Environmental Reporting & Aim Listed Companies

8/6/2019 Environmental Reporting & Aim Listed Companies

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Project submitted in partial fulf i lmentof the requirements of the Masters Degree in

International Accounting

In the School of

Business

a t th eUniversity of Northumbria

atNewcastle

NAME:

COURSE: MA INTERNATIONAL

ACCOUNTING

SUPERVISOR:

TITLE: ENVIRONMENTAL REPORTING

AND AIM LISTED COMPANIES

DATE: SEPTEMBER 2006


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DECLARATIONS

I declare the fol lowing:

(1)that the material contained in the dissertation is the endresult of my own work and that due acknowledgement hasbeen given in the bibl iography and references to AL Lsources be they printed, electronic or personal.

(2)the word count of this dissertation is 14,284

(3)that unless this dissertation has been confirmed asconfidential, I agree to an entire electronic copy orsections of the dissertation being placed on Blackboard,if deemed appropriate, to al low future students theopportunity to see examples of past dissertations. Iunderstand that i f displayed on Blackboard i t would bemade available for no longer than f ive years and thatstudents would be able to print off copies or download.The authorship would remain anonymous.

(4)I agree to my dissertation being submitted to a plagiarismdetection service, where i t wil l be stored in a database

and compared against work submitted from this a or anyother school or institution using this service.

In the event of the service detecting a high degree ofsimilarity between content within the service this wil l bereported back to my supervisor and second marker, whomay decide to undertake further investigation that mayultimately lead to discipl inary actions, should instances ofplagiarism be detected.

(5)I have read the Northumbria/NBS Policy Statement on

Ethics and Consultancy: Northumbria/NBS Ethics inResearch and Consultancy: Guidelines andProcedures for students undertaking Postgraduateresearch methods modules and dissertations and thePolicy for Informed Consent in Research andConsultancy and I declare that ethical issues have beenconsidered, evaluated and appropriately addressed inthis research.

SIGNED:


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ABSTRACT

K ey w or ds : E nvi ro nm en ta l r ep or ti ngMotivation

StakeholderLegitimacy

Environmental reporting has become increasing commonamong large companies in recent years as a means to providetransparency and accountabil i ty to a range of stakeholders.The benefits have been cited to include higher shareholderreturns, lower costs through improved eff iciency, mitigating riskand increased competit ive advantage. However there is l i t t leresearch into smaller companies in the UK and the motivationsthey require to undertake such reporting. This report aims toaddress that situation by investigating the motivations andcurrent reporting practices of companies l isted on the AIMIndex. This index is for companies new to the stock marketswhich are often new, fast growing dynamic companies but thelisting requirements of the AIM Index are less stringent thanthose of the Main List and so are seen as riskier.

A postal questionnaire was used to test the current practiceand motivation of these companies and although only a smallsample responded the f indings give a basis for further research

in this area. It was found that the main motivators werelegislative requirements and f inancial considerations which arealso motivators for larger companies but other reasons such ascompetit ive advantage, stakeholder accountabil i ty or legit imacytheory appear to have no influence over the reporting decision.The information received was tested against a needs hierarchyin order to see what distinguished these smaller companiesfrom their larger counterparts and it was concluded that thesmaller companies concentrated their efforts on survival tacticssuch as f inancial stabil i ty while the larger companies havingachieved this were able to turn their efforts to competit ive

advantage enhancing activit ies such as reputationenhancement, r isk reduction and improved stakeholderrelations through environmental reporting.


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ACKNOWLEDGEMENTS

T ABLE OF CONTENTS P AGE

Title Pa ge 1

Declarat ion and Word Count 2Abstract 3Acknowledgements 4Table of Contents 5List of Figures 7Glossary 8

Chapter 1 Introduct ion 91:1 Background an d Rational to the Research 91:2 Research Question and Objectives 111:3 Overview of the Subsequent Chapters 12


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1:4 Conclu sions 13

Chapter 2 Literature Review 14

2:1 Theories Underpinning the Resea rch 142:1:1 Stakeholder Accountabili ty 142:1:2 Legit imacy Theory 162:1:3 Crit ical Theory 172 :1 :4 M ot iv at io ns f or E nv ir on me nt al R ep or ti ng 1 8

2:2 The Business Case 202:2:1 Financial Considerations 212:2:2 Risk 23

2:2:2:1 Environmental Risk 232:2:2:2 Reputation Risk 24

2:2:3 Competit ive Advantage 252:3 Other Fa ctors Relevant to the Research 26

2:3:1 Legislation 262:3:1:1 Operating and Financial

R ev ie w/ Ex te nd ed B us in es s R ev ie w 2 72:3:1:2 Combined Code on Corporate

Governance 282:3:2 Environmental Management Systems,

Frameworks and Awards. 282:4 Conclu sions 292:5 Hypotheses 30

Chapter 3: Method ology 313:1 Introduction 313:2 Research Philosophy 313:3 Method 323:3:1 Section 1 333:3:2 Section 2 333:4 Limitations of the Method 34Chapter 4: Findings and Analysis 364:1 Find ings 36

4:1:1 Section 1 37

4:1:2 Section 2 374:2 Analysis 41

4:2:1 Section 1 414:2:2 Section 2 41

4:3 Testing of the Validity of the Hypotheses and theResearch Question answered. 464:3:1 Hypothesis testing 464:3:2 The Research Question Answe red 47

Chapter 5 Conclusions 495:1 Limitations of the Research and Suggestions for

Future Research 51


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References 53Bibliography 58

Appendix A - An overview of environmental reportingsystems frameworks and a wa rds. 60Appendix B - Questionnaire 62A ppend ix C - Sp re adsheet of we b sea rch resu lt s 66

Last Page 72

LIST OF FIGURES

Table 2:1 Impacts of different management approaches toenvironmental reporting.Table 4:1 Web site reporting statisticsTable 4:2 Summary of question 7 resultsTable 4:3 Summary of question 8 resultsTable 4:4 Summary of question 9 results


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Glossary

A IM Al te rnat ive I nvest ment Mar ketLSE London Stock ExchangeGRI Global Reporting Init iat iveS ME Sm all a nd Med ium Si zed En te rpr ise sD EF R A D ep ar t me n t o f F oo d, R ur a l A f f ai rs a nd A g ri c ul t ur eO FR Ope rat in g a nd Fi na ncia l Re vie wEBR Enhanced Business ReviewA CC A A ss oc i at i on o f C ha r te r ed C e rt i fi ed A c co un t an t sE MA S E co -M an ag em en t a nd A ud it S ch em eE MS E nv ir on me nt al m an age me nt S yst em

I SO I nt er na ti on al O r ga ni sa ti on f or S ta nd ar di sa ti on


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C CC G C om bi ne d C od e o n C or po ra te G ov er na nc eCSR Corp orat e Soc ial R espon si bil it y

Chapter 1 Introduction

1:1 Background and rationale to the research

The intention of this research is to investigate companies l istedon the Alternative Investment Market (AIM) and f ind what wil lmotivate them to produce environmental reports. This type ofreporting is becoming increasingly common among largercompanies but the trend does not appear to have carried overto their smaller cousins. A search of the Corporate Register(2006) showed a total of 513 UK companies producedstandalone environmental or social reports; this is less thanhalf the UK companies l isted on the main index of the London

Stock Exchange (LSE, 2006) so there is sti l l a long way to go


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before smaller companies feel the pressure to fol low suit.However statistics on how many companies report this type ofinformation do not tel l anything about the quality of thereporting nor about how companies attempt to reduce their

ecological footprint on the earth. (Britton and Gray, 2001)

The pressures of globalisation and the need for moretransparent internal governance procedures are seen by someas one of the drivers for environmental reporting. (GRIGuidelines, 2002) The need for organisations to beaccountable to a range of stakeholders throughout the worldwhen global business is perceived by many as an evil, and inthe wake of the Enron and other major scandals, manycompanies are looking at new ways to provide thataccountabil i ty and transparency. Non-governmentorganisations are becoming increasingly powerful andcompanies which have tradit ionally been perceived as beingless than environmentally fr iendly have recognised the benefitof adopting some of the environmental rhetoric (Norman andMacDonald, 2004)

The AIM index was chosen as companies l isted here are oftenfast growing and may enter the off icial l ist after two yearstrading on the AIM. This should ensure a more dynamic samplethan a random selection of SMEs. Smaller companies were

also chosen as the majority of most countries economies arecomprised of these smaller organisations. (New Straits Times,2003) The AIM index is for growing global companies and isless strictly regulated than the Official l ist. For this reasoncompanies l isted on this index are perceived as riskier,however for growth the index has the best record in the worldand has consistently outperformed the FTSE 100 between 1999and 2005. (LSE. 2006) One method of reducing risk is throughenvironmental reporting so part of the project wil l be toinvestigate ways in which risk and shareholder/stakeholderexpectations are interl inked. Although this is a global index,

only UK companies wil l be investigated in the research.

