Question: Is there is any relationship between Carbon disclosure score and inclusion of climate change strategy in business?
Introduction: (Not assessed)
Climate change is often considered to be today’s most important environmental challenge, and the scientific evidence increasingly points toward man-made emissions of carbon dioxide as a cause of the problem. The first approach concerns performance in terms of output, direct and indirect greenhouse gas emissions, while the second one is based on environmental intention of mitigating climate change, including climate change policy and emission reduction initiatives. The Climate Performance Leadership Index is employed as a measure for climate change disclosure level, incorporating initiatives contributing to climate change mitigation, adaptation and transparency.
Literature Review: (Has been condensed from task 2 for task 3)
Literature on legitimacy theory recommends that communication is one procedure of legitimation (Gray, 1995a and Gray, 1995b). The yearly report has been viewed as the significant communication medium and data source for scientists examining inspirations for natural disclosures. According to our findings, environmental performance for both adopted approaches entails a positive effect on climate change disclosure, a result that is consistent with voluntary disclosure theory. (Buhr, 1998 , p. 164) states that “the annual report is the most commonly accepted and recognized corporate communication vehicle”. O’Donovan, suggests that corporate management believe that the annual report is an effective way of informing and educating the public of the corporation’s view of certain environmental issues (1999).Guthrie point out that “the credibility of the annual report to relevant public provides organizational managers with a unique opportunity to design a particular organizational image for their relevant public” (Guthrie, 1989, p. 344).Hooghiemstra argues that companies use corporate social reporting as a corporate communication instrument (Hooghiemstra, 2000). To achieve the carbon emission targets and avoid the fines, companies could invest in their carbon reduction management system by using low emission energy, equipment, and/or by developing low carbon technology.
The main aim of this instrument is to influence people’s beliefs of the company. Deegan, argue that companies consider that social disclosure in annual report is a useful device to reduce the effects upon a corporation of events that are perceived to be unfavourable to a corporation’s image (Deegan, 2000). O’Donovan points out that most of the research, which conducted to confirm legitimacy motives for social disclosures has used ex-post content analysis of annual reports and / or other published data, is limited in usefulness as they only allow for explanations about data that were disclosed (O’Donovan, 2002). Some studies have focused upon the data gathered by (questionnaires-interviews publicly available data or documents). A few researchers for example, (Buhr, 1998 and O’Donovan, 1999) have used methods to gather qualitative data by the direct questioning of managers for the purposes of testing legitimacy theory. (O’Donovan, 2002) argues that gathering data, directly from management, about their beliefs and from ex-ante perspectives is more useful in evaluating reasons for certain environmental disclosure and, more importantly, why decisions not to include environmental information were made. The author (Gray, 1995b) argue that differences in research approach and the difficulties in showing these differences in method consider one of the problems, which arises in attempts to research the phenomenon of social and environmental reporting. The analysis of (Guthrie, 1989) has failed to support legitimacy theory as an explanation for corporate social reporting. Many studies (Brown, 1998; Buhr, 1998; O’Donovan, 2002 ; O’Donovan, 1999) report that environmental disclosure strategies of management appeared to be tied to the extent of media attention devoted to environmental issues. Legitimacy theory hypothesis that an organization’s survival relies upon getting and looking after social endorsement. An organization ought to acknowledge responsibility for the social and environment implications of its operations. On the off chance that it neglects to agree to requests of society, an organization will confront dangers to its authenticity furthermore, later to its survival. Organizations are confronting expanding weights to openly be their environment performance.
Conceptual Model: (Not Assessed)
Conceptual framework
INDEPENDENT VARIABLE:
Inclusions of climate change issues in business strategies
DEPENDENT VARIABLE:
DISCLOSURE SCORE
CONTROL VARIABLE: Companies including climate change in business strategy
1ST 30: YES
1st 30: NO
1ST 30: NO
Figure 1 Conceptual model showing IV, DV and CV
Hypotheses:
H0: There is no relationship between carbon disclosure score and integrated climate change in business strategy.
