Accounting Theory(Senate inquiry into carbon risk disclosure)

Content Stakeholder Theory

Application in Considerations of Carbon Risk Exposures

Presented to

Executive Summary

The purpose of this report is to provide the Senate Economics Reference Committee with a critical review of the scholarly research literature focusing on carbon risk disclosure to help in the drafting of its report. The report adopts the Stakeholder Theory to evaluate the context and findings of six scholarly research articles relevant to current carbon risk disclosure practices within corporate Australia

When analyzing current international carbon risk disclose frameworks, it became clear that there are a number of international-focused organizations that are committed to developing and providing effective frameworks, tools, and models of enhancing carbon risk disclosure. GRI, CDSB, and SASB are example of international consortiums that have designed and disseminated reporting frameworks for disclosure. Equally, there are several standards and provisions guiding carbon risk disclosure with ASIC playing a central role in regulating reporting in the country. The motivation for carbon risk disclosure is both internal and external. That is, company factors and the organization management, and stakeholders (investors, customers, suppliers, and employees) and the government influence entities to report. Besides complying with exiting legal standards, businesses are required to consider all stakeholders because they are primary users of the information and use it to evaluate the entity’s performance and opportunities.

By improving carbon risk disclosure requirements for organizations, an integrated reporting approach bring forth additional information, especially regarding the long-term risks and costs of climate change and formulate well-informed policies for more sustainable long-term investments for the good of all stakeholders as well as the entire society.

Table of Contents

Title Page……………………………………………………………………………… 1

Contents……………………………………………………………………………….. 2

Executive Summary……………………………………………………………………. 3

1.0 Introduction………………………………………………………………………… 4

2.0 Current International Carbon Risk Disclosure Frameworks……………………….. 4

2.1 The Climate Disclosure Standards Board (CDSB)…………………………. 4

2.2 Global Reporting Initiative (GRI)…………………………………………… 5

2.3 Sustainability Accounting Standards Board (SASB)……………………….. 6

3.0 Current Carbon Risk Disclosure Practices within Corporate Australia……………… 7

3.1 Carbon Risk Disclosure Framework in Corporate Australia…………………. 7

3.2.0 Motivation for Carbon Risk Disclosure……………………………………. 8

3.2.1 External Stakeholder Perspective………….…………………….. 8

3.2.2 Management Perspective………………………………………….. 9

3.2.3 Government/Regulatory Perspective……………………………… 10

4.0 Recommendations………………………………………………………………….. 10

5.0 Conclusion…………………………………………………………………………… 11

References………………………………………………………………………………. 12

  1. Introduction

This report adopted the Stakeholder Theory to provide the Senate Standing Economics Reference Committee (SSERC) with a critical review of the scholarly research literature focusing on carbon risk disclosure to help in the drafting of its report. Carbon risk disclosure refers to the disclosure of an organization’s financial and non-financial information regarding its current operations and practices. In light of the SSERC, corporate organizations are required to disclose both types of information mentioned above and the format the information is presented in, besides the time frame to reporting the information is not only needed but also expected to adhere to certain regulations, legislation, and reporting standards (Yunus, Elijido-Ten & Abhayawansa, 2015).

2.0 Current International Carbon Risk Disclosure Frameworks

2.1 The Climate Disclosure Standards Board (CDSB)

CDSB is an international carbon risk disclosure framework comprising of businesses and environmental NGOs (Andrew & Cortese, 2013, p.397). The Consortium primarily focuses on improving and aligning the international mainstream corporate disclosure framework with the view of fostering equity between natural capital and financial capital. CDSB undertakes this practice by providing business institutions with a comprehensive framework they can employ to enhance disclosure. The framework assists the corporate companies to present significant stakeholders, including investors, suppliers, consumers, the government, with decision-useful environmental information through the mainstream corporate report (Lovell & MacKenzie, 2011, p.719). Furthermore, it helps the organizations scale up the efficiency and effectiveness of investing and allocating capital (Andrew & Cortese, 1023, p.398). CDSB is committed to fostering integrity and accountability necessary for promoting resilient financial markets.

2.2 Global Reporting Initiative (GRI)

GRI is an independent organization that offers an efficient carbon risk reporting framework particularly for corporate sustainability disclosure and incorporates contributions from many stakeholders, including the civil society organizations, businesses, education institutions, the research community, and other professionals. It creates and delivers sustainability reporting directions which assist organizations to disclose their financial, environmental, and social aspects of their operations, products, and services (Lovell & MacKenzie, D., 2011, p.729). By adopting GRI offering, businesses can have a comprehensive and excellent framework for addressing, comprehending and acknowledging the contribution of their organization to sustainable growth through their reporting practices. Microsoft 2015 Citizenship Report holds Standard disclosures and the GRI Content Index are essential to business organizations as it can aid in the creation and dissemination appropriate environmental information, including carbon risk (Lovell & MacKenzie, D., 2011, p.723).