The current situation in the UK has no legal requirement toprovide environmental reports to shareholders however manycompanies l isted on the off icial l ist prepare environmentalreports. The government has been seen to be in favour ofenvironmental reporting with Environment Minister Ell iot Morleyactively promoting the voluntary production of environmentalreports (DEFRA, 2006) and while the Operating and FinancialReview (OFR) has been abandoned as legislative requirementall but small companies are required to prepare an Extended

Business Review (EBR) within their directors report for periods


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commencing on or after 1 s t April 2005. (Kreiger, 2006) TheEBR must contain non-financial key performance indicatorsconcerning environmental matters. The government continuesto seek voluntary reporting particularly through the adoption of

environmental management systems such as ISO14001 or theDEFRA Guidelines. It may be that many AIM l isted companiesfall into the small company category so avoiding the necessityto prepare an EBR but those with foresight cannot deny thatlegislation is inevitable given the current level of public interestin environmental matters.

Previous research has shown that there are several reasons forthe preparation of these reports, including higher shareholderreturns, lower costs through improved eff iciency, mitigating riskand increased competit ive advantage. (Toms, 2000,Bebbington et al, 2006, Porter and Van der Linde, 1995) Mostcurrent research has been carried out into the reportingpractices of large, often, multi-national organisations with 71%of the UKs top 100 companies producing environmentalreports in 2005, 49% in 2002, up from only 13% in 1993.(KPMG, 2005) However preliminary internet searches of AIMlisted companies has revealed that there is l i t t le or noproduction of environmental information among thesecompanies. There are several reasons why this may be so;perhaps companies perceive that the above average returns

often associated with AIM l isted companies negate thenecessity to provide the addit ional environmental and socialreports now produced as a norm by many larger companies.The International Organisation for Standardisation cite severalreasons for the lack of environmental reporting orimplementation of environmental management systems amongsmall and medium sized enterprises, including a lack ofknowledge or understanding of systems or denial that theyhave any environmental impact, resource constraints or a lackof incentive to implement systems (ISOa, 2006); while ACCAcite cost as a major deterrent especially for smaller

organisations. (ACCA, 2004) These reasons wil l beinvestigated within this report.

Of course some of the strongest proponents of environmentalreporting are the major accounting and consult ing f irms who,by no coincidence, offer environmental reporting and audit ingservices to cl ients. (Norman and MacDonald, 2004) For thisreason it may be viewed within companies that environmentalreporting is something of the domain of accountingprofessionals and academia and not something to beconcerned about in the real world. The perception of the


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relevance of the f inance directors involvement inenvironmental reporting wil l be tested within the research.

1:2 Research question and objectives.

The research question is What are the main motivations forAIM l isted companies to adopt environmental reportingpractices and do they differ from those adopted by largercompanies?

The objectives of the study are;

To review the relevant l i terature in order to understandmotivations and current practices for environmentalreporting which wil l enable hypotheses to be formed andsubsequently tested.

To analyse the data collected and l ink the results toexpectations gained through earl ier research andwrit ings.

To answer the research question by either proving ordisproving the hypotheses.

To draw conclusions and make comment on the

information obtained, highlighting any shortcomings inthe research process and making suggestions for futureresearch.

1:3 Overview of the subsequent chapters.

Chapter 2 is the l i terature review which wil l examine theliterature relevant to the subject. Although there is a paucity ofl i terature concerning SMEs there is an abundance of researchinto larger organisations.

Firstly theories underpinning the research are discussed to putinto perspective the whole research question. The mainpurpose of the research is to examine the motivations for acompany to commence environmental reporting and todetermine whether the stage of development the company was

at had any bearing on the level of environmental reporting


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undertaken or the potential drivers to introduce environmentalreporting, as a proxy for the stage of development Maslowshierarchy of needs (Mull ins, 2006) wil l be used to explainmanagerial behaviour. A range of drivers were chosen, to be

ranked in importance by respondents to a questionnaire, whichwhen the results were analysed should al low probabil isticstatements to be made regarding the behaviour of the sample.By viewing current practice and managerial perceptionsthrough this lens should al low insight to be gained into whycompanies do or do not prepare environmental information andwhether the main drivers for companies at this level aredifferent from those of larger companies.

Secondly the business case for environmental reporting wil l beexamined and discussed in the context of the SME. Thisdiscussion looks at both the f inancial considerations to betaken into account when implementing a new system and thepotential impact of non-implementation. Next environmentaland Reputational r isks are discussed to highlight the possiblebenefit or detriment to be gained by a company. Finally in thissection competit ive advantage is discussed in order todetermine how environmental reporting can be l inked to overallstrategy. This leads to a discussion of relevant legislation andenvironmental management systems as without a suitablesystem in place environmental reporting can be meaningless.

(ACCA, 2004)

Conclusions are drawn from the l i terature review and thehypotheses are developed in order to answer the researchquestion.

Chapter 3 is a discussion on methodology, outl ining theresearch philosophy and the rationale behind the choice ofmethods adopted and then describing the methods employed inthe research. The choice of methodology dictates the methodsused in the research and appropriate choices wil l lead to sound

intellectual reasoning and produce credible and robustconclusions. (Hussey and Hussey, 1997) Limitations of themethod are then discussed to highlight any areas ofshortcomings identif ied; this wil l al low recognition to be madeof such in the f inal conclusions.

Chapter 4 is the data analysis and f indings where the results ofthe primary research and questionnaire survey wil l bepresented and discussed. This leads to an appraisal of thevalidity of the hypotheses and their acceptance or rejection onthe basis of the information obtained from the survey.


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Chapter 5 is a discussion of the conclusions drawn from theresults and attempts to highlight any shortcomings in themethods employed and make suggestions as to the direction offuture research in this area.

1:4 Conclusions

This chapter has attempted to give an overview of the currentstate of environmental reporting in the UK looking at thenumber of companies disclosing information rather than anappraisal of the quality of reporting. It has described thereasons behind the growing trend for increased disclosure andinterest in governance matters after corporate scandal andoutl ined reasons why companies can f ind this increaseddisclosure attractive. Governments part has been discussed toshow that although not incl ined at present to pass legislation i tmay be signif icant in future the level of concern expressed byministers. Reasons for non-disclosure were identif ied and wil lbe investigated in greater depth within the research to examinewhether these reasons vary between large companies and thesmaller AIM l isted companies.

Although this research is on environmental reporting, l i teratureexamined also includes that of sustainabil i ty, social reporting

and tr iple bottom l ine as many of the issues fol low a commontheme of accountabil i ty and transparency.

Chapter 2 Literature Review

There is l i t t le previous research on smaller companies howeverresearch carried out by Jackson et al. (2000) found that incompanies outside of the FTSE300 there was overwhelmingdisinterest in the subject and a major reason for not reportingwas that the information was not required by shareholders. Theliterature review shall examine current theories used to explainmotivations for environmental reporting l inking these to thebusiness case for environmental reporting. This leads to adiscussion of the current legislation and possible futuredevelopments and f inally a brief discussion of the available

environmental management systems and frameworks which are


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a precursor to ful l reporting and a brief discussion of theawards made to companies excell ing in environmentalreporting.

2:1. Theories underpinning the research

The main two theories used to explain the rise in environmentalaccounting are stakeholder and legit imacy theory, crit icaltheory wil l also be examined as i t may assist in providing anexplanation for the lack of environmental reporting carried outby the majority of UK companies.

2:1:1 Stakeholder Accountability

Stakeholders were defined by Freeman (in Schaltegger andBurritt 2000:31) as

any individual or group having an interest in the companybecause they can affect or be affected by the companysactivit ies.

