The Relationship Between Environmental Performance And Environmental Disclosure Accounting Essay


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Relationship between the level of corporate environmental performance and corporate environment disclosure is an open issue in the area of environmental accounting. It is an issue where accounting profession is being conscious nowadays.

Patten (2002) ascribes the failure to determine the consistent and significant relation among the environmental disclosure and performance is due to the problems arise in research designs prepared by past researchers. The problems are such as insufficient sample selection and insufficient measures of environmental performance and disclosure. Thus, in order to investigate this relationship, the study comes out with a more deliberate and rigorous research design. In this study, two theories which are voluntary disclosure theory and socio-political theories are been developed in order to test the two emulative forecasting about the rank of voluntary environmental disclosures.

The first theory is voluntary disclosure theory which indicates a positive relationship between the level of discretionary environmental disclosure and environmental performance. However, socio-political theories said otherwise. Socio-political theories infer a negative relationship between the level of discretionary environmental disclosure and environmental performance.

Most of the past studies were relied on the Wiseman (1982) based content analysis to assess the degree of environmental disclosure. The Wiseman index concentrates on the financial outcome of corporate environmental activities as well as quantitative disclosures. By using this appraise, poor environmental performers may get a higher disclosure rate as compare to the good environmental performers. This is simply because poor environmental performers exposed more than good environmental performers and they are required to explain any material financial information in its annual reports.

By the help of the environmental disclosure expert, a content analysis index based on the global reporting initiative guidelines was developed in order to identify the degree of discretionary environmental disclosures in environmental and social responsibility reports. This index is not the same like Wiseman index because it concentrates on the commitment to environmental protection.

This study concerns about the environmental disclosure. A total of 191 firms selected from five distinct industries have been investigated for the year of 2003. The five industries being investigated are chemical, pulp and paper, metals and mining, oil and gas, as well as utilities. The reason of why these five industries are being chosen is that all of these industries are having a high pollution tendency and collectively being the subject of environmental regulations in the past 30 years.


The past literature on environmental accounting research can be grouped into three main categories. The first category of research evaluates the relevance of corporate environmental performance information. The second category of study is to examine the variables that influence managerial decisions to expose potential environmental liabilities. The third category is most applicable to this study which is investigating the relationship among environmental performance as well as the environmental disclosures.

Ingram and Frazier (1980) investigate the relationship between corporate environmental performance and corporate environmental disclosures. They use the performance index which is invented by the Council on Economic Priorities (CEP) to represent the environmental performance. The regression result showed that there is no relation between the environmental performance associated with the environmental disclosures.

Wiseman (1982) investigates the degree of voluntary environmental disclosure prepared by corporations in its annual reports. As similar to Ingram and Frazier study, Wiseman represents the environmental performance by using the CEP ranking. The results showed that CEP performance ranking and Wiseman disclosure index do not have a significant relationship.

Freedman and Wasley (1990) investigate the relationship between the corporate environmental performance and the disclosures of pollution issue in its annual reports. The results signify that the annual reports do not point out the environmental performance.

Patten (2002) recognizes three issues in the previous research which are failure in controlling other factors, insufficient sample selection, and insufficient appraisal of environmental performance. Patten uses TRI data to represent the environmental performance. As a result, Patten finds a negative relation between environmental performance associated with the environmental disclosures.

Two hypotheses are being developed in this study. The hypotheses are as follow:

H1a: Environmental performance and level of discretionary environmental disclosure are positively related based on voluntary disclosure theory.

H1b: Environmental performance and level of discretionary environmental disclosure are

negatively related based on socio-political theories.


The key issue of this research design is to build up a consistent proxy toward the firm's environmental performance. In the research, author track the presented literature and using the real pollution discharge data from the US Environmental Protection Agency's (EPA) TRI database to construct the environmental performance proxy. Firstly, author collect the sum of toxic release and toxic waste treated or processed derived from the sample firm. Next, TRL measures gained at the company stage been compared with the Investor Responsibility Research Center database. However, this research design is available for those firms in related industries which are Pulp and paper, Metals and Mining, Oil and Gas, Chemicals and Utilities.

There are two types of disclosures index which is hard disclosure items and soft disclosure items. Hard disclosure item is other performers like poor environmental performer not able to imitate the other firm's measures. While the soft disclosure item is any firm can simply to mimic other firm's measures. After all, author will compare the index and environmental performance among the firms.