H1: There is meaningful relationship between carbon disclosure score and integrated climate change in business strategy.
Proxy measures:
Table 1: Illustrating Proxy measures
Theoretical
Construct
Proxy measure
Dependent (DV),
Independent (IV), or
Control Variable
(CV)
Source
Voluntary
Disclosure
Percentage
Disclosure score
CDP data
Dependent Variable
CDP
Inclusion of climate change into business strategy
Companies reporting to Carbon disclosure project
Independent
Variable
CDP
Scale of companies
First 60 companies divided into:
Ist 30: yes
Ist 30: no
Control variable
CDP
Data Analysis – Descriptive (Not assessed)
To analyse the data and comparison descriptive data analysis is being applied in research paper. Descriptive data analysis is reformed to be one of the best form to analyse and tabulate the collective samples from the set of data provided in CDP. To measure the central tendency results is to analyse the differences from data collection Mean, Median, Mode are used. Skewness and range is used to box plot the results of data collection.
Based on two underlying parameters for the assigned question, the research proceeds in analysing the data by SPSS Representation using descriptive analysis. The two underlying parameters for analysing the descriptive data are as follows-
1. Is climate change integrated in the business strategy and how does it affect the carbon disclosure score?
2. Is Climate change not integrated into the business strategy and how does it affect the carbon disclosure score?
Table 2. Companies where climate change is included in the business strategy
COMPANIES RESPONDING YES
MEAN
90.9
MEDIAN
97
MODE
100
MAXIMUM
100
MINIMUM
RANGE
100
STANDARD DEVIATION
19.11011648
SKEWNESS
-4.07676280
KURTOSIS
18.61209467
SUM
2727
COUNT
30
The above table 1 indicates the descriptive of emission level based on where climate change is integrated into the business strategy with positive response. Mean of the companies responding yes is 90.9 is higher which says that these companies emit high level of emission. The standard deviation is low in these companies which means the data is normally distributed. The range in yes in this data is 100 which means there is great dispersion in data. The skewness is -4.07(as it is <0) which indicate the distribution is highly negatively skewed and far from symmetrical. However, positive kurtosis (distribution >3) suggest that distribution is leptokurtic and has longer and flatter tails and its central peak is higher and sharper.
Table 2. Companies where climate change is not included into the business strategy
COMPANIES RESPONDING NO
MEAN
47.3
MEDIAN
49.5
MODE
MAXIMUM
99
MINIMUM
RANGE
99
STANDARD DEVIATION
37.10484
SKEWNESS
-0.10782
KURTOSIS
-1.54075
SUM
1419
COUNT
30
The above table 2 indicates the descriptive of emission level based on where climate change is not integrated into the business strategy with negative response. Mean of the companies responding no is 47.3 which is lower than the yes responding companies which means data is not normally distributed. The range in no responding data is 99 which not a significant difference according to the yes responding companies. The skewness is -0.10 (as it is <0) which says that the distribution is slightly negatively skewed. Whereas, in this companies where climate change is not integrated in the business strategy shows negative trend and If the kurtosis is less than zero, then the distribution is light tails and is called a platykurtic distribution.
Data Analysis – Inferential (ASSESSED)
Table 4 Paired Samples Statistics
Table 5 Paired Sample Correlations
Table 5 Paired Sample test
Hypothesis testing (ASSESSED):
P value rejection rule is applied to test hypothesis (C, 2018). This rule state as:
P value or sig value < .05 (alpha) (reject the null hypotheses)
Or
P value > 0.05 (accept the null hypotheses)
Application of rule:
.000< .05
So, reject the null hypothesis (C, 2018).