This definit ion may include shareholders, employees,customers, suppliers, communities or other interest grouphowever Sternberg (2004) contends that this gives too broad ascope to the definit ion and could even be extended to terrorists

and sea creatures; she does also point out that stakeholdersare not eternal (p55) and so reminding companies that theyneed to have a constant awareness of changing stakeholderrelationships. Toms (2000) says that the environment is astakeholder and if that definit ion is given to solicit respect forthe environment then it could be a powerful stakeholder.

Much recent stakeholder l i terature has stressed the importanceof a wide group of stakeholders to an organisations continuedsuccess (Deegan 2000, Gray, 2003, Guthrie and Parker, 1989)and the trend has moved away from the shareholder model

where the only stakeholders who the company is accountableto are the shareholders. Although Sternberg (2004) sti l ladvocates the shareholder model as the only acceptable modelbecause the function of an organisation is to fulf i l i ts legit imately constituted purpose or objectives (p31) and isunder no obligation to other stakeholders; there is l i t t lecontemporary support for this ideal. Shareholders are sti l l seenas the most important stakeholder group and if a company hasshareholders that actively use voice there is greater evidenceof voluntary environmental disclosure. Since the 1970s, wheninstitutional shareholders took over from individuals, as

majority shareholders levels of disclosure have increased


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rapidly. Research from the USA could explain thisphenomenon, f inding that as shareholding became morediverse, so pressure on managers to disclose socialresponsibil i ty matters increased. (Toms, 2002) Toms (2002)

own UK research corroborated this, f inding that with dispersedinstitutional shareholding the level of environmental reportingincreased. It may be that AIM l isted companies, as new entriesto the stock market, have a less diverse shareholding base andtherefore do not come under the same pressures to discloseenvironmental information as larger more diversely heldcompanies do.

To accept stakeholder theory, Freidmans (1970) assertions thatthe purpose of a business is to create wealth for i ts beneficialowners must be discarded. This view has gathered greateracceptance in recent years (Deegan, 2002, Owen 2003,ODwyer et al. 2005) as the importance of a wider group ofstakeholders to the company has become more widelyrecognised. The importance of environmental reporting andperformance to a wide range of stakeholders becomes moreapparent as the human impact on the changing environmentand issues such as global warming become evident.(Scaltegger and Burrit, 2000) ACCA (2004) however havefound that most reporting lacks sufficient stakeholder dialogueand leads to company focused reporting rather than fulf i l l ing

the needs of outside stakeholders.

Jackson et al (2000) found that reporting was of greatestusefulness to local communities as key stakeholders incompany eyes, but Henriques and Sadorsky (1999) furtherqualif ied this by saying that companies which operate atdifferent levels of environmental awareness wil l have differentperceptions of the importance of key stakeholders and thismanagerial perception is crit ical to the level of importanceattached to particular stakeholder groups while ODwyer et al(2005) found that the management perceived stakeholder

interest in environmental and social matters was very low incomparison to actual interest.

2:1:2 Legitimacy Theory

Businesses may seek to gain legit imacy through environmentalreporting as suggested by Deegan (2000, 2002). He posits thatan organisation is granted a r ight to operate by the public, theygrant a social contract and through environmental reportingseeks to legit imise i ts operations and therefore acquire orstrengthen this r ight in the eyes of i ts stakeholders. However

there cannot be a definit ive definit ion of how companies seek


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to legit imise operations as what is perceived as acceptable toone society may not be so in another, therefore the condit ionsof the social contract can be constantly changing as the needsand perceptions of stakeholders change. If a companys

activit ies are contrary to what is deemed acceptable they maytry to re-establish the social contract through addit ional(environmental) disclosure. Legit imacy theory cannot beaccepted if managerial motive to report is due to their beliefthat they do so as their duty of accountabil i ty and responsibil i tyto stakeholders, the theory only holds true i f the motive is togain or retain legit imacy and is used as a reputationmanagement tool. (Deegan, 2002)

While stakeholder theory may be seen as proactive by init iatingdialogue, legit imacy theory can be viewed as reactive, in thatdisclosure is a result of external environmental factors (Guthrieand Parker, 1989) and increased disclosure has been foundamong companies which have previously been prosecuted f orenvironmental infringements. (Frost and Wilmshurst, 2000)

Companies may also use voluntary reporting as a means tolegit imise their activit ies and thereby defer the need forgovernment intervention with the introduction of furtherlegislation. (Frost and Wilmshurst, 2000, Clarke and Gibson-Sweet, 1999) If legislation is l ikely to restrict the way a

company does business or has f inancial implications they mayuse legit imising tactics, such as increased disclosure, to pre-empt government intervention.

While legit imacy theory remains the most commonly acceptedin current research it is not universally accepted as the maindeterminant of environmental reporting: Guthrie and Parker(1989) found no evidence in a case study to suggest the theoryapplied in their case and Frost and Wilmshurst (2000) foundonly l imited support for legit imacy theory being a motive butstate that i f companies fai l to legit imise their activit ies this may

lead government to legislate to ensure companies comply.

2:1:3 Critical Theory

Crit ical theory developed, nearing the end of the last century,in the philosophical arena to appraise the social order incapital ist countries to inform debate on the class struggle. Nowcommonly used in accounting research to take an objectiveperspective i t seeks to analyse the objective through subjectiveinterpretation. (Ryan et al 2002)In crit ical theory, the commonly held belief that accounting

systems have developed to produce unbiased and neutral


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reporting is refuted and the perspective of accounting as beingfor the benefit of certain parties permitt ing only them tomaintain power at the expense of others in society. (Deegan,2000) Environmental accounting research has frequently been

a topic examined under this crit ical lens as researchers haveattempted to highlight the deficiencies of tradit ional accountingto provide stakeholders with useful reports. Many crit icaltheorists are opposed to aspects of the capital ist culture whichpredominates in todays world and that as the power l ies withlarge organisations, governments and regulatory bodies thenthe status quo wil l be maintained as those bodies may have avested interest in maintaining the current system. (Deegan,2000,) Therefore under crit ical theory i t may be found thatthere is resistance to implementing new systems and ways ofaccounting to be found among those who have not alreadycommenced environmental reporting due to other external orinternal pressures and that the concern of accountants withfinancial matters being the only ones of importance to acompany wil l result in environmental exploitation anddegradation. (Owen, 2003)

2:1.4 Motivations for environmental reporting

In order to ascertain the motivation for environmental reportingthe underlying concept of motivation must f irst be analysed.

This is defined in individuals by Mull ins (2006. p 184) as

.some driving force within individuals by which they attemptto achieve some goal in order to fulf i l some need orexpectation.

This definit ion can also be applied to organisations as theycomprise individuals and therefore the operation of anorganisation rel ies on the collective aspirations and needs ofthose individuals.

Maslows hierarchy of needs for example says that once anindividuals basic needs, food, shelter, s leep etc. are satisfiedthen their needs move up the hierarchy to the need forsecurity, then to social acceptance needs, then to ego needswhich can include reputation and recognition and f inally to theneed to reach their ful l potential. (Mull ins, 2006) Embedded inthis theory is the notion that once the basic needs are fulf i l ledthe individual wil l endeavour to reach the higher levels and thebasic needs are no longer a motivational force as the newneeds fulf i l this purpose. (Brooks, 2003)


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The most basic needs, that of food and shelter must beobtained at any cost, taken in the context of an organisation i tmay therefore be hypothesised that when in i ts infancy anorganisation is focused on survival and becoming successful at

what i t does (i .e. trading and accounting for that business in asstraightforward a manner as possible) and thereforeconcentrates al l i ts effort on these goals. If i t is successful atdoing this then the aspirations of the organisation may change,possibly to growth, either organically or through acquisit ions,and as this occurs then the environment in which i t operatesalso changes and to remain competit ive i t has to adapt to thatchanged environment. Porter and Van der Linde (1995) claimthat through environmental reporting companies can gain acompetit ive advantage but the tr igger point to commenceenvironmental reporting has not been defined. Freedman andStagliano (1992, in Wilmshurst and Frost, 2000) state there isno single motivator for external reporting which comes as aresult of managerial motivations and att i tudes. Using Maslow totry to analyse this point may be impossible as he states thatthe hierarchy is not necessari ly in a f ixed order and also thatthe satisfaction level necessary to move to the next levelvaries from individual to individual (Mull ins, 2006) and someare happy to remain at a particular level lacking the motivationto attain higher. (Brooks, 2003) Further, the theory wasintended for use on the individual not organisations.