Author also hired an expert to help in the research where the expert must be specialist in the area of environmental reporting. The expert helps to build up a suitable analysis index in order for the firms' sustainability reports or according to the sections of a broad social conscientiousness report or comparable discussions on the web. In addition, the expert convinced that GRI reporting principle is reliable in this research. GRI is the Global Reporting Initiative to set up an international accepted reporting outline to strengthen the reporting. It follows on 11 principles as transparency, timeliness, completeness, comparability, accuracy, inclusiveness, clarity, relevance, neutrality, auditability, context and sustainability. The principles used to ensure the credibility to address the key issue to stakeholders, ensure the economic, environmental and social presentation is reasonable and allow the comparison over the firms and times. The author decided to use the GRI which is published in 2002.

In the research, it is consisted of 95 lines items about the spirit of the GRI principle as expert suggested. There are 4 main categories in the hard disclosure item and 3 main categories in the soft disclosure item.

Under the hard disclosure item, there are A1 until A4 categories. A1 represent the disclosure the on the firm's governance organization and management procedures which is respect to the environmental safeguard. A2 discuss on the reliability of their environmental report like verification from independence agencies. A3 focus on the extent of disclosure environmental report which consists of pollution emissions, recycling attempt and also conservation. A4 is review the firm environmental consuming. Here, the author is focus on the dollar reserve from existing environmental programs and also the effort or spending to advance environmental performance. In short, A1 to A4 make the poor environmental performance difficult to imitate the environmental disclosures from the good environmental performance.

Under the soft disclosure item, there are A5 to A7. A5 is the disclosures of a firm on the environmental plans and its vision. A6 is comparing the forthcoming environmental regulations to the firm's environment profile. Lastly, A7 is code a firm's environmental initiatives like employee training in environmental policy or rule. A7 can be easily be mimicked. For example, company with no commitments in environmental protection can pretend the true commitment.


We concentrated on the statement of the money savings from present natural world plans, hard works and the present expenditures to the additional action of increasing the quality of the nature world plans such as implementing a new application of scientific knowledge in the plans or doing R&D and innovations. Besides, we also put in the statements of fines which are occurred in the natural world but we are not necessary to disclose the fines because it is considered as irrelevant expenses. However, the figure of the fines should be known by the natural world stakeholders. In conclusion, the context in A1 to A4 is considered as a hard disclosure.

In soft disclosure, we test the company's statement of objectives and natural world plan requests in A5. For example, a company always state widely that the natural world contract is very important in their company and they manage to make sure that the natural is in safe mode. However, there are some possibilities that the company will give a misleading impression in this statement. Normally, the actions taken by company to prove that they have those environmental policies such as initiatives but this can be trustable and some company are just disclose it without real action to protect the natural.

We use econometric model to test our hypotheses as following:

VED=βо +β1EP +β2J-F coefficient +β3 FIN +β4 TOBIN Q +β5 VOLAT+β6 ROA+β7 LEV +β8 SIZE+ β9 NEW+ β10 CAPIN+ ∑

VED= the achievement of natural world protecting actions done by volunteers that recorded in the statement.

EP= the survey or measurement of natural performance.

J-F coefficient= Coefficient of imbalance

FIN= sum of the debt and capital that rose by the company in 2004.

TOBIN Q= Tobin's Q

VOLAT= stock price volatility

ROA= total return on assets

LEV= leverage ratio

SIZE= natural logarithm of total asset

NEW= asset newness

CAPIN= capital intensity

There are five polluting industries which have toxic release data reports in US environmental Protection Agency such as the firm under Pulp and Paper industry, Chemical industry, Oil and Gas industry, Metals and Mining industry and Utilities industry. In the statistic, most of the firm that involved in toxic release is the firm under Chemical industry which is 63 firms and the least amount of the firm that involved in this issue is the firm under Oil and Gas industry which is just 21 firms. From here, the statistic shows that most of the firms which disclosed the statements about the environment in fiscal year 2003 but least amount of the firms had stand alone environment reports and also net about environment. We categorize those firms do not have any environmental reports or net as 'silent'. From the table, we can know that the A1 to A4 is the review of division of the scores across the excellent and bad EP players. To categorize a firm as excellent or bad EP players, the median of % recycled is exercised to determine its scores. Normally the excellent EP players have a higher score than the bad EP players.

Table 1 show that the standard score of A1 category for excellent (bad) EP players is 2.08 (1.29), the standard score of A2 category for excellent (bad) EP players is 2.88 (1.99), and the most interesting part is A1 to A4 are considered as hard disclosures but A5 to A7 category are soft disclosures. A3 category which the standard scores for excellent (bad) EP players is 10.19 (6.00). The standard score of A4 category for excellent (bad) EP players is 0.85 (0.45). In this category, the standard score shows that the firms with excellent EP will prepare more money for the fines spending compared to bad EP firms.