H0: There is no relationship between carbon disclosure score and integrated climate change in business strategy. (Rejected because p value is smaller than alpha)
H1: There is meaningful relationship between carbon disclosure score and integrated climate change in business strategy. (Accepted because p value is smaller than alpha)
In the table paired samples test significant is .000 which is less than alpha .05 which means null hypothesis is rejected and H1 is accepted. There is significance relationship between carbon disclosure score and inclusion climate change issues in business strategy
Discussion (ASSESSED)
The allocated theory for this research was legitimacy theory. legitimacy theory (Deegan 2009; Deegan & Gordon 1996; Deegan & Rankin 1996; Patten 1991, 1992; Patten 2002) posits that an organisation is operating within norms or standards which have been identified in the “social contract” between the organisation and the community members. Therefore, the organisation is always trying to seek legitimacy, which is conferred by the society based on the social contract between them. Once an organisation feels that its legitimacy is threatened, it pursues several strategies to retain this legitimacy.
Question selected to get a deep analysis of legitimacy theory was that whether, there is a relationship between carbon disclosures score and inclusion of climate change issues in business strategy. Results of the research shows that there is a significant relationship between carbon disclosure score and inclusions of climate change in business strategy. These results are clearly visible both in descriptive analysis and inferential analysis as in both the companies involving climate change issues in their business strategies are showing high mean value as compare to those which are not showing. In inferential analysis Paired sample test is conducted and the results are showing significant relationship between the variables. There were three variables identified in this research, which are Dependent variable (disclosure carbon score), Independent variable (inclusion of climate change issues in business strategy), and Control variable (60 companies selected based on their inclusions of climate change in their business strategies.
H1 is selected which means that there is a relationship between carbon disclosure scores and companies strategies which includes climate change issues as well (C, 2018). The following discussion outline the key points of this whole research and results of hypothesis.
Those companies which are disclosing carbon emissions and including carbon emission as a part of their business strategies are earning more than those, which are not including it. According to the study, which coincides with the climate talks in the New York, finds that corporations that are planning and managing climate change secure an 18% higher return on investment than companies that are not and 67% higher than those companies who refuse to disclose their carbon emission (Confino, 2018). Even though our research also supports these studies and shows similar results that there is a relation.
In additions to this, business leaders of companies also state that inclusion of climate change in business brought them new opportunities as it helped them to recognized by investors and these results are also reflected in their share prices. Failure to identifying the importance of acting now regarding climate change issues, results in difficulty for companies to justify longer term investment and makes it more attractive to go for short term, but relatively ineffective (Confino, 2018).
Apart from this, the CDP report also supports this notion as report concludes that those companies that achieve a strong financial performance have set a strong carbon emissions targets and risk management of climate change and they have made all these things part of their strategies and they revealed a true carbon disclosure scores and reveals their policies to lower down carbon emissions as much as possible (Confino, 2018).
Moreover, other reason of this positive connection between carbon disclosure score and inclusions of climate change in business strategy can be because companies wants to manage their long- term assets, as by integrating climate change risks into strategic planning, and responding to CDP they want to demonstrate a long view of how to manage the assets of shareholders (O’Donovan, 2002).
Furthermore, those companies investing in carbon reductions achieved a 50% higher earning over a past decade and 21% stronger dividend. This results clearly represent the idea that why the average mean scores of the companies, which have adopted climate change strategies, have higher score than other group (Confino, 2018).
In addition to it, in legitimacy theory assumes that companies are disclosing more information to maintain their legitimacy within the society. Therefore, organization always trying to seek legitimacy, which is conferred by the society. Once an organization feels that its legitimacy is threatened, it pursues many strategies to retain their legitimacy. Climate change issues are global issues now and most of the people are quite aware about these issues (Doran, K & Quinn, E 2009). Planning and implementing of climate strategies, which includes reduction of carbon emissions and target carbon reduction gives a new view to company. Society always wants something which proves beneficial for them for long term and inclusion of climate change issues will bring this for sure. And if society is happy with the work of company then legitimacy will not be threatened.
However, there are some companies which are not agree with the relationship existence between carbon disclosure score and including climate change issues in business strategy. There can be several reasons for it but the major one can be that climate business strategy can increase business overall operating costs which can also results in lesser profit, but as per the different studies, it is proven that climate change strategies are increasing profits instead of decreasing (Doran, K & Quinn, E 2009). So, companies need to add climate change issues in their strategies not for themselves but for society as well, to strengthen the legitimacy.