Research by Roberts in 1990 into trends in social reportingfound that the increasing unemployment in the previous decadehad led to a reduction in social reporting as the economicaspects of business grew to be of greater importance than thesocial. (Owen, 2003) found that the amount of social disclosureincreased with the size of the company while Campbell andSlack (2006) found that size and proximity to end user wererelative to the amount of charitable giving an organisationmade. This would suggest that Maslows hierarchy could be asuitable framework for evaluating the evolutionary stages of a

company.

Attempts at classif ication have also been made in order todescribe the degree of proactivity companies display in theirenvironmental management, again describing evolutionarystrategies a company might take as i t moves from the beginnerlevel to a proactive approach (Henriques and Sadorsky,1999)but this research does not explore the tr iggers for thesedifferent classif ications beyond management hubris.

Most research carried out on major companies points to

increasing levels of disclosure cit ing a number of reasons for


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disclosure. Khanna and Anton, (2002) state that companiesprepare different types of reports depending on whether theirmain motive is for legislative reasons or competit ive advantagereasons. The reports of companies concentrating on the

legalistic implications wil l tend to be formally expressedpractices, such as specialized environmental staff,environmental policy and audit and l iabil i ty insurance whilecompanies focusing on competit ive advantage wil l place moreemphasis on training and rewarding employees and totalquality management which wil l continuously strive to improveenvironmental performance. AIM l isted companies tend to befast growing and dynamic newcomers to the market and wil lneed to maintain competit ive advantage in order to continuetheir growth strategy and therefore may be expected to preferthe competit ive advantage types of reporting.

Previous research can be categorised by three main groups;the business case, stakeholder accountabil i ty and crit icaltheory. (Brown and Fraser, 2006) These categories wil l bediscussed in more depth in relation to the research beingcarried out.

2:2. The Business Case

Supporters of the business case claim that environmental

reporting should be a key strategic tool to build value in thebusiness (Porter and Van der Linde, 1995) and not somethingto be offset against profits with the motive for reporting lyingelsewhere. (Brown and Fraser, 2006) Gray (2003) takes thedefinit ion of the business case to i ts lowest level stating i t aswil l i t make us or stop us losing money? (2)

The business case wil l be examined under the headings of;

Financial considerations; are an important aspect, and relevantto, organisations of al l descriptions but perhaps more so to

companies on the AIM index which are often in their earlyyears of trading and making a trading loss.

Risk: the risk of causing environmental damage and theassociated costs involved or reputational r isk which needs tobe managed and encompasses environmental r isk and canhave a signif icant impact on revenues and expenses. It canalso impact on access to capital from investors and banks.

Competit ive advantage: Companies, especially those in highlycompetit ive industries, need to maintain a competit ive


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advantage and how environmental reporting can assist in thiswil l be examined.

These three factors can be summarised (see table 2:1) using

three different management approaches, compliance, eco-efficiency and new markets, against each type is shown theeffect of implementation on performance and profitabil i ty and inthe third column is indicated which of the business caseindicators are most affected by this style of management.

Table 2:1 Impacts of different management approaches to

environmental reporting.

ManagementApproach

Performance andProfitabil i ty Impact

Business caseindicators

Compliance Legislative

compliance toprevent costs ofnon-compliance.

Reducingenvironmentaland Reputational

risk.

Financial

Risk


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Eco-efficiency Achieving costefficienciesthrough processimprovement.

Understandinglife-cycle costs.

Financial

Competitiveadvantage

New Markets Improving marketshare throughproduct changes

Engagingstakeholders tomanagereputation andmaintain

credibil i ty Defining

organisationalwide values andstrategies toensure consistentstandards andrisk management.

Financial

Risk

Competitiveadvantage

Adapted from Cottrel l and Rankin, 2000. p3

2:2:1 Financial Considerations

The most basic method for companies to benefit f inanciallythrough the implementation of environmental systems isthrough cost savings such as due to less energy or waterusage when the environment and the company both benefit.(Gray, 2003) Costs wil l be incurred by al l companies to meetlegislative requirements, but these costs wil l be less than thoseincurred should a breach of regulation occur and bediscovered. (Cottrel l and Langton. 2000) However anorganisation more committed to environmental issue wil l incur

greater costs when implementing an environmentalmanagement system, costs wil l be incurred in replacing plantand equipment that has better environmental credentials. Thisprocess improvement could lead to cost savings so offsett ingthe init ial costs (Cottrel l and Langton, 2000) but the init ial costcould be seen by companies as a disincentive to report andsmaller companies could see it as a barrier i f they haveinsufficient funds. However much of the information is alreadycollected within companies so init ial costs need not beexorbitant and the management phrase of i f you cant measureit, you cant manage it is appropriate in this case and is simply


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a move away from the tradit ional focus on f inancialperformance. (Norman and MacDonald, 2004)

Research by Toms (2000) concluded that through

environmental reporting companies created value both throughincreased profits and increased share prices. The recentexplosion in the number of ethical investment funds lendsweight to the claim that share prices can increase whenenvironmental matters are reported. (Robson, 2006) Most mainstock exchanges now have sustainabil i ty indices; e.g. the DowJones Sustainabil ity Index and the FTSE4Good Index howeverToms (2001, 2002) found that investment professional attachedlitt le importance to certi f ied environmental managementschemes placing more weight on the quality of reporting, aview backed by Robson (2006) who found that benefits to thebottom l ine depended on the manner in which i t was recorded,while Alexander and Buchholtz (1978) found no discernibledifference risk adjusted rates of return when investigatingsocial responsibil i ty reporting and share price. Neither dothese funds accept companies in unethical industries e.g.armaments or tobacco and so even should such companieshave impeccable environmental credentials would be barredfrom these funds on the grounds of their industry. (Cowton,2004)

The costs to business for permitt ing environmental degradationcan be substantial i f legislation is broken with large f ines andclean-up costs and Schaltegger and Burrit (2000) suggest thatcompanies are adopting environmental reporting procedures,not through consideration for the environment, but to avert thecosts incurred should non-compliance occur.

Companies can benefit from a reduced cost of capital and onefactor considered in the calculation of interest which isincluded in cost of capital calculations is r isk, includingenvironmental r isk, (Schaltegger and Burritt, 2000, Jones, 2000

) so prudent environmental management can reduce borrowingcosts and therefore increase return on capital.

It is possible that quality environmental reporting is notsignif icant to enhanced f inancial performance and that theperformance is a result of superior management overall or thatthere are other barriers to competit ion. (Toms, 2001)

2:2:2 Risk

In the context of this research risk can be subdivided into two

categories; environmental r isk and reputational r isk. The two


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are l inked in that i f a company chooses to ignore theenvironmental aspect i t can impact on reputation which canlead to degradation of profits and even ult imately to withdrawalof the perceived l icence to operate, bestowed on a company by

the public.(Deegan, 2000) Risk reporting in the annual report,as part of the business review, is seen to benefit companiesthrough the provision of forward looking reporting at a t imewhen acceptance of the provision only of historical informationincreasingly comes under crit ic ism, reduction in cost of capital,enhancing risk management and improved accountabil i ty toshareholders and investors. (Ell iot and Ell iot, 2005)

2:2:2:1 Environmental r isk

As investing in the AIM index may be riskier than investing inthe main indices then it should fol low that there would beincreased disclosure among companies in the AIM index.However AIM l isted companies are not bound under their l ist ingrules to make risk disclosure under the Combined Code onCorporate Governance so this may be an internal function only.For investment decisions investors and banks wil l take intoconsideration environmental r isk when making investmentdecisions, (Gray, 2003) banks may have the chance to reviewenvironmental r isk when they are approached by a companyrequiring f inance but investors wil l generally not have this

luxury.

Research by Toms (2002) found that there was a posit ivecorrelation of r isk to reputation and by reducing risk toincrease reputation the cost of capital is reduced as investorsrequire a lower rate of return.

The implementation of an environmental management systemcan be seen as a posit ive signal in the management of r isk,providing insurers and government with evidence ofassessment and management of environmental r isk. (EMAS,

2003)

2:2:2:2 Reputation risk

Bebbington et al (2006) suggest that reputation consists of f iveelements which are; f inancial, management quality, social andenvironmental performance, quality of employees and quality ofproducts; poor performance in any of these elements can leadto loss of reputation. Toms (2002) found that disclosure ofenvironmental reports and the monitoring and disclosure ofenvironmental policies made a signif icant contribution to


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environmental reputation which was unaffected by f inancialperformance.