Table 2 shows the statistic of standard score in every industry. The result show that Metal and Mining industry had a lowest standard environmental disclosure score which is 10.08 only whereas the firms under Pulp and Paper Industry had a highest standard score which is 25.21. The statistic shows that the firms with high tendency of polluting the environment are most probable to present the environmental disclosure to stakeholders.


Inter-industry analysis

The research proposed the outcome of inter-industry multivariate regressions of disclosure scores on the environmental performance measures and the control variables. Tobit analysis is the method used by author to value the regressions for the examination of the dependent variable at zero. Besides that, the author had also tried to utmost the possibility of using Newton-Raphson algorithm in examination the Tobit regressions.

In the research, there had 3 different disclosure score used in dependent side which are total, hard, and soft. Examination of environmental performance variables separately and at one time in this research is the way to value the regressions.

Dependent variables

Total disclosures

Hard disclosures

Soft disclosures










J-F Coefficient










Table 1 Inter-industry regressions with industry fixed effects (Tobit analysis)

Table 1 shows the outcomes of the Tobit analysis. As the hypothesis in H1a, the outcome of J-F Coefficient shows the environmental performance is significant and positive. The outcome is parallel with the theory stated by Verrecchia (1983) and Dye (1985). The company willing to disclose more about their environmental data is leading by a higher environmental performance. There is statistically significant for soft disclosure but not for total disclosure and hard disclosure. This research had also found that most of the company concentrate on disclose of their future ROA in a better forward looking. Nevertheless, debtors tried to ask the management to emphasize on the publishing of the environmental information for the evaluating of potential future profit and liability.

In contrast, the possibility of company to publish the environmental disclosure unrestricted is low if the company's equipments are new. It is important to know that the Janis-Fadner coefficient does not show the degree of disclosure (Aerts and Cormier, 2006). Hard disclosure in the analysis is used to examine the reality of the disclosure in self-imposed disclosure theories. In this research, it shows the similar score for the soft and hard variables. Both variables' coefficient are positive and significant which parallel to the H1a.

Intra-industry analysis

Dependent variables

Total disclosures

Hard disclosures

Soft disclosures










J-F Coefficient










Table 2 Intra-industry rank regressions (OLS analysis)

Intra-industry method used within-industry variation in the level of the independent variables to describe the within-industry variation in the level of disclosure degree (Lang and Lundholm, 1993,1996, and Healy et al.,1999). This approach used to overcome the problem of difficulty in comparison across different company in different industry and also the low distribution of disclosure level in Metal and Mining industry. The result in intra-industry method is similar with the inter-industry method. It shows that there is a positive relationship among the environmental performance measures and the discretionary environmental disclosure. In the soft and hard variables, the positive and significant results shown and it is parallel with the H1a. Control variables are also parallel to the results in table 1.


Socio political theories used to hold the attention of designs of data in the disclosure strategies. One of it is the legitimacy theory. Legitimacy refers to 'legitimization'. Legitimization means it is allowed by law. It predicts that firms with legitimacy are more likely to have their own disclosure. The assumption of the economic disclosure theories is to tell the truth about the biased disclosure. There are no assumptions and any predictions in it. The legitimacy theory seems to be stronger since there is a result of a research showed that something that can be predicted by legitimacy theory, but it cannot be proved and explained by economic disclosure theories.


The researcher used Wilcoxon rank tests to test each of the disclosure. The result showed that the non-parametric Wilcoxon rank tests are stronger. It means that the data has a greater possibility to not follow the normal distributions. The researcher examines the relationship between discretionary environmental disclosures and the environmental performance by using a Logit model by select some firms and to find the significant differences between those firms. The results showed that there is relationship between the discretionary environmental disclosures and the environmental performance and the environmental performance is the main driver of the discretionary environmental disclosures.


There are two ways to improve the literature. First is the predictions of discretionary disclosure and the second is develop an analysis. For the predictions of discretionary disclosure, it focuses on the not mandatory disclosure such as corporate internet web sites. While for the second one, a content analysis will be develop to worth the environmental disclosure in the web sites. The results of both of the way showed that there is positive relationship between environmental performance and the disclosure discretionary. That means in the discretionary disclosure, the superior environmental performers are more willing to give the related information compare to others. Besides that, there are also two measures that give stronger proven in the research, actual toxic emission and waste management data. Actual toxic emission is based on Toxic Release Inventory. It is scaled by the sales data in the firms. The waste management data is the percentage of the toxic wasted in the firms. But the result that showed was inconsistent. It showed there is a negative relationship between them. And the result is not stronger enough. There are some areas that need the improvements such as obtain the sustainability reports and the disclosure of environmental performance indicators. There is a suggestion said that some changes of the focus need to make upon the future environmental disclosure and the level of the disclosure.

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