Limitations (ASSESSED)
Apart from the positive result of this research, limitations of research can be ignored. There were several limitations of this research. Firstly, data selected as sample was too small only 60 companies were selected out of 5000 which may give a question about data validation. There may be a different scenario if all the companies have been selected. Moreover, time allotted to complete this research was very less, 3 months to complete a study and test a hypothesis may bring many sampling errors, which results in inappropriate results. Lastly there can be research done on many other topics or other questions provided in the CDP data but because of limited time and less resources it was not possible.
Further Research (ASSESSED):
In this we can further research about the other questions given in CDP data. Rather than focusing on one question. Moreover, out of 5000 companies we can also take more companies to test the hypothesis and we don’t know how much data is accurate which is provided in carbon disclosure data. Furthermore, companies have left many variables such as performance of the company based on projected scores. In the CDP data there are many questions which we can use for further research to analyse the result. These kinds of potential investigations would further facilitate theoretical development in the context of corporate reporting and in context of greenhouse gas reporting. The key factors that can be including in further research to make it more reliable are:
- Increase the size of sample as it was only 60 sample companies and the sampling error was huge.
- Use of other theories such as stakeholder and Agency theory
- Data can be divided in low and high carbon emissions
- What can be a best level in the organization to perform their duty, disclosing about climate change within the organization
- Apart from society, who are other people that can get affected by company’s disclosure scores
Legitimacy can be considered as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions” (Deegan, 2000).
References (ASSESSED):
Confino, J. (2018). Sustainable companies are more profitable, report finds. [online] the Guardian. Available at: https://www.theguardian.com/sustainable-business/2014/sep/23/business-companies-profit-cdp-report-climate-change-sustainability [Accessed 21 Jul. 2018].
C, C. (2018). [online] Math.mercyhurst.edu. Available at: http://math.mercyhurst.edu/~griff/courses/m109/Lectures/sect7.2.pdf [Accessed 21 Jul. 2018].
Deegan, C., 2002. “Introduction– the legitimising effect of social and environmental disclosures–a theoretical foundation”. Accounting, Auditing and Accountability Journal, pp. 282-311.
Doran, K & Quinn, E 2009, ‘Climate change risk disclosure: a sector by sector analysis of
SEC 10-K filings from 1995–2008’, North Carolina Journal of International Law and
Commercial Regulation, vol. 34, pp. 721-67
Gray, R., D, O. & Adams, C., 1996. Accounting and Accountability. Prentice Hall Europe, Great Britain: s.n.
Gray, R., Kouhy, R. & Lavers, S., 1995. “Corporate social and environmental reporting – a review of the literature and a longitudinal study of UK disclosure”. Accounting, Auditing & Accountability Journal, pp. 47-77.
Guthrie, J. a. P. L., 1989. Corporate social reporting a rebuttal of legitimacy theory. Accounting and Business Research, pp. 343-352.
Jose M P-and, I M Garcia 2010, ‘The Role of the Board of Directors in disseminating relevant information on Greenhouse Gases,’ Journal of Business Ethics.
Hooghiemstra, 2000. Corporate communication and impression management-new perspectives why companies engage in corporate social reporting. journal of Business Ethics, (27).
McLeod, T. and Wiseman, J. 2018. Company directors can be held legally liable for ignoring the risks from climate change. [online] The Conversation. Available at: http://theconversation.com/company-directors-can-be-held-legally-liable-for-ignoring-the-risks-from-climate-change-68068 [Accessed 7 Jun. 2018].
O’Donovan, 2002. Environmental disclosures in the annual report the applicability and predictive power of legitimacy theory. Accounting, Auditing and Accountability Journal, 15(3), pp. 344-371.
Perrini, G.: 2006, ‘The Practitioner’s Perspective on Non-Financial Reporting’, California Management Review 48(2), 73–103.
Rouse, M., 2000. statistical mean, median, mode and range. statistical mean, median, mode and range.
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