The l i terature suggests that companies may make

environmental disclosure as part of their reputation riskmanagement (Bebbington et al. 2006, Clarke and GibsonSweet, 1999) and that good environmental reputation is anintangible asset (Toms 2001); Friedman and Miles (2001)include this as a strong reason for the business case and thestrengthening of corporate governance to provide greatertransparency and accountabil i ty. Used as a public relationsexercise i t is unlikely to be sustainable and only through thedevelopment of a sustainable model, taking into account keystakeholders, can this type of r isk be managed. (Robson, 2006)

Reputation as an intangible asset arises out of pastperformance of a company, whether i t has provided goodservice or rel iable products or is well known for i ts ethicalstance, and is built out of the perceptions of a wide group ofstakeholders. (Bebbington et al, 2006) As reputation is built onperceptions i t is highly subjective and as these perceptions arethose of a wide group of stakeholders i t becomes a highlycomplex, and possibly very fragile, commodity in todays highlycompetit ive marketplace.

As reputation is not static and built on perceptions i t isextremely diff icult to manage and newer f irms wil l want to builda solid reputation, i f they report superficial, unsubstantiatedenvironmental reports which may later be refuted they maychoose to ignore this area of reporting unti l compelled byexternal factors at a later date. Only quantif iable, verif iableinformation wil l contribute to the building of sustainablereputation. (Toms, 2002)

At face value reputation risk management and legit imacytheory have many common characteristics but Bebbington et al

(2006) discuss the differences, arguing that while legit imacytheory is based on societys norms and values reputation isl inked to the comparison of l ike organisations.

2:2:3 Competitive Advantage

Wagner and Schaltegger, (2003) question whether a businessbecomes competit ive and then reports on sustainabil i ty orwhether i t is through this reporting that the business gainscompetit ive advantage. However Porter and Van Der Lynde(1995) claim that the competit ive advantage is gained, not

through the reporting i tself but through the innovation and


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development of new technologies required to combatenvironmental damage. This latter explanation is the logicalexplanation for gains in competit ive advantage as reporting initself is unlikely to create advantage; reporting is unlikely to

create advantage unless there is a comprehensive programmeof improvement and monitoring with the co-operation andinvolvement of employees. Toms (2001) takes this further bysuggesting that the creation of a good environmentalreputation, through publicising their environmental reporting, isin effect creating an intangible asset and the improvedreputation can be a competit ive advantage. Competit iveadvantage is an advantage that is not easy to imitate (Johnsonand Scholes, 2002) and as investing in environmentalmanagement can be costly would be diff icult for competitorsunwil l ing to make the same level of commitment to imitate.(Toms 2001) This cost could though set companies at acompetit ive disadvantage (Alexander and Buchholz, 1978)unless they are able to uti l ise the expenditure in productivemanner. Large companies can exploit competit ive advantagethrough economies of scale but smaller companies wouldbenefit more through developing intangible assets, such asreputation, which are more diff icult to imitate. (Toms, 2002)

Having the best possible management can also be a means ofgaining competit ive advantage and Robson (2006) found that

65% of accountancy students would look at companies CSRpolicy when looking for a job with many making it their mainpriority. Although this is not exclusively environmental i t maybe unwise not to take heed that younger generations take goodenvironmental and social responsibil i ty as an accepted norm.

Competit ive advantage can also be lost due to imitation bycompetitors, i f there is a l ikelihood of this happening then itmakes sense for management to wish to keep the source of theadvantage secret. Therefore the call for extensive reportingand transparency is in confl ict and there is a paucity of

guidance in the l i terature on this issue. (Norman andMacDonald, 2004)

2:3. Other Factors relevant to the Study

2:3:1 Legislation

This section refers only to regulation of companies governancewith regard to requirements for reporting environmental mattersand not to environmental legislation i tself as this subject hastoo broad a scope for this piece.


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Voluntary environmental reporting can be seen as a way toavoid governments imposing restrictive legislation. (Frost andWilmshurst, 2000, Brown and Fraser, 2006) Current reportinglegislation in the UK is only applicable to companies l isted on

the Official List and guidance is to be found in the CombinedCode on Corporate Governance, further guidance would havebeen provided had the Operating and Financial Review beenimplemented however this was abandoned by the governmentbefore coming into force this year. Many companies hadalready started to voluntari ly produce a review and it is yet tobe seen whether they wil l continue this practice. Company lawrequires no environmental disclosure, but the power ofshareholders to require a company to provide this informationshould not be overlooked. In 1998 Shell was the f irst companyto be forced to address environmental issues aftershareholders lodged a resolution to address what they saw asinadequate policy and reporting practices. Although theresolution was unsuccessful, Shell did re-evaluate their currentpolicies. (Friedman and Miles, 2001)

Self regulation is seen by some (Ashby et al, 2004) as anotheralternative to government regulation, with the companys imagebenefit ing from public disclosure, and that i f the benefitsaccrued from voluntary compliance exceed costs no regulationissue exists but this is generally unlikely to occur. It can also

be seen through the legit imacy lens as averting governmentregulation through voluntary compliance. Governmentregulation is advocated by many writers (Deegan, 2000,Medawar, 1979, Inman, 2004) as a means to achieveaccountabil i ty and transparency and that companies reportvoluntari ly to defer government intervention. Voluntary actionis viewed as less costly than legislative compliance. (Ashby etal, 2004) A problem seen with self regulation is that of free-riding by companies who disregard voluntary codes and behavein an inappropriate manner in the belief that compliance by themajority wil l mask their transgressions. (Ashby et al, 2004)

Although not specif ically environmental regulation the provisionof directors l iabil i ty brings individual responsibil i ty (Wilmshurstand Frost, 2000) Government, however, must be careful whenconsidering what could be seen as burdensome legislation inthat the imposit ion of such in a cl imate of general disinterestwil l only lead to massive levels of non-compliance. (Jackson etal, 2000)

Outside the UK several countries do have mandatoryenvironmental reporting including Denmark, Netherlands,

Sweden, France, Austral ia and Korea and the European Union


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has prepared the Commission Recommendation on theRecognition, Measurement and Disclosure of EnvironmentalIssues in the Annual Accounts and Annual Reports ofCompanies (2001) which calls for closer integration of f inancial

and environmental reporting. (Gray, 2003) All of which mayindicate that the UK wil l eventually fol low suit possibly throughEU directive i f the UK government does not take the init iative.

2:3:1:1 Operating and Financial Review/Extended BusinessReview

The reporting requirements of the Operating and FinancialReview, scrapped by the government in November 2005, hasbeen superseded by the Extended Business Review althoughcompanies sti l l have the option of reporting voluntari ly underthe OFR standard.(Deloitte, 2006)Section 29 of the OFR would have required l isted companies todisclose environmental matters ( including the impact of thebusiness of the entity on the environment.) The report wouldhave included environmental policies and how successfulimplementation had been. If disclosure was not made this mustbe stated. (ASB 2005, paras. 29, 30) The standard also statesthat i t should not be a replacement vehicle for reporting toother stakeholders on matters such as environment orcorporate social responsibil i ty. However there was also the

proviso that directors need not disclose anything that could bedetrimental to the business. This appears to absolve directorsfrom reporting any adverse environmental impacts butunfortunately due to the OFR requirement being scrapped bythe government prior to implementation remains untested.However with Friends of the Earth took legal action against thegovernment due to lack of consultation and forced thegovernment into a review in February 2006. (Woods, 2006)This reversal of government posit ion is not the end of theirdesire for companies to report on their environmental impact,environment minister Ell iot Morley has urged companies of al l

sizes, not just those required to fulf i l legal obligations, toimplement the new DEFRA guidelines. (DEFRA, 2006)

The successor to the OFR is the Extended Business Reviewand has been welcomed by the Department for Environment,Food and Rural Affairs (DEFRA, 2006) as the guidelinesaddress signif icant environmental impacts and view it as anopportunity for businesses to measure, manage and reportenvironmental performance as a means to save costs, enhancereputation and reduce risk. (BatE, 2006)

2:3:1:2 Combined Code on Corporate Governance


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The Code incorporates the Turnbull Report and Review of 2005to require disclosure of material non-financial matters; thisincludes but is not exclusive to any potential environmental

matters; however this is left to the discretion of the directors todecide what is or is not material. The main issue is of r isk andinternal control which should be reviewed on an ongoing basisand disclosure made when there is seen to be any relevantissues. As the l ist ing requirements for AIM l isted companies donot require compliance with the Combined Code it is possibly atest of a companys integrity and wil l ingness to seektransparency should i t voluntari ly comply with the requirementsof the code.

2:3:2 Environmental Management Systems, Frameworksand Awards.

In order for a company to effectively manage its environmentalreporting i t needs to implement an effective environmentalmanagement system. (New Straits Times, 2003) As anargument in favour of the business case for environmentalreporting the International Organisation for Standardisation(ISO) says:

There is mounting evidence that companies which manage not

only the standard economic factors but also the environmental and social factors affecting their business show financial performance superior to those which fai l to manage all three.(ISOb. 2006)

There are several EMSS available to companies and themerits of each are examined at appendix A. The purpose ofthis, l inked to the research questionnaire, is to determinewhether there appears to be a preferred method amongst AIMlisted companies and if so what merits or otherwise can beattached to the chosen systems.

One crit ic ism made of the compliance approach as opposed tothe legislative approach to environmental reporting is that thecommitment to reduce emissions etc. al lows companies to setlow easily achievable targets of l i t t le benefit to theenvironment. (Ell iot and Ell iot, 2005)

2:4 Conclusions

Environmental reporting has increased considerably in recentyears among larger companies but appears to lack direction

and focus with companies reporting on a variety of indicators


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but there is a lack of comparabil i ty between companies. Thereis l i t t le research into smaller companies and the stage ofcompany growth at which environmental reporting becomes astrategic tool, an issue this piece of research seeks to address.

What research there is indicates a lack of interest in thesubject.

Companies may incur costs when complying with legislation butthere is potential to make signif icant cost savings through moreprogressive environmental management. There is also thepossibil i ty of improved shareholder value through the creationof an intangible asset in the form of environmental reputation

Risk is an important factor in environmental management asthe effect of underestimating risk can have serious f inancialand ecological consequences. Reputation risk managementand legit imacy theory have several common themes includingthe empowerment of stakeholders to have influence overmanagerial behaviour from which i t may be concluded thatcompanies which ignore their key stakeholders are ignoring thebusiness case for improved accountabil i ty and transparency.

Companies may underestimate the power of key stakeholderswith managerial perceptions leading to a lack of reporting, asituation which may only be revised if the company is seen, by

powerful key stakeholders, to have transgressed their moralcode and apply pressure on management to change theirprocedures. Although many companies report on environmentalmatters in order to pre-empt shareholder/stakeholderdissatisfaction i t has not been conclusively proven that thislegit imising tactic really works.

Legislation has, so far, fai led to compel companies to giveenvironmental matters serious consideration only paying l ipservice to r isk considerations and as only companies l isted onthe main index are bound to fol low the Combined Code this

leaves reporting of the majority of the countries organisationsat the discretion of management. Although it cannot bepredicted at present, as public opinion shifts more strongly infavour of sustainabil i ty, i t may be in the not too distant futurethat environmental reporting wil l become required of al lorganisations.

Regardless of whether a company provides qualityenvironmental information or not good management isimperative and no conclusive l ink has been established toindicate whether one precedes the other.


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2:5 Hypotheses

H0 = That companies need to attain certain levels ofdevelopment before implementing environmental policies

and reporting.

This hypothesis wil l be tested using Maslows hierarchy ofneeds as the framework for analysis.

H1 = That motivation for AIM listed companies will be thesame as those identified within the literature for largerorganisations.

The l i terature review wil l provide the basis for testing thishypothesis against the results obtained from the questionnairesurvey.

H2 = A lack of understanding or implementation of the keyconcepts for the business case will lead to low rates ofenvironmental disclosure.

This hypothesis wil l be tested by rating the key issues of thebusiness case to f ind what level of recognition exists amongAIM index companies.

Chapter 3: Methodology

3:1 Introduction.

The role of methodology in research is to define the boundswithin which the nature of reality is assessed. When definingthese bounds assumptions are made and interpretations madewhich wil l in turn order the nature of the research method.Accounting research fal ls under the remit of social science asit investigates social issues and not that of the natural world.(Ryan et al 2002)


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3:2 Research Philosophy

The research method chosen is empirical and posit ivist innature in order to test att i tudes and perceptions and l ink these

results to the current theory underpinning the phenomena ofenvironmental reporting. It seeks objective truth which wil l beachieved through primary research in the form of aquestionnaire. Had the research been interview based aphenomenological viewpoint would have more appropriate asthe more in depth answers provided would have permitted astudy of the behaviour displayed by the participants. There wil lbe an element of phenomenology underpinning the quantitativemethods used in the f inal analysis as there are open endedquestions included in the questionnaire. This al lows for somemethodological tr iangulation to take place and lends moredepth and richness to the f inal analysis. It may also al lowgreater validity and rel iabil i ty than the use of a single method.(Hussey and Hussey, 1997)

This piece of work is deductive and quantitative in nature as i tsets out to test the theories used to explain environmentalreporting. Relevant theory sets the bounds for the l i teraturereview and from that the hypotheses developed. There is noattempt explain or predict the outcome of the research or todevelop new theories as there would be with inductive

research. Absolute objectiveness is not possible but thismethod does provide a transparency not possible with aqualitative piece. The deductive method is most appropriate tothis research as no new theory is being produced, existingtheory, previously applied to a different type of organisation, isbeing tested in the context of the AIM l isted companies.Objectivity cannot be absolute as perceptions and opinions arebeing sought, and personal biases of the respondents areunknown, and therefore some measure of subjectivity isinevitable. Using deductive reasoning conclusions are drawnthrough logical reasoning but even when the process of logical

reasoning is correct what actually occurs in reality may not bethe same. For example when Mil ler and Modigliani developedtheir theory on dividend policy and the irrelevance of dividendsit was theoretically correct but in practice the perfect marketsand zero taxation they used for the model do not exist andtherefore the model was worthless. It did however lead to muchfurther research into the subject with subsequent researcherssupporting the theory. (Watson and Head, 2004)

Much crit ical accounting research is objective but undergoessubjective interpretation and seeks to change contemporary

reality, as this piece of work is a study of existing practice i t is


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objective, accepting existing structures and seeking to explainactions. (Ryan et al. 2002)

3:3 Method

An init ial web search was carried out on a selection ofrandomly chosen AIM l isted companies to obtain secondarydata to assist in the development of the questionnaire.Although the companies were randomly chosen a balance ofdifferent industries and companies with a higher public profi lewere selected, no f inancial services companies were used dueto the differing regulation of pension providers. This searchwas to see to what extent companies provided environmentalinformation on their web sites and if they had annual reports online, to what extent environmental matters were reported. Itwas also recorded whether or not they made reference tocorporate governance matters, reporting in accordance with thecombined code and then to compile a database to be used incontacting the companies by postal questionnaire to explorefurther att i tudes and practices in environmental reporting.

The postal questionnaire (Appendix B) was used in order tocollect primary data not available elsewhere. It was adescriptive survey intended to test att i tudes and beliefs anddiscover the views of respondents on environmental matters.

(Hussey and Hussey, 1997) A weakness of this type of datacollection is the typically low response rate, being around 10%.(Robson et al 2005) As only 37 questionnaires were sent out,due to t ime and f inancial considerations, i t was not expected toreceive a statistically signif icant number of replies but usefulinformation may nevertheless be compiled. A further weaknessis that respondents may exaggerate or undervalue certainresponses. (Ticehurst and Veal, 1999) The questionnaire wascompiled with the aim of understanding the motives and driversfor environmental reporting and to attempt to see if there wasany difference between them and those reported in studies on

larger companies. It consisted two sections; section one was todiscover the current level of environmental reporting andactivity within companies and section two to understand thedrivers for environmental reporting with addit ional space forrespondents to add any information they thought relevant tothe debate. This was intended to broaden the scope of answersavailable to respondents which were otherwise l imited to theconstraints of closed questions and Likert scales. It wasaddressed to Financial Director level in order to investigatewhether company boards take environmental considerationsinto account when devising their business strategy and

although these were the opinions of one person within an


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organisation, they were of a senior enough standing to be seenas representative of the companys posit ion. Respondents wererequested to supply their posit ion on the questionnaire tomonitor their level of standing within the company.

The introduction to the questionnaire explained a l i t t le aboutthis project and gave brief background information on the topic.It contained assurance of confidential i ty to al l respondents,that no names or identifying details would be used in the f inalreport and a statement that the assumption was made that al lrespondents, through the act of completing and returning theform, were satisfied that they had no ethical concerns.Respondents were also given the contact details for the authorshould they wish to discuss the project further.

All respondents were asked to give their name, company nameand posit ion in the company. They were also given theopportunity to request a copy of the completed report. I t wasnot felt necessary to collect further personal information suchas age or salary as these would lend l i t t le extra to the f inalreport.

3:3:1 Section 1.

The aim of this section was to discover the current level of

environmental reporting and activity within companies. Therewere f ive questions in this section devised to f ind whethercompanies already carried out any environmental reporting orother types of non-financial reporting and whether anyenvironmental management system was in place. It was also todiscover i f any companies using environmental reporting usedit as a strategic tool through publication possibly in order toeither lower perceived risk or raise reputation. Although theinit ial web search had revealed l i t t le in the way ofenvironmental reporting i t was felt important to clarify whatcompanies were presently doing as there may have been

internal reports not available to the public.

3:3:2 Section 2.

The aim of this section was to attempt to understand the maindrivers for environmental reporting. Comprising of fourquestions and space for comment, three of the questions usedLikert scales to measure the perceived level of importance of anumber of statements. The f irst question was designed to testatt i tudes and beliefs of respondentsThe Likert scale questions were scaled from one to f ive with

one being the most important and f ive the least important. The


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questions and subsequent statements to be scaled drew onresearch and studies by KPMG, (2005) Bebbington et al,(2006) Wilmshurst and Frost, (2000) and were an attempt todiscover the main drivers for companies to implement

environmental reporting and environmental managementsystems particularly i f they do not already do so.

The questionnaire was then pi loted on peers and f inaladjustments made before being mailed, with a reply envelope,to potential respondents.

On receipt of completed questionnaires they were coded andinput into excel for further analysis. No coding was applied tothe open ended questions as there were so few comments thatindividual analysis was possible.

3:4 Limitations of the Method

Positivist research is crit ic ised by those preferring aninterpretivist methodology on philosophical premises, notbecause the methodology itself is f lawed. (Ryan et al, 2002)

The shortcoming of this piece of research is that a relativelysmall sample is being tested and therefore any conclusionsdrawn may not be indicative of the behaviour of the population

as a whole. Also the l ikelihood of a response is increased whenrespondents have strong feelings, either posit ive or negative,about the subject. Therefore false results may be obtaineddepending on the individual respondents personally heldbeliefs.

Although the research was posit ivist and therefore objective innature the greatest drawback is that human nature cannot bescientif ically accounted for in the analysis. Personally heldviews and perceptions are being tested and so can onlyprovide a subjective view. So although the analysed results

may be highly rel iable, the validity may be called into question.(Hussey and Hussey 1997)

The choice of companies for the survey may also lead to biasoccurring as i t was unknown whether the chosen companieswere representative of the population as a whole and thereforeunexpected bias may occur in the results. This bias may alsobe increased as even were the sample unbiased those whochose to respond may not be. (Hussey and Hussey, 1997)


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Chapter 4 Findings and analysis

4:1 Findings

The init ial web search was used to compile a spreadsheet,(Appendix C) providing information on the 37 chosencompanies including contact details, notes on environmentalinformation provided on their web sites, whether they producedan environmental policy and whether they complied with therequirements of the combined code on corporate governance.The results are tabulated below in table 4:1.

Table 4:1 Web site reporting statistics


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EnvironmentalPolicy

In accordance withCCCG or otherrecognised standard

Any mention ofenvironmentalmatters.

8% 57% 43%

An in depth content analysis of the 43% of companies makingmention of environmental matters was not possible due to t imeconstraints but the level of information provided ranged froman environmental policy statement and some discussion ofenvironmental impact of the business, to legal compliancestatements down to statements such as the company displayeda "responsible att i tude towards environment." 57% ofcompanies web sites made no mention of environmentalmatters.

Although companies on the AIM index need not comply with theCombined Code on Corporate Governance many of them statein their annual reports that they comply where appropriate foran organisation of their size. 57% of company web sites foundstated that the company applied the principles of the CombinedCode where applicable to AIM l isted companies. The combinedcode requires that companies disclose any material r isk; nosuch disclosures were discovered in the annual reports ofthose companies that provided annual report information,however nowhere was it stated what was or was not

appropriate.

Expectations of not receiving a high return of questionnaireswere ful ly l ived up to with only 7 responses from 37 mail ings;this was an 18.92% reply rate so is in fact greater than theaverage response rate for postal questionnaires. However dueto the low response rate i t would be inappropriate to carry outcertain statistical tests as the results would not be statisticallysignif icant. Instead the results were analysed using mean andstandard deviation to identify trends in the thoughts of thoseresponding.

4:1:2 Section 1

Question 1 asked Do you currently provide any form off inancial reporting on the economic impact of environmentalmatters? One company provides this information (14%) butdoes not make this information available to the public. (Q2)

Question 3 asked if an EMS was in operation and if so whichone? 57% of respondents said they did have a system in placebut of those replies 29% delegate responsibil i ty to subsidiary

level and it is unknown whether al l subsidiaries operate such a


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system. Of those that do operate an EMS all use ISO14001;reasons for this may include the higher public profi le of ISOstandards particularly among industries in which ISOaccreditation in other areas in standard or i t could simply be

that the on-l ine information provided by the InternationalOrganisation for Standardisation is more easily understandablethan that of EMAS or GRI and could support the claim that onereason for not reporting is lack of understanding of EMSs.

Question 4 asked whether any other type of non-financialreporting was carried out. Only one company (14%) respondedposit ively, stating this was a corporate governance report. Thisis not a true refection of non-financial reporting as otherrespondent companies provide corporate governancestatements within their annual reports and the intention herewas to see if any provided any form of social reporting,however the questionnaire did not give a l ist of options and lefti t open-ended as to what was commented on.

Question 5 asked whether the company had ever undergone anenvironmental audit. The response was the same as forquestion 4 which indicates that as part of their ISO14001procedures environmental audit is included.

4:1:3 Section 2

Question 6 asked if the respondent believes that theaccountant has a role in the preparation of environmentalreports. The response rate here was an encouraging 71%.Space for comments was provided at this point; comments thatwere made include

Evaluate f inancial impact/integrate report to otherreports and published documents.

If i t affects shareholder judgement/share price.

If there is a cost implication

Where required, as used in discipl ines of data collectionand reporting.

Interestingly al l of those providing comment believe that theaccountant does have a role to play in the preparation ofenvironmental reports, those who had disagreed were unableto provide comment to back up this statement.


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The f inal three questions were on a f ive point Likert scale. Ascore of 1 being the most important and f ive the leastimportant. i .e. the lower the score, the greater the perceivedimportance. Questions 8 and 9 also had space for respondents

to give any other reason they felt important that were notalready l isted. None used this opportunity to present anydifferent views.

Question 7 asked: What is the main reason for not preparingenvironmental data? There were four options, shown in table4:2 with the mean average score and standard deviation ofeach statement and overall standard deviation of the question.

. Table 4:2. Summary of question 7 results

Question 7. Mean

Std. Devofstatement

Std.Dev. Ofquestion

S h are h old e rs d o n o t re qu irethis information 2.43 1.90

Not company pol icy 2.71 1.25

Economic considerations 3.00 0.82

Lack of t ime 3.14 1.21

0.32

Shareholders not requiring this information was the most

important factor and scored a mean average of 2.43 while t imewas the least important and scored an average of 3.14.However Shareholders not requiring the information alsodisplayed the greatest standard deviation and in fact only onerespondent did not answer either 1 or 5 for this statement.

Question 8 asked: What would be the greatest incentive tocommence environmental reporting? There were eight options,shown in table 4:3 with the mean average score and standarddeviation of each statement and overall standard deviation ofthe question.