2.3 Sustainability Accounting Standards Board (SASB)

SASB is a worldwide recognized non-profit reporting organization that designs and offers industry-oriented disclosure guidelines regarding material sustainability concerns with the view of integrating global corporate reporting practices and models. Its’ central standards are not only applicable to the corporate American but also relevant international to institutions seeking to disclose on material environmental, social as well as governance concerns. The organization utilizes a multi-stakeholder, transparent approach to developing reporting standards (Schooley, & English, 2015, p.5). SASB develops in the midst of an increasingly acknowledge of the significance of the bridging material, environmental, and social issues with financial reporting. Many countries are increasing embracing this practice. For instance, South Africa has adopted the SASB’s practice via the listing needed by the Johannesburg Stock Exchange (JSE), in which all public institutions are expected to present an integrated annual report (Lovell & MacKenzie, D., 2011, p.712). Other nations are embracing the practice with laws and expectations emerging that suggest more integration of both financial and non-financial disclosure. Moreover, some countries, such as the UK, US, and Australia, practice integrated reporting out of their national reporting frameworks to seek for the value of more transparent disclosure of their overall performance and strategy holistically (Schooley, & English, 2015, p.12).

3.0 Current Carbon Risk Disclosure Practices within Corporate Australia

3.1 Carbon Risk Disclosure Framework in Corporate Australia

The current financial and non-financial disclosure framework calls for reporting threats that might bear an adverse impact on the ability of a firm to realize strategic financial targets (Securities, 2013). The Australian Securities and Investments Commission (ASIC) regulates reporting in corporate Australia by providing standards for financial reporting and auditing standards under the Corporations Act 2001. ASIC expects total compliance with reporting standards for organizations bound by the Corporations Act and offers relief from those provisions, in particular, situations (Subramaniam et al., 2015. P. 410).

Its robust monitoring of organizations’ adherence to the established requirements enhances the integrity and improve stakeholder trust in corporate Australia. It aims at ensuring that both financial and non-financial reports presented exhibit utmost relevance and integrity, which can assist all stakeholders to make informed investment decisions (Securities, 2011). In a survey that measured carbon-associated risk exposure considering a firm’s recent footprint and carbon risk awareness, Jung, Herbohn and Clarkson reported that lenders mind a company’s historical carbon footprints in considering primary and secondary stakeholders’ demand and interest in carbon risk disclosure (Jung, Herbohn & Clarkson, 2014). An OFR needs to incorporate an overview of environmental and related threats to the institution that may potentially impact its ability to realize strategic goals and performance disclosed, considering the nature and business of the organization and its group strategy.

3.2.0 Motivation for Carbon Risk Disclosure

3.2.1 External Stakeholder Customer Perspective

The current reporting framework requires entities to consider investors, customers, suppliers, and employees because they are primary users of the information (Kolk, Levy & Pinkse, 2008, p.719). Investors, suppliers as well as clients require organizations to determine and provide reporting in a manner that optimizes the relevance of the decisions these stakeholders make regarding their qualitative attributes. Moreover, stakeholders expect these entities to exhibit consistency in making, presenting and communicating their disclosures and are supposed to incorporate details that can help the primary stakeholders maximize decision-usefulness. Reporting is perceived to be more useful if it links the information the entity utilizes for internal decision-making purposes with information that is availed to investors, clients, and suppliers to help them make informed decisions (Subramaniam et al, 2015, p. 408). Kolk, levy and Pinkse established a significant relationship between economic pressure and decision – firms confronted with direct economic consequences have higher chances to disclose. Furthermore, they found that stakeholder pressure plays a critical role the decision of entities to disclose their actual footprints (Kolk, Levy & Pinkse, J., 2008, p.741).Therefore, it is imperative to consider all stakeholders in the choice and use of different corporate reporting strategies (Pellegrino & Lodhia, 2012, p.72).

3.2.2 Management Perspective

Typical information that is useful to the management in running the organization is also essential to suppliers, investors, workers, and customers, who are the consumers of the disclosed information as they use it to evaluate the entity’s performance and opportunities (Jung, Herbohn & Clarkson, 2014). As such, the entity is required to ensure customers’ health is protected by delivering health products, and employees’ working conditions are improved to avert health risks (Yunus, Elijido-Ten &d Abhayawansa, 2015, p.2). Also, they are expected to engage in voluntary disclosure and comply with existing corporate ethics regarding reporting to uphold their reputation before their investors, clients, employees and suppliers and avoid a penalty for pollution, which might only impact business operation, but also attract demands from investors and suppliers. Therefore, reporting should encompass a comprehensive lunation of how environmental change has affected or is a threat to the entity’s strategic objectives (Eleftheriadis and Anagnostopoulou, 2015, p.82). Therefore, disclosure needs expound on the entity’s operational priorities, the current and emerging practices, risks and opportunities that might potentially impact these stakeholders and the sources required to output results.

