we will observe all environmental information available on websites, environmental and sustainable development reports, and the CSR and annual reports of companies. According to Cormier et al. (2005), Cormier and Magnan (2015), Clarkson et al. (2008), Hooks and van Staden (2011), and Cho et al. (2012), the analysis of environmental information published by firms requires not only the observation of the annual report and financial information, but also the analysis of the companies’ websites and of the environment, sustainable development, CSR, or other reports. Despite the multiplicity of sources, the scoring grid ensures that the same information is not taken into account twice in the determination of the disclosure score.
As suggested by Charitou (2022), we will include the corporate governance mechanisms in the grid (category A1) and analyze all main company determinants predominantly driving the CSR-reporting agenda identified by Ali et al. (2017): company size, industry sector, profitability, and corporate governance mechanisms. In Barbu et al. (2022), we analyzed only the first three elements.
These two grids of financial and non-financial environmental disclosure proposed by Barbu et al. (2014a) and Barbu and Boyer-Allirol (2021) could be used by researchers to measure the levels of quantitative and qualitative environmental disclosure and to analyze various environmental practices of companies. They are also useful for companies to evaluate their environmental disclosure and practices.
4. The Relationship between National Regulatory Systems and Corporate Environmental Disclosure and Practices
First, Charitou (2022) considers that “Barbu et al. (2022) need to motivate their study by providing more in-depth intuition as to why differences between the countries should be expected. However, the authors assert that the regulatory systems differ among the four countries, but is this enough to justify differences in the level of environmental disclosure? What about other factors, such as common-law versus civil (code)-law systems, which have different legal environments, levels of investor protection, disclosure policies, and transparency levels?”
Our research observes the corporate environmental disclosure in four European countries. We consider that an analysis of our results through the differences between common law and civil (code) law is not adequate for our study because all European countries have a civil-law system. An international comparison of environmental disclosure of European companies (having a civil-law system) with the American, British, Canadian, or Australian companies (having a common-law system) could be analyzed through the difference between common-law and civil-law systems. Because our study analyzes only European companies, we use only civil-law systems and the differences between them. Civil-law countries have continuously updated legal codes that specify various aspects capable of being brought before a court, the applicable procedure, and the appropriate punishment for each offense. Even if all European countries have a civil-law system, there are various regulatory codes.
The selection of these four countries was realized according to the classification of European countries proposed by Boyer-Allirol and Barbu (2017). The authors classified all regulatory frameworks of the European Union countries into three groups of countries according to the type of national environmental law: (a) countries that have regulations or environmental reporting legislation, considered as hard-law countries; (b) countries guiding environmental reporting through guidelines or codes of conduct issued by the state, classified as soft-law countries; and (c) countries with no regulation or recommendation from the state but with sporadic professional initiatives targeted at particular companies or sectors, considered to be countries of flexible law. We have chosen one or two countries from each group: (a) France and the Netherlands for the group of hard-law countries, (b) Belgium for soft-law countries, and (c) Portugal for flexible-law countries.
Our results indicated that the strengthened national legal framework does not appear to have a major influence on environmental reporting. Companies listed in hard-law countries (the Netherlands and France) display similar disclosure scores and are reporting at the same or even lower levels than those in soft-law or flexible-law countries with weakly constraining regulations (i.e., Belgium or Portugal), especially after the 2014/95/EU European Non-Financial Directive. Firms in Belgium and Portugal tended to include more environmental content in their financial reports in recent years.
The lack of penalties, an environmental legislation that is not very clear, a financial and accounting profession not specialized on environmental or CSR aspects, an important cost associated with environmental disclosure and practices, the green image more important than real environmental actions, and other factors have a negative influence on the development of environmental disclosure and practices. Hence, our findings suggest a negative relationship between environmental disclosure and national legal framework stringency. A deeper analysis of various factors influencing the level of environmental disclosure and practices could be realized through interviews with CEOs or CSR directors from European firms.
5. Sustainable Development: A Synergy among Environmental, Social, and Economic Pillars
As suggested by Charitou (2022), future research should provide more in-depth economic intuition and identify the economic consequences of corporate social and environmental reporting. We consider that a company should improve its sustainable practices according to the triple-bottom-line pillars: environmental, social, and economic. These three pillars are not isolated, and only by their synergy is it possible to achieve corporate sustainable development. We consider it important to observe the consequences of economic activity on the environment and society and to reduce these negative consequences, but we do not consider it essential to analyze the economic consequences of environmental or social reporting or practices.
Nowadays, the economy should serve society and operate by protecting the environment. When pollution caused by companies contributes to more than 5 million premature deaths per year and bad working conditions result in more than 2 million deaths a year, we think it very important to focus our energy and research to analyze how to protect the environment and society and save lives. We can see the same preoccupation during this pandemic period: even if there have “only” been 1 million deaths caused by COVID-19 in one year (compared to more than 7 million deaths determined by irresponsible corporate practices), all responsible governments and countries chose to slow down the economy to protect life.
The world’s logic should be to observe the synergy among environmental, social, and economic pillars or the 17 SDGs of the United Nations. The triple bottom line, with its three pillars (social, environmental, and economic; or people, planet, and profit), should be adapted to see an economy with an impact on society and the environment such as in Figure 1. We added the SDGs corresponding to each pillar.
Fig. 1. Synergy among the environmental, social, and economic pillars and the 17 SDGs.
All SDGs are directly or indirectly linked to the three pillars of the triple bottom line. Whether we are in the construct of the triple bottom line or of the 17 SDGs, the economic pillar has a positive or negative impact on the environment and society. It is for this reason that we consider it important to analyze the consequences of economic activity on the environment and society, and not the reverse.
We would like to thank Prof. Charitou for his suggestions, which offer us and other researchers various avenues for future research.
Acknowledgments
The co-authors, Liliana Feleagă and Yann Ferrat, would like to pay a tribute to Elena M. Barbu, the first author of this paper, who had passed away on December 31, 2021, due to complications from COVID-19. She will be missed by many, especially her family, friends, and fellow researchers at the University of Grenoble Alpes (France) and at the Bucharest University of Economic Studies (Romania). Her knowledge of extra-financial reporting and dedication to research were a blessing and will be greatly missed.