Table 4:3. Summary of question 8 results

Question 8. Mean

Std. Devofstatement

Std.Dev. Ofquestion

Legislat ion 1.14 0.38

Cost savings 1.50 0.84

Access to capital/ increasedshareholde r value 1.57 0.79

Competetive pressure 2.43 1.27

0.88


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Risk m anagem ent /r educt ion 2 .5 7 1. 51

Improve other stakeholderrelationships

0.95

Ethical considerations

2.71

0.76

Innovation and learning 3.86 1.07

Legislation received the lowest mean average score of 1.14and was therefore the greatest incentive with 86% ofrespondents scoring this option as 1, and innovation andlearning the least with 3.86. This question scored the widestspread of scores with a standard deviation of 0.88.

Question 9 asked: What would be the greatest incentive toimplementing an environmental management system? There

were ten options, shown in table 4:4 with the mean averagescore and standard deviation of each statement and overallstandard deviation of the question.

Table 4:4 Summary of question 9 results

Question 9. Mean

Std. Devofstatement

Std.Dev. Ofquestion

Economic considerations 1.26

Cost savings 0.89

Risk management/reduction

2.00

0.63

Reputation or brand 2.33 1.21

Strengthened supplierrelationships

1.21

Improved relations with

2.67

1.03

0.41


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governmental authorit ies

Innovation and learning 1.17

Ethical considerations2.83

0.98

Employee motivat ion 0.89

Market posit ion/shareimprovement

3.000.89

There were three statements t ieing for most important with amean average of 2, they were; economic considerations, r iskmanagement/reduction, and cost savings. The least importantoptions were jointly employee motivation and marketposit ion/share improvement scoring 3 each. The standarddeviation was 0.414.

Both questions 8 and 9 had space for any other reasons but norespondent made any other comments here.

Finally there was space for comments the respondent may feelrelevant to the environmental reporting debate. There were fewadditional comments but of those that did comments madeincluded that the company operate overseas and exceed localstandards although see no need for preparation of anenvironmental report. Another respondent fai led to observe anylink between environmental reporting and cost savings,innovation and learning and risk management. It was observed

that the difference between management and reporting shouldbe distinguished and that the management was an importantaspect but the reporting not so.

4:2 Analysis

The number of responses was disappointing although to beexpected from the number sent out and above the expectedaverage which could indicate a general interest in the subject,or maybe just sympathy for the author and the task beingundertaken. Generally low returns may be an indication of theapathy felt amongst many for the necessity to provideenvironmental information. However i t may also be due to thequestionnaires being sent out during peak holiday season andrespondents being on leave! However al l respondents were atboard level so that signif ies an awareness of the issues at thatlevel


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4:2:1 Section 1

The responses to section one were as expected from the init ial

web site search. The questions had sti l l been asked in order todiscover whether there was internal reporting being undertakenas environmental reporting could be a contentious area if thereare adverse situations to report which companies would prefernot to make public. The number of companies with an EMS inoperation was also disappointing being just over half ofrespondents, with only some subsidiaries operating an EMS, al lusing ISO14001. No other environmental init iatives have takenplace and environmental audit ing does not appear to havebeen recognised as a useful management tool, other than inconjunction with the implementation of ISO14001. The chanceto explore this issue further would give the opportunity todiscover how long companies had been reporting for and toquestion those that did not report whether they had plans toimplement an EMS. This would give information as to the rateof adoption on EMS which may be viewed as an important stepin init iating environmental reporting.

4:2:2 Section 2

It is encouraging that the need for accountants to be involved

in the preparation of environmental reports has beenrecognised by the majority of respondents. It also assists invalidating the data as i f 100% of respondents did acknowledgethe need for accountants to be involved the overall responseswould have been biased in that direction. The need arises notonly because of the increasing need for tr iple bottom l ine orsocial and environmental reporting in the annual report, whichwil l become inevitable for many AIM l isted companies, butbecause f inancial reporting issues such as impairment ofassets and environmental l iabil i t ies must be recognised. (Gray,2003) The accountant also needs to have awareness of

environmental legislation in that changes may impact on thebusiness through the goods it can supply or suppliers orcustomers i t can do business with. The business case forenvironmental reporting seems to be poorly understood amongsome respondents who perhaps have not recognised thatl inking environmental and f inancial performance can bebeneficial not only for economic reasons but inshareholder/stakeholder relations and possibil i t ies forinnovation to acquire competit ive advantage.

The comments made after this section seem to indicate that

there may be a misunderstanding of the true nature and


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discipl ine of environmental reporting. The f inancial impact/costaspect is the most easily recognisable theme and this isconfirmed in the later questions where f inancial aspects ratehighest in question 9 and second highest, after legislation, in

question 8. Of course the respondents are taken from thefinance function so i t would be nave at best to assume thatother motivations may be paramount.

In question 7 shareholders not requiring the information isperceived as the most important reason for not reporting mayindicate information asymmetry and a lack of consultation withshareholders, this may be corroborated by the next moreimportant reason being not company policy as a companywhich has extensive consultation with i ts shareholders shouldincorporate their wishes into i ts business strategy. That thestandard deviation is also greatest for this question possiblyindicates that shareholders are given the greatestconsideration of al l stakeholders (Although consideration neednot necessari ly lead to consultation). Were there l i t t leconsideration then the standard deviation may have had a farmore mediocre score as did the importance of economicconsiderations. The constituency of shareholders may also besignif icant here; i f shareholding is not diverse, of which thereis a greater possibi l i ty in the AIM index than in the main index,then there may be l i t t le pressure to provide addit ional

information. As shareholding has a minimum float of only 15%of available shares there wil l be l i t t le l ikelihood of shareholdersusing voice. The superior performance of the shares of manyAIM index companies may also act as a disincentive to al l butthe most ecologically aware of shareholders to pursue greaterconsultation on this subject.

Also in question 7 respondents rated a lack of t ime as the leastimportant reason for not preparing environmental information;this may have been an incorrect interpretation on therespondents part. Robson, (2005) suggests the size of a

company may affect the att i tude to CSR (which includesenvironmental reporting) and that in smaller companies f inancedirectors may have a plethora of other duties within thecompany and so view environmental reporting as eitherunnecessary or an opportunity to change, improve andintegrate systems. If i t is the former then it is possibly easier tosay the information is not required than to state there isinsufficient t ime.

In question 8 the overwhelmingly most important reason forimplementing environmental reporting was due to legislation

with only one respondent choosing to score this as 2 rather


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than 1. As imposing legislation levels the playing f ield for al lcompanies this seems to indicate that in general companieshave not recognised the potential competit ive advantagebenefits of voluntari ly reporting. This theory is strengthened as

the least important reason is innovation and learningsuggesting that competit ive advantage through innovation inareas other than the core business has not been considered.This response also contradicts the KPMG (2005) survey ofdrivers for corporate responsibil i ty, which found that innovationand learning was regarded as being very important, and aboveitems such as cost savings and risk management, torespondents f rom larger organisations.

Not surprisingly economic considerations, cost savings andaccess to capital were the next more important factors. Asmany AIM companies have recently f loated to raise externalf inance this wil l be a major consideration. That many make atrading loss could be a signif icant factor should this researchhave been carried out among a larger sample. Providingsufficient capital could be described as a basic need usingMaslows hierarchy of needs which would explain theimportance placed on the economic considerations. Thenecessity to comply with legislation also has a f inancial aspectas the costs of non-compliance can be excessive.

Stakeholders appear to be given l i t t le consideration upholdingthe shareholder model implied by the importance ofshareholders in question 7. This contradicts muchcontemporary research on larger organisations showing thestrengthening of the stakeholder model but may be a symptomof the developmental stage of the company as using Maslowshierarchy of needs consideration of others would be at a higherneed level as stakeholders are perceived as having lessimmediate importance to the survival of the company.

That ethical considerations appeared so low a priority may

indicate that for the AIM l isted companies trying to grow thenethics may come low on their l ist of priorit ies. This wouldconcur with the assessment of growing companies provided bytheir analysis using the lens of Maslows hierarchy of needs.Ethical considerations would fal l into the highest category ofego needs and unti l the lower needs have been satisfied, suchas the need to operate successfully in their industry, then theego needs remain unsatisfied. As ethical considerations werethe joint second (along with innovation and learning) reason inthe KPMG (2005) survey, a clear division is beginning toemerge between the recognition and perception of


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environmental reporting between larger organisations andthose growing and emerging.

That this q

Environmental Reporting & Aim Listed Companies

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