3.2.3 Regulatory Perspective

Carbon risk disclosure needs to comply with existing legal standards and provisions for disclosure and communicate information regarding the environment. Bae Choi, Lee, and Psaros explored the scope of voluntary carbon risk disclosures by large Australian firms for the 2006-2008 period, presenting contemporary data and explanation regarding carbon risk disclosure in Australia and determining factors influencing the extent of carbon risk exposures (2013, p.59). The research found a significant overall carbon risk disclosure over the study period, with major companies with higher visibility exhibiting greater tendency to present more comprehensive disclosures. Therefore, the government expects organizations to ensure their disclosures comply with existing disclosure standards.

4.0 Recommendations

This report sought to provide SSERC with a critical review of the scholarly research literature focusing on carbon risk disclosure to help in the drafting of its report. In light of the conclusions of the examination, the report presents the following recommendations:

(i) Determining disclosures at a particular period in assessing the impact of the necessary climate change reporting on voluntary carbon disclosures in corporate Australia.

(ii) Understanding and considering all stakeholders influencing carbon risk disclosure in formulating carbon disclosure policy

(iii) By examining the relationship between environmental information reporting and additional company factors, existing reporting frameworks can enhance the evolution of carbon regulation and standard to specially manage carbon risk.

(iv) Perception of environmental change as major a threat to corporate investment hence enhance the need for companies to address this risk in their investment portfolio.

5.0 Conclusion

Entities are required to consider multiple factors in their carbon risk disclosure, including company factors, stakeholder demands, and the existing regulatory framework. From the international front, GRI, CDSB, and SASB, among other global consortiums focus on designing and disseminating reporting frameworks for disclosure. The motivation for carbon risk disclosure is both internal and external as both the organization management and the government and stakeholders (investors, customers, suppliers, and employees) influence entities to report. Besides complying with exiting legal standards, businesses are required to consider all stakeholders because they are primary users of the information and use it to evaluate the entity’s performance and opportunities. It is imperative to adopt a holistic approach that integrate the demands of all the significant parties and factors in developing carbon risk disclosure practices to mitigate the long-term risks and costs of climate change and help formulate well-informed policies for more sustainable long-term investments for the good of all.

References

Andrew, J. and Cortese, C., 2013. Free market environmentalism and the neoliberal project: The case of the Climate Disclosure Standards Board. Critical Perspectives on Accounting, 24(6), pp.397-409.

Bae Choi, B., Lee, D. and Psaros, J., 2013. An analysis of Australian company carbon emission disclosures. Pacific Accounting Review, 25(1), pp.58-79.

Eleftheriadis, I.M. and Anagnostopoulou, E.G., 2015. Relationship between Corporate Climate Change Disclosures and Firm Factors. Business Strategy and the Environment, 24(8), pp.780-789.

Jung, J., Herbohn, K. and Clarkson, P., 2014. The impact of a firm’s carbon risk profile on the cost of debt capital: Evidence from Australian firms.

Kolk, A., Levy, D. and Pinkse, J., 2008. Corporate responses in an emerging climate regime: the institutionalization and commensuration of carbon disclosure. European Accounting Review, 17(4), pp.719-745.

Lovell, H. and MacKenzie, D., 2011. Accounting for carbon: the role of accounting professional organisations in governing climate change. Antipode, 43(3), pp.704-730.

Luo, L., Lan, Y.C. and Tang, Q., 2012. Corporate incentives to disclose carbon information: Evidence from the CDP Global 500 report. Journal of International Financial Management & Accounting, 23(2), pp.93-120.

Pellegrino, C. and Lodhia, S., 2012. Climate change accounting and the Australian mining industry: exploring the links between corporate disclosure and the generation of legitimacy. Journal of Cleaner Production, 36, pp.68-82.

Schooley, D.K. and English, D.M., 2015. SASB: A pathway to sustainability reporting in the United States. The CPA Journal.

Securities, A., 2013. Investments Commission 2011. Financial literacy and behavioural change”, Report, 230.

Subramaniam, N., Wahyuni, D., Cooper, B.J., Leung, P. and Wines, G., 2015. Integration of carbon risks and opportunities in enterprise risk management systems: evidence from Australian firms. Journal of Cleaner Production, 96, pp.407-417.

Yunus, S., Elijido-Ten, E. and Abhayawansa, S., 2016. Determinants of carbon management strategy adoption: evidence from Australia’s top 200 publicly listed firms. Managerial Auditing Journal, 31